Four questions to ask during Financial Literacy Month
SUMMARY
Putting financial wisdom into practice isn't always easy, especially for busy professionals. Regularly asking key questions about your wealth can help, however.
Almost every career involves continuous professional development.
After all, laws, financial reporting standards, best practices, ethical considerations and technologies are evolving all the time. And keeping abreast of what’s new while brushing up on the basics isn’t just desirable but typically a requirement.
The same should apply for personal development.
Take personal finances, for example. Revisiting core principles – and how they relate to your circumstances – is something that every professional should do regularly. Of course, this can be challenging given the pressures of a busy career.
April marks Financial Literacy Month in the US. The aim of this period is to promote financial education and financial wellbeing. In this spirit, we present four pivotal questions to ask yourself about your wealth – and consider acting if need be.
Am I holding too much cash?
Especially amid today’s unsettled times, having a big cash cushion can feel comforting.
If you’ve accumulated large liquid reserves, you’re not alone. Excess cash is a pervasive feature of many professionals’ wealth.
Having cash on hand is useful for emergencies, meeting capital calls from private equity funds, addressing day-to-day needs and so on. So, why not simply retain bonuses and other compensation received in liquid form?
In short, such “security” comes at a high price. Historically, cash has delivered lower returns than equities, bonds and most alternative asset classes. Cash-heavy investors therefore face retiring with potentially much less than they otherwise might have done.
A regular reassessment may help here. Working with your financial partner, you can estimate your future inflows and outflows. Having decided on a suitable amount of cash to hold, you can then consider putting the rest to work.
Knowing that you have a carefully modelled strategy around your cash needs is a more rational form of comfort than a large cash pile lying idle.
Is my portfolio on track?
Following a long-term investment plan is vital to pursuing your financial goals. If you don’t, you may end up seeking lower returns or taking more risk than you intended.
Deviation from the plan can happen for various reasons. For example, you might choose to hold only investment grade bonds, even though your plan also includes other types of fixed income.
Or your portfolio might have started out by following the plan but has since drifted away from it.
This occurs naturally because of market moves over time.
When an asset class performs strongly, it may become a larger part of your portfolio at the expense of others. For example, a 60/40 equity–bond allocation could inadvertently morph into a 70/30 allocation during a strong equity bull market.
Undertaking frequent portfolio reviews can help keep you on track, though. Having compared your portfolio with your plan, you can then rebalance accordingly.
You might also embrace any asset classes or regions of the world from your plan that you’ve left out.
How tax-aware is my portfolio?
Understandably, most investors focus heavily on their portfolio's returns. Tax, by contrast, often gets little attention. This is a mistake: tax can significantly affect your investment outcomes.
If you hold investments outside tax-advantaged vehicles, you’ll likely face tax on income received, as well as capital gains. So, the returns you end up with may be lower than what you see in your account statements.
Tax-aware investing may help mitigate the impact. This is not about changing your asset allocation or how much risk you take. Instead, it’s about seeking to mitigate your tax liabilities to the least required by law.
One technique is to avoid paying higher, short-term US capital gains rates by structuring sales of equities held for more than one year. Another technique is harvesting losses and using them to offset present or future gains.
A thorough assessment of your portfolio and your scope for tax-aware investing are the first steps.
Is my estate plan up to date?
Almost everyone wishes to preserve the fruits of their career for their loved ones. However, this desire does not always translate into action.
Some professionals lack an estate plan, while others have one that is outdated. This is true even of some working in the legal industry. Time pressures and reluctance to contemplate death or incapacity are among the reasons why.
The consequences of inadequate estate planning are typically painful. They include needlessly heavy taxation, disputes, delays, additional costs and stress for your beneficiaries.
In the case of incapacity, there is often damaging confusion over issues such as guardianship, control of assets and healthcare matters.
Whatever your age, having a robust estate plan is always advisable. A wealth planner can help you determine whether your existing arrangements are aligned with your objectives. And as your circumstances shift, so should your estate plan.
Applying the lessons of financial literacy
We believe financial literacy should be a lifelong pursuit for all. Whatever the stage of your wealth journey, there is always a case for revisiting core principles and considering whether you are putting them into practice.
This Financial Literacy Month, why not seek to renew your understanding and develop even better wealth habits?
