Meeting our day-to-day financial needs, let alone delivering on our future goals and aspirations, can be challenging. In fact, very few of us can confidently say that we have enough wealth to live comfortably through our life, let alone if we have to ‘live’ in perpetuity.
So, what’s the best way to plan and manage your wealth, to ensure that you can achieve this goal? We use the ‘Today, Tomorrow, Forever’ approach. Let me explain a little more about how we apply this.
Investing can be complex – in fact, so much so, that many are afraid to start. The levels of complexity are numerous. What are my investment objectives? Where do I invest? Which investments are going to do well?
Most people are ill-equipped and poorly resourced, especially when it comes to the time required to do everything that is needed to make such decisions. This can lead to either ‘analysis paralysis’ or ‘snap investment decisions’ we later regret.
I find the best way to address any complex decision is by breaking it down into more manageable pieces. The starting point is to understand why you are investing. You may have multiple objectives. However, it’s best to start by identifying which are the most important.
Do you want to buy your first apartment? Do you want to retire in 15 years’ time? Do you want to send your children to university overseas?
The 3-step roadmap
Once you’re clear on your objectives, you can then identify the best way to address each of these with a ‘pot of money’ allocated to each goal. This is where our ‘Today, Tomorrow, Forever’ approach helps you think about different investment objectives over the course of your life.
‘Today’ is about being able to maintain your current standard of living. This allocation should be liquid and is generally focused on your day-to-day income requirements. It is also important to factor in minimum protection needs to be able to survive any unforeseen events, such as health-related emergencies.
‘Tomorrow’ is about planning for the future and more focused on wealth accumulation to provide a nest egg that can allow you to thrive later in life. You should also consider protection such as life insurance, to shield your loved ones and yourself from ‘the unexpected’.
‘Forever’ is about planning for the generations to come. It is highly unlikely that you will exhaust your financial resources exactly on the day you ‘expire’. Too many, of course, face financial difficulties during the later stages of their lives. However, if you have planned well, you will hopefully have some excess financial capital that you will need to decide how to deploy.
This may be implemented by finding the most effective and efficient ways to pass the wealth onto your children and/or spouse, or it may be via contributions to charities or even setting up your own foundation.
Risk-return trade-off
Each stage will mean different things to different people. Your wants and desires are, and should be, very personal to you.
In the earlier stages of your life, many of us are lucky enough to have our Today needs covered by employment income which takes care of day-to-day living expenses. If it is way too early to think about the Forever allocation, your main focus would be on growing your nest egg to ensure you are comfortable in retirement. Therefore, you allocate most of your surplus cash into investments aimed at wealth accumulation.
If your time horizon is long – for a 35-year-old, for example, a time horizon of 25-60 years probably makes sense – then investments should be aimed at capital appreciation. Naturally, there is a trade-off between risk and return.
While everybody wants higher returns, it is critical not to take on risks that will make you so uncomfortable as to sell during periods of transitory losses. It is better to start on the conservative side and remain invested through economic cycles, potentially accelerating investments during market downturns.
Handling the Forever phase
As you go through your career, naturally your living expenses increase, but hopefully your income growth outpaces this, allowing you to allocate more to your ‘Tomorrow’ allocation and, if you are lucky, to start thinking about the next generation. As the Forever investments are not critical for you to achieve your retirement goals and the time horizon is even longer, it is likely that this pot of money can have a higher risk profile.
As you hit retirement, your focus on income generation is likely to increase, as well as your emphasis on a greater work-life balance or stopping working altogether. This is the time that the discipline of saving and investing over the years really comes to the fore as your investment income offsets the decline in your employment income.
It is also a time when the level of uncertainty starts to decline, which may allow you to think more and more about the legacy you want to leave behind. We may not live forever, but at least this approach helps you plan and manage your wealth during your lifetime to help make life better for you and for ensuing generations.
