wealtharticles-turning_silver_into

The Alchemy of Finance: Turning Silver Into Gold

In medieval times the Philosopher's stone was a mythical substance that could supposedly turn inexpensive metals into gold and create an elixir that could make human beings youthful. In the world of magic and alchemy, creating the desired philosopher's stone was also believed to give the creator enlightenment.

Moving forward hundreds of years, human beings today embrace the new alchemy of finance, one that does not involve mystery or myth. The alchemy of finance draws its strength from logic and the tried-and-tested science of mathematics, which has the ability to turn your silver - an allusion to your wealth accumulating days - into making your retired years gold - the reward of financial independence.

In theory, these two matallic substances in alchemy - silver and gold - could be transmuted because the alchemists understood the basic elements of the metals and the principles of alchemy.

You have worked hard, saved diligently and accumulated a tidy sum of money; it is quite an accomplishment. This is where alchemy comes in; to not only preserve your accomplishment but turn it into gold. To achieve this, you need to understand what the different elements are and how these intereact when combined together.

To illustrate this, let us view how we constructed a financial plan for one of my clients. My clients, let's call them John and Susan. They are both successful lawyers in their mid 40s and they have two lovely young children, Brandon, seven, and Lucy, five. Having accumulated about $750,000 in savings, John and Susan approached me on the best advice to invest their money.

Like most people, they were jumping the gun, looking for financial products before understanding their own goals. Sure, you could say that their goal is financial freedom but, ask yourself, is that the only gateway to achieve one's lifestyle goals?

So, what are the elements to consider in understanding one's goals and ultimately plan well for retirement? I took John and Susan through this simple yet effective exercise.

Element 1:
Goals - where do you want to go?

Element 2:
Your current situation - understanding what your assets and liabilities are

Element 3:
What's the gap?

Element 4:
Investment framework

Element 5:
Ongoing review and discipline

Like many other successful people, John and Susan were too busy earning the money to spend time on financial planning. They had never spent time to discuss their retirement dreams together. They were too bogged down and concerned by investment returns - something which is out of their control; no amount of worrying can make an impact on investment markets.

In addition, in spite of their good spending habits, they had not planned the education funds for their children. As they were very busy lawyers, they left their money sitting in the bank, earning a miniscule interest while inflation continued to erode away the real value of their wealth; leaving them a much smaller sum then they had anticipated.

When we did the math together, and reviewed their current savings rate and the years they would be working, we came to the conculsion that the couple needed a growth strategy for their liquid investment assets at approximately 5% above inflation as a long-term investment strategy.

Having gone through the lifestyle planning process and having an understanding of the 5 elements of financial planning, John and Susan now feel confident and in control of their finances. They have peace of mind, knowing that they will have enough for their children's university fees and when the time comes, their healthcare costs are provided for and they can continue their current lifestyle in retirement. John can look forward to annual golfing vacations and together, the couple can live their dreams.

John and Susan, with the help of modern day financial alchemy, have turned their silver into gold.

By Yashodhara Mishra, CFP

n	What is your cash flow like?
n	What is your savings per month?
n	What are your lifestyle assets versus investment assets?
n	What are your liabilities?
n	What are your investment assets earning?

n	Can you reach your goals and compute the gap?
n	If not, what should you do? Do you need to work longer?
n	How much more do you need to save?
n	Do I need to makemy money work harder?

n	Have your goals changed?
n	Have economic legislations changed? For example, CPF rules, tax, estate planning?
n	Are your strategies still appropriate?
n	Are you sticking to your strategies over the long term?

n	When do you want to 'retire'?
n	How much will you need in retirement? This depends on what you want to do with that 40-year vacation without a pay cheque.
n	You want to send your children to university in Australia or the US. How much will that cost?

n	What kind of investment returns do you need to achieve your goals?
n	What kind of asset allocation do you need to achieve that return?
n	Can you handle the volatility, ie, risk in the portfolio?