Financial planning is really about… coming up with good ideas

Debt can be the strategic financial planner’s friend.

Debt has certain characteristics that allow a strategy-based financial planner to create something from nothing for almost every client.

For example, a simple (and we hope obvious) strategy for an employed client with a credit card debt and a home loan is to ask the bank to consolidate the expensive credit card on to the cheap home loan. If the credit card debt is $10,000, at 15%, and the home loan is at 5%, the client saves a non-tax deductible $1,000 a year, every year. This non-deductible $1,000 is the equivalent of about $1,400 in pre-tax income for a 30% average taxpayer.

The average income in Australia for a 50 year old male is about $60,000 a year, or $1,153. It’s less for women. This means the strategy is tantamount to saving an average Australian about three month’s work over the next ten years. That’s a great return on the investment. And it is something from nothing.

Once you have saved your client the equivalent of more than a week’s work every year, leverage that saving into a permanent form by bringing super into the equation. Dedicate the saved amount to increasing deductible super contributions. Alternatively, the amount saved could be dedicated to retiring more of the home loan.

If you do not do this there is every chance the saving will disappear, consumed by the infinite claims on your client’s household budget.  Worse, your client may run up a fresh $10,000 credit card debt. It happens. Perhaps the advice meeting should include a ceremonial cutting of the card.

Suggest she salary sacrifice her saving into super, so she captures the benefit of her strategy, and makes it permanent. An extra $1,400 of super a year for 20 years compounds to more than $46,000 at 5%, and $71,000 at 9% (ie using the long term average earning rate on Australian shares and property).

Provide your client with a table and a graph showing how this happens: you can create one on-line at this website. Put her name on it, and otherwise personalise it as much as you can. Personalisation helps create traction for her decision to accept and act on your advice.

Another simple and obvious strategy involves suggesting your client ask the bank manager for a lower interest rate. Do it for every client. It’s amazing how often the bank says yes. It might only be a few hundred dollars a year, but it’s something from nothing, and a great way to establish yourself, or reinforce yourself, as your client’s trusted adviser.

The Dover Group