The ability to generate income is probably the most important asset you will ever aspect you will ever need.

Just consider for a moment if you were unable to receive an income pay next month. As mentioned, many Australians live close to the breadline and missing a month’s salary could spell disaster. Income protection pays you a monthly cheque in the case of sickness or accident occurring. Again, I cannot stress enough that you or your adviser needs to walk through the policy definitions and options on the application. Importantly you must also ask the insurer ‘what they won’t pay for’.

This insurance is vital. Imagine if you were unable to pay off the mortgage and support the savings plan you have in place to pay for private school fees. If you’re self-employed the risk can be far greater, without the breadwinner no income at all is created. You would be surprised on how much income you earn in your lifetime.

Income protection protects your wages and salary. Should illness or accident occur you will receive 75% of your current income for the period you have nominated, say 2 years, 5 years or to age 65. These payments are made to you monthly. You may also be flexible with the waiting periods. For example, you can elect to have a waiting period anywhere from one week to two years, before you start receiving the benefit.

Income protection cover is also fully tax deductible for most people. However, when you are in receipt of a claim, it is treated as taxable income.

The funds you have borrowed against your equity should also receive a very competitive interest rate from your bank or financial institution. Consider an interest only loan, and there are plenty of banks and lending institutions that would welcome your business. I am certain the financial institution which has your current home loan would not want to miss out on lending more money to you.

Regular saving
Once again, ‘drip-feeding’ the regular purchasing of your investments into the market may be a smarter approach and is essentially dollar cost averaging. Discipline is essential as with all investments strategies. Again, any income derived from the franking credits needs to be paid back into the home loan and not into other places such as your wallet.

Over time, as the balance reduces on your home loan and hence more equity is created, you can keep adding this new equity to your investment portfolio. Can you see now the process working and how we are switching bad debt into good debt?

Be patient as this strategy becomes effective after a number of years as your income is increasing and the growth of your portfolio is also moving upwards. As you keep lowering the mortgage, you then continue to draw out more equity to invest in a portfolio of managed funds or shares. It is important to keep adding to your investment portfolio on an annual basis by the same amount you are paying down each year on your home loan.

This strategy requires careful planning and structure. Financial planning advice may be required to be certain of your calculations—they need to be exact. You need to clearly understand the concept of borrowing from your home and the placing of these funds into an investment portfolio. The calculations are very important. Every dollar counts!

This strategy can continue to be used for wealth creation long after the school fees and other things like university fees have been paid for. As you can see, I have only touched on the concept here, you will need to work through the calculations of funding as well as the mechanics of adding to the investment portfolio on a regular basis.

Three essential points you must adhere to for all these strategies are:
1. Maintain a budget. Every dollar must be watched. Companies and other big organisations have them—you need it to. Be prepared for all your yearly expenses. Map it out. Cash flow management is critical to financial success in whatever form.
2. Leave the past behind you. If you have had bad luck before or made a wrong decision on an investment before, please leave that baggage behind. It’s time for a fresh start.
3. Be Patient. If you don’t believe in your financial plan and have doubt about what you’re trying to achieve, it will only make you become impatient and make mistakes. Planning is more than half the battle, be patient and let the plan work for you.
4. Discipline. This speaks for itself.

Step 1 of our game plan to pay for private school fees is to determine the best asset class to invest in based on your circumstances and goals. This is step one in the two-step game plan that will help you bring the overall strategy together when we work through the next chapter.

You could well ask ‘just tell me straight off, what asset class and how do I use this asset to get to my end goal?’ But before making any investment decisions, it is always prudent to ask yourself: What am I investing in? What is the asset, and what returns can I reasonably expect? Therefore it is important to ensure you understand a bit more about what we are investing ‘in’.

First, let’s look how the asset class of cash performs.

Cash
Of all the asset classes this is the worst performing in terms of investment growth. There is virtually no growth with cash investments. Savings accounts offer minimal or no interest and any interest they do offer is outweighed by account fees. As we all know, cash is easily accessible, accepted everywhere and useful for purchasing goods, paying for services and to survive day-to-day.

However, as a saving vehicle, cash does not generate enough growth to provide future income for goals such as funding private school fees. In the Australian banking system, there is an excess of cash just sitting in the banks and cash management trust, most of them earning very little interest. If you leave your savings in cash, you better watch out for inflation.

For example, if you left $10,000 in cash in a bank account in 1995, inflation over the period 1995 to 2006 would itself wilhavel eroded your purchasing power to $7,831 within 10 years. (That’s a loss of 21.7%. So, unless you earn more than inflation, your wealth is essentially going backwards. You need to invest your cash that is not earmarked for short-term goals into other asset classes.

Before anything is said to a financial planner, they have a legal obligation to provide you with the following:

• a Financial services guide (FSG) should be the first document handed to you before anything is said. A FSG describes everything about the adviser and the business. It shows if any external fees are paid or if there is any other remuneration on how the adviser is being paid.
• a privacy statement
• a fee schedule
• a planner profile. What is his or her experience? Who are you dealing with?
• an Statement of Advice. If you take advice from and adviser, an SoA must be produced and signed by all parties before any implementation of your affairs are undertaken. The rules are simple, if someone has provided advice on a financial product then a SOA must be produced. It’s the law.
• a product disclosure statement in respect of each product recommended by the financial adivser

Questions you should ask the financial planner during the meeting
• What financial services or financial products are you allowed to provide advice on?
• What qualifications do you have?
• How long have you been in the industry?
• What is an example of your typical client that you currently see?
• How will you monitor my current situation?
• How often would we meet to review my situation?
• How do you stay informed with markets and technical work?
• Where do you get your research from?
• Would you be willing to provide some references from current clients that I can ask whether they would endorse your services?
• And, most importantly,
• Do you, as a financial planner, have a financial plan?

Please refer to the resources section of this book for relevant websites about financial advisors.

The ability to generate income is probably the most important asset you will ever aspect you will ever need.

Just consider for a moment if you were unable to receive an income pay next month. As mentioned, many Australians live close to the breadline and missing a month’s salary could spell disaster. Income protection pays you a monthly cheque in the case of sickness or accident occurring. Again, I cannot stress enough that you or your adviser needs to walk through the policy definitions and options on the application. Importantly you must also ask the insurer ‘what they won’t pay for’.

This insurance is vital. Imagine if you were unable to pay off the mortgage and support the savings plan you have in place to pay for private school fees. If you’re self-employed the risk can be far greater, without the breadwinner no income at all is created. You would be surprised on how much income you earn in your lifetime.

Income protection protects your wages and salary. Should illness or accident occur you will receive 75% of your current income for the period you have nominated, say 2 years, 5 years or to age 65. These payments are made to you monthly. You may also be flexible with the waiting periods. For example, you can elect to have a waiting period anywhere from one week to two years, before you start receiving the benefit.

Income protection cover is also fully tax deductible for most people. However, when you are in receipt of a claim, it is treated as taxable income.