Principles of Financial Success

When you are running your own business, it is important to understand your business. What’s just as important, is understanding the principles of money management, are exactly the same for individuals, as they are for businesses.

There are some basic tools that need to be remembered when running a business as in life.

• Have a budget to control spending. Without the necessary controls to make sure that you spend less than you earn, even the greatest business will soon suffer from a cash flow problem. As one great man once said: "Turnover is vanity, profit is sanity.”
• Keep a cash reserve in case of emergencies. Avoid borrowing, or using credit cards when emergencies crop up.
• Have adequate insurance. Especially on your life, health and income, as otherwise if you can’t work, this can bring you undone. The types of insurance needed are:
• Trauma insurance. Trauma insurance provides a tax-free lump sum payment to help you financially while you take time out to recover from a serious illness or injury. It is designed to pay out on diagnosis (or occurrence) of one of a list of specified serious medical conditions. Each insurance company has its own list, which include conditions such as cancer, heart attack or stroke.
• Life insurance. With this, your surviving family will receive a tax-free lump sum of money if you die or are diagnosed with a terminal illness.
• Income protection insurance. This is worth considering for all working people. It can pay a proportion of salary (usually 75%) if you’re temporarily unable to work because of sickness or injury. The length of time you receive payments depends on the contract term; for example two years, five years, or up to age 60 or 65. It varies depending on the amount of cover you are willing to pay for.
• Total and permanent disablement insurance. TPD cover provides a tax-free lump sum if you suffer an illness or injury that leaves you totally and permanently disabled. TPD insurance benefits are often used to eliminate debts, pay for medical expenses or fund any permanent lifestyle changes resulting from disablement.
• Business expenses insurance. If you are self-employed or in a small partnership, your ability to operate their business is imperative to its success. Without you, the business may struggle to operate, yet its associated expenses will continue. This insurance will provide you and your business with cover for certain business expenses for the period that you are unable to operate your business due to disability.

  As an added bonus, the premiums for most of the above insurances either are tax-deductible or can be so if structured properly.

• Prepare and sign a Will. It is essential to have a properly structured Will so that you can ensure that your beneficiaries will be looked after in the event of your death, that tax is minimised and that the money stays in your family. Make sure that you keep your Will up to date, so that your wishes in the event of your death are clear and concise, and do not create any unnecessary difficulties for your loved ones. I recommend that you see a solicitor. Do it professionally, and do it right the first time.
• Put in place an Enduring Power of Attorney. This is an important legal document you can prepare to give someone else the power to make personal, health and financial decisions on your behalf. This is essential, so that in case of incapacity, someone you trust is able to make decisions for you. Unlike other types of Power of Attorney, it endures until death – unless you revoke in the meantime.

  To make an Enduring Power of Attorney you must be an adult capable of making your own personal, health and financial decisions. Having the capacity to make decisions means that you can:

  • Understand the nature and effect of a decision
  • Freely and voluntarily make those decisions; and
  • Communicate the decisions in some way.
• Have the security of a home to live in. Your own bricks and mortar will help you provide a financially secure and stable monetary future, without worrying about rent increases or landlords.
• Save something for retirement. Whether you use super, shares, property, or a combination of these, prepare for the day when your working life comes to an end, because one day it will.

Remember the most crucial of all financial rules. “A tenth of your income is yours to keep.” Save 10% of your income throughout your working life and invest it wisely, and you will have a fine financial legacy.

If you follow these basic rules, you should be on your way to a bright future!

The comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information’s applicability to their particular circumstances.

Sean Litchfield

Diploma Financial Services, Diploma Financial Planning, Advanced Diploma of Financial Services, Fellow Certified Chartered Financial Practitioner (AFA), AFP®, AIMM ,CDec.

Senior Adviser, Retirewell Financial Planning