• Not considering self- employment – for at least one partner
• Thinking interest free loans provide risk free rewards
• Allowing familiarity to transform relationship
• Mistaking financial control for frugality
• Justifying a change in shape due to a change in stage
• Believing that volatility is risk
• Taking DIY literally because it’s cheaper
• Non alignment of goals and purpose with plans and strategy

1               Self-employment

One of the most stressful times in a young couples new relationship occurs when children arrive. Up to this point lifestyle has been generated by two incomes. Usually funding a deposit, then a sizable mortgage.

Financial pressures of debt repayment and a continuing ‘comfort’ lifestyle necessitates the continuation of two incomes – along with two cars, two TV’s and two banking systems. But now the added cost of childcare becomes a reality. Many young couples are living this pressure filled existence and the outcomes are there for those that choose to look.

For many the long term outlook is fraught with anxiety as the need to pay off debt precludes most anything else. Especially retirement planning. For the risk takers and entrepreneurial types investment property becomes a real option – for others, self- employment.

Taxation is the largest expanse this young couple will encounter through their accumulation years. Unless they take advantage of tax efficiencies from either leverage or self-employment their ability to create wealth, generate a replacement income from investment or provide a luxury lifestyle will be impossible, especially if they want a hands on child rearing experience to. (only one income)

Self- employment provides taxation advantages as well as freedom of time and workplace. It might not be the panacea for all however for those that genuinely give it the attention that all ‘investment’ (and business is just another investment option) requires, will often find purposeful reward, financial advantages and time with the kids.

As an employee your ability to create wealth is limited to: the hours you work, your hourly rate and your ability to save. When self-employed you can leverage. Leverage time by employing others to free you to earn more, leverage resources by borrowing to invest into your business.

2               Thinking interest free loans provide risk free rewards

All debt eventually needs to be repaid whether interest free or not. Interest on top of a loan (to buy consumables) simply extends the repayment period and increases the overall cost. The reward of ‘interest free’ whilst providing instant gratification will inevitably lead to consternation due to financial habits – that of borrowing to buy liabilities when will it stop?.

One should learn to pay cash for liabilities and borrow to buy assets. This changes ones perception of life and wealth. The discipline of saving to buy consumables – automatically creates a more disciplined purchasing procedure by delaying the ultimate decision and the activity of borrowing to buy assets is wealth enhancing (if the asset is continuing to produce an income).

‘Monopoly’ and ‘cashflow’ (one of Kyosaki’s board-games) are ideal educational gaming experiences with which to build confidence in how and when to borrow. The only time an interest free loan stacks up is when a) you were actually saving to buy the item, b) the repayment terms do not exceed your current savings for the same item.

Another example of false risk and reward thinking is – ‘fly buys’. The practice of using ones credit card to find lifestyle and necessities and thinking the ‘flights’ are free. Everyone I’ve ever encountered using this strategy swears they repay all credit card debt monthly. I’m sure some do – but others must not otherwise the credit card/bank would pull the product. I’m also convinced that using a credit card to pay for anything – let alone everything, is an exercise in expenditure justification. People are hooked on this ‘fly buys’ merry go round – do the accumulated points create a must fly soon situation? – does the credit card get used again offshore? – is the expenditure more or less overall? I’d love to know the stats – but I’m guessing that with its continuation it has to be a commercial success. No different to Universities, Harvey Norman and interest free offerings – business is not a zero sum game. Some-one is paying and some-one is making a profit.

3               Allowing familiarity to transform relationship

It isn’t easy to keep loving, keep compromising, keep happy when internal financial pressures escalate and/or external influences dominate. The success rate of long term relationships is just as bad as long term partnerships. In marriage as in business the record is not good and the reason – well, not exclusively but often, is – taking ones partner for granted. Familiarity. Because something has always occurred and been handled – that way, doesn’t mean it should not be just as gratifying to the recipient as the first day it occurred. Sadly that is often not the case – but it is with successful marriages/relationships and it is with successful business partnerships. Each party needs to think they are getting the best side of the deal – that’s not the same as – getting the best side of the deal. Thinking one is getting the best side of the deal and aiming to get the best side of the deal are two different things.

Life and Business both need a vision to succeed long term. Simply living to exist has no purpose or meaning and certainly no destination. It’s very hard for people to remain ‘on the same page’ without mutual goals and aspirations and a conductor (coach, mentor, manager, financial planner) to keep them ‘on plan’. To review outcomes and expectations. Ultimately the best partnerships and the best teams communicate openly and often – when deafening silence or the silent treatment occurs we all know the road ahead is strewn with confrontation and combatants.

Relationships need to be worked on. Inappropriate relationship habits are just as contagious and harmful as bad habits are with money or health.

4               Mistaking financial control for frugality

Some cultures remain frugal. It is as natural to them as eating and breathing. Some eras necessitated frugality – the great depression and two world wars for example, but for those of us whom have followed in their wake – frugality has become a signature of the past. A time to learn from but to never repeat. It signifies concerns about income and worries about supply. Of things to eat or things to buy. Frugality might mean not being able to spend and in an era of consumption one can understand the antipathy to this. Especially when such capability to consume surrounds us. Temptation, technology and time payment.

But having financial control does not mean not spending. In simplistic terms its – ‘how spending’. In an era of online banking and online shopping, revolving credit and interest free loans – how one spends is pretty damn important. But again, it does not mean – not spending.

Financial control allows spending to occur because it has allowed saving and investing to occur first. In other words it has simply reversed the order of spending, then allocated through banking structure how and where money is directed. Goals, variable expenditure (personal spending) and fixed expenditure.

Grandma had to be frugal – her capability to run the home on a limited income and bring up ‘the kids’ (and there were usually more than one or two) meant penny pinching, hand me down clothes and daily tasks for the older kids in helping to bring up the younger ones. Financial control certainly means understanding ones income and allocating ones resources to maximise lifestyle and goal achievement – but it doesn’t necessitate being mean, never going on holiday or not occasionally having a spend up. We would contend that financial control and improved lifestyle go hand in hand – not the opposite.

5               Justifying a change in shape due to a change in stage

No one said staying slim, toned and fit was easy. It’s not, especially as time and circumstances take their toll but the downside of ignoring ones diet, weight and exercise would seem to be self- fulfilling.

The need to maintain good habits to maintain good health is probably more important than having good relationship and good financial habits. But they are interrelated. Poor health will affect ones ability to create income and to maintain a superior lifestyle – it is also likely to affect ones relationships. The three go hand in hand – health, money and relationships.

Why then are we heading to number one in the obesity stakes for the OECD? It’s easy to answer if we kid ourselves that it must be our next door neighbour or the lower socio economic people who ‘always eat fast foods’ – it’s easy to justify if we are getting older, or have a medical condition or we can’t exercise for some reason or another. But the real issue is what we eat – especially sugar and seed oils (namely fructose and canola type oils). The problem with this stuff is a) we don’t realise we are eating it and b) we don’t realise the damage it is inflicting because it’s slow reacting. The food manufacturers understand that sugar sells – jams. Tarts, pastries, breakfast cereals, lollies, cakes, jellies, chocolate bars and sugar water – we are consuming 40 teaspoons of sugar a day – in the early 19^th century it was less than 3. Our liver converts fructose into fat. Eat and drink less fructose – lose weight. Simple.

‘The good oil’ – Olive, coconut, avocado, butter

‘The bad oil’ – Canola, sunflower, safflower, soybean, ricebran, corn, sesame (omega 6 fat)

(Polyunsaturated fats: cause cancer, combined with fructose cause heart disease, blindness, Parkinson’s, rheumatoid arthritis and other autoimmune diseases, osteoporosis, allergies and asthma)

Those interested in the research – read: (Eat Real Food – David Gillespie 2015)

6               Believing that volatility is risk

By far the most important investment decision when using managed funds for long term accumulation is what proportion of the funds to apportion into defensive assets (bonds and cash) and what proportion will be apportioned to growth (commercial property and equities). That decision alone accounts for over 90% of fund performance because the four asset classes offer consistent long term returns. Bonds and cash generating less volatile but lower returns (around 6% and 4% before inflation) and commercial property and equities (around 8% and 12% before inflation). When taking inflation into account a small/value structured equity managed fund is likely to earn 3x that of a bond fund. (1926 to 2013 in US at 3% inflation)

But fund managers are subject to external pressures from ratings agencies and the public alike who react to market gyrations – good and bad. Short term trading decisions are made in an effort to maintain current performance measures at the expense of long term buy and hold – a strategy the masters such as Buffet, Munger, Ruane, Simpson employ when outperforming market returns. (a market return being the index – the measure of an asset class, such as the S & P 500 – which is a large capitalisation fund of America’s top 500 companies – often used as a proxy for US market performance)

Market movements (volatility) up and down are common. That’s what they do because there is a constant sale and purchase of securities occurring as businesses grow and businesses decline. The general political and economic environment has a bearing on business growth but long term businesses not governments drive productivity, wages and profits. Unfortunately many of the public see market declines as loss when in fact it is the order of things in a capitalist system – what is important to understand are two key determinants.

1. Markets go up and markets go down – but over time they go up more than down
2. When markets go down (in a recession – 20%) such as the depression or the global financial crisis – they always come back up to greater levels. (the average time from high – to new high being 40 months – since 1926)

There have been 13 such market declines since the Second World War (bear markets). The small and large capitalised managed funds have averaged 12% and 10% through that time.

7               Taking DIY literally because it’s cheaper

As the add goes ‘it’s in our DNA’ but there are some things in life which require expertise. Growing a business and investment to create wealth are a couple of them, neither of which are taught in schools mainstream or University (although I see the Wananga do both).

Whilst I’m a typical Kiwi who likes to ‘have a go’ rather than ‘pay for everything’, I’ve also made a career out of building businesses for other people and myself, and investing. When you do this stuff for over 40 years after having experienced both first hand as a youngster – you get to see a few things which you learn not to do and learn a few things which you should do more of.

Paying for good advice is pretty high up in the pecking order. It needs to be managed and measured – it must provide value and both parities need to enjoy the relationship – otherwise terminate it and look around.

A key weakness with many SME’s and investors is the minimal amount of time and resource which goes into strategic planning. This is where the greatest need exists. At the front end. It’s very hard for an ‘advisor’ to pick up the pieces when situations have become dire. It’s too late, for example to ask a lawyer to look over ‘the agreement’ once you’ve signed it. It’s too late to demand advice from an accountant when the IRD comes knocking – the horse has bolted – all the accountant can do is charge you an hourly rate which you will baulk at – in an attempt to minimise the penalties. A totally negative use of a professional’s expertise.

Negotiate terms up front, minimise the term at the start and measure the value. It’s always easier to extend terms when the results have been positive than to terminate agreements prior to completion – think of it like an employment agreement. Take the time to select, do your due diligence, agree on mutual expectations and have an escape clause.

Cheap options cost you more in the long term either from missed opportunities or rectifying bad decisions. It is more cost effective to learn from others (professional advisers) than to repeat the mistakes of previous DIY’s.

8               Non alignment of goals and purpose with plans and strategy

Making plans doesn’t mean you can’t be impetuous or frivolous at times. Strategy and measured actions does not equate to boring and conservative. Mitigating risk does not mean ‘no risk’.

Life is for living, enjoying, experiencing and having fun not looking back on and crying ‘I wish”.

The ‘art of life’ then is to determine the basic structure of how you would like to live it (set some goals), why you would like to live it this way (your purpose/contribution/experiences/legacy), then to formulate some fundamental means of achieving those outcomes (the strategies).

To achieve life goals needs resources. Time, money and relationships – but if you don’t see how the concept of planning will impact positively you will still use the same resources except in a more reactive way. You will adapt on the fly and some people do this well – just as some sports teams do this well. Long term however the best results and the most robust opportunities and experiences go to those ‘with a game-plan’.

Financial planning does not need to be complex but it does need to align goals and aspirations with strategies and action plans – then reviewed, annually. The art is the design of the plan and the science, the measurement. Using the sporting analogy again – keeping score creates attention and interest. It also tells the players if they are on track. The referee adjudicates and hopefully (as in planning) does not overly officiate or dominate.

If it makes sense to have an holistic attitude to life – through good health, enjoyable relationships and a comfortable financial position then it would also seem to make sense that alignment of the products and services necessary to achieve them is appropriate

Non alignment would seem to place a greater risk of non- achievement and thus the primary role of a good financial adviser is to keep their client on track, to smooth the road and to ultimately provide financial security.