Ever fantasize about leaving your other half?

02 May 2016 13:39 PM

Of course you have, we all have, and many have actually taken the plunge.

One of a woman’s biggest concerns in this situation is money - particularly if this is not something that she has taken care of before.

Even if she has been involved and is reasonably on top of her finances, many of the arrangements that have been put in place as a couple are ineffective and costly to a single person.

I have been working with a number of law firms to help women to manage their finances after a separation so I have put together a very practical guide.

Either save it under an unrelated name in some obscure file or pass it on to a friend who really needs the help.

This document aims to break down the process of managing money into five manageable areas – making it, growing it, protecting it, leveraging it and enjoying it.

Making It

(Your income plan)

There are certain tax approved ways of stretching your income such as: income splitting, salary packaging and negative gearing.

While certain arrangements could have been tax effective for you as part of a couple, they may not work for you as an individual.

It is important to understand the implications of how your income is structured and evaluate whether this is still a beneficial arrangement for you.

Growing It

(Your investment plan)

The most important aspect of an investment plan is that it must be appropriate for you – the objective must be determined by your long and short term goals and the level of risk must be commensurate with what you are willing and able to accept.

Long term goals include paying off a mortgage or saving for retirement whereas shorter term goals may include saving for your children’s education or paying off your debt. The return objective of your investment portfolio must be aligned with what you are trying to achieve.

The level of risk that you are willing to accept is determined by your risk profile which can be measured through psychometric testing. Some people have a higher tolerance for risk than others. The level of risk that you can accept is determined by your assets, liabilities and levels of income.

The structure of the investment also has significant consequences from a tax perspective – should you invest in your own name, your super or through a family trust? It is important to review your overall financial position to determine which is the most appropriate structure for your circumstances.

Protecting It

(Your risk plan)

It is critically important to insure that you and your family will be taken care of in the event of your death or temporary or permanent inability to earn an income. The consequences of not having sufficient cover can be catastrophic therefore, this is the area of managing your money that should be dealt with first.

Insurance levels are typically worked out as a couple. It is assumed that the one partners income will supplement the others needs in the event of death or disablement. As a result the partner with the lower level of income will have insufficient cover after separation. In addition, insurance companies have multiple criteria which may make one company the best fit for a couple with a certain level of income and type of occupation, but completely ineffective for a single person.

 It is critically important to review your insurance cover after separation to ensure that you have the most appropriate levels of cover and the most effective policy.

Leveraging It

(Your debt plan)

There is low cost debt and high cost debt, good debt, bad debt and necessary debt. There are also appropriate levels of risk.

Low cost debt is debt secured against your home or investment property, where as high cost debt includes margin loans, personal loans and credit cards. In the current climate, the interest cost on your debt can range from 4.5% to 18% - this is a very significant difference.

Good debt is tax deductible and includes margin loans or investment property loans. Bad (but sometimes necessary) debt includes all the other forms of debt.

Are you accepting too much or too little risk? Are you paying principal and interest or interest only? Are your rates fixed or variable? If interest rates were to rise by 2% - would this have a terrible effect on your cash flow?

If you have received assets (with attached debt) as part of your settlement, then it is important that it is structured in a way that is suited to your personal circumstances.

Enjoying It

(Your retirement plan)

While you previously had to take your partners needs into account, your retirement plans are now solely determined by you.

The first step is determining what you would like to do in retirement and how much income you need to fund these plans. It is then necessary to determine the asset base that you need to provide for your income needs. How much do you have now, how much you need to invest and by how much do your investments need to grow to fund your future income.

Once you have determined the broad criteria, it is necessary to find the most effective and cost effective way to achieve your requirements by selecting from the multitude of funds available.

Small differences in both investment performance and costs can have a substantial impact on our long term returns. For example, an annual fee of 2% of your fund balance rather than 1% could reduce your final return by up to 20% over a 30 year period (for example reduce it from $1,000,000 to $800,000).

It is important to spend the time to make the right choice.

While taking control of your finances may seem like a challenge, it is critically important to your future freedom and security. Tackling these issues early on will relieve an enormous amount of stress and give you the confidence to move forward

Get in touch with marisa at marisa@onelifewm.com.au or 0416 538 227

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