I always thought that referencing how fast the year was passing was an older person’s lament; clearly, I now qualify.
I have been reflecting on my column topics this year in search of inspiration. The topics have ranged from the exciting opportunities offered by artificial intelligence to the more mundane (but probably more personally applicable) topic of the importance of tax efficiency in your investment portfolio.
When reviewing the range of topics, it caused me to reflect on the reality that acquiring knowledge is great, but its value is only revealed if it is applied.
Encouraging the wider community to make positive changes in their financial position is why I continue to write this column.
When considering my own journey of transitioning from having a young family and considerable mortgage debt, through the expensive teenage years, to being able to reduce debt and build financial assets outside our home, there has been one simple tool that has been my guiding light.
It is based on the principle that you can’t manage what you don’t measure.
Since my mid-40s (and I should have started earlier) I have compiled a family balance sheet on a monthly basis. I must say that my wife was initially a little sceptical about this. It is simply a list of the current value of our assets from which I deduct our current liabilities.
Initially the assets were limited to the family home and KiwiSaver accounts (and their previous forerunners) and the liabilities were our mortgage and any other short-term debts that we may have held.
As you would expect, when we first started the figure was highly negative but over time, as we repaid debt and our investment balances slowly grew, the deficit reduced.
It was somewhere in my early 50s that the assets exceeded liabilities and the figure was positive.
When we started this monthly process, I had no idea how motivating we would find it. I suspect that there are a number of psychological factors at play.
1. There are times in life when our financial progress feels slow and a bit of a grind. For me, being able to see even a small improvement in our overall position provided real motivation.
2. The transparency of the process helped keep us accountable to each other. The temptation and implications of taking on further debt was starkly brought to life.
3. In any relationship there is often one partner that tends to take the lead on financial matters. In our case, this monthly process helped ensure that my wife was fully aware of the reality of our financial position.
4. The process was also a reminder that there are times in life when we are forced to take an economic step backwards. This could be a life event like moving to a single income or just a period of investment market volatility. Understanding that these events are normal and that your position will recover over time, helps you develop financial resilience.
This approach highlights that for most households, wealth accumulates through a combination of debt repayment and traditional investment concurrently. The emphasis as to where capital is directed may change over time, perhaps with a greater focus on debt repayment initially, but reliance on just one of these legs can create a degree of financial vulnerability.
If you are going to implement this approach to your family finances, then your investment strategy needs to have significant exposure to share investments. In this way you can maximise the compounding value of investment returns to build momentum on the investment side of the ledger.
Twenty years later we are still running this system. My wife has bought into the process to the point where, if I am tardy in updating the summary sheet, I receive a reminder.
We have now removed the family home from the asset column on the balance sheet as it will always be required as somewhere to live. However, the principle and the process remain the same as we start to transition towards retirement.
I am the first to agree that financial progress is not the sole marker of a healthy relationship. But I do know that financial stress is one of the primary causes of relationship breakdowns.
At the risk of sounding like the Christmas Grinch, I thought this concept might be a helpful reminder to take control of your finances and enjoy a Christmas season that is not too detrimental to your family balance sheet.
Wishing you a wonderful (and financially prudent) Christmas.
- Peter Ashworth is a principal of New Zealand Funds Management Ltd and is a Dunedin based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.
