Defense or offense — what’s your financial game plan?
All sports have elements of offensive and defensive play. And whether you play Netball, soccer, cricket or basketball, your team must constantly strike a balance between the two.
But whilst in sport the distinction between offense and defense if fairly clear, in the financial world, it may be less so.
Offensive moves are typically attacking type moves. They’re trying to make something happen in your favour. They’re pro-active decisions or tactics that you are employing to make progress towards your goal.
Defensive moves are concerned with protecting what you’ve got, not going backwards or giving up ground.
Let’s start by considering what playing offense might look like.
A good starting point would be to have an emergency fund set-up to cover unexpected expenses like the fridge deciding it’s had enough, or unplanned medical expenses. The alternative, that leads all too many people towards financial peril, is that when these type of events crop up, they hit the credit card.
Your next offensive play is to educate yourself on investment and money. Now given you’re reading an article in the Money section right now, I appreciate I’m preaching to the converted here. Gain a basic understanding of investment options, from term deposits to shares, property and funds, and a sense of the risk in each.
It a bit of a cliché, but another foundational offensive play is to spend less than you earn. This requires management of your cash flow and knowledge of what is affordable. I’ve come across several instances in recent years where people have signed up to rent a home, without appreciating that once they pay that rent, they simply won’t have enough money left to live off.
Let’s start to stretch the legs a bit now — it’s time to start building some wealth. We all need a roof over our head and food to eat. And since the days of living in a cave and hunting for your dinner are well behind us, you’re going to need money.
You’re currently earning money through your skills and knowledge, and whilst your ability to generate income is unquestionably of enormous value, it has its vulnerabilities and limitations — for one you have to get the work done in order to earn the income, but also there is the risk of your skills becoming obsolete or just less valued, you suffer an injury, or simply old age slowing you down to the point where income generation is no longer possible.
Owning a home and/or income generating assets is highly desirable. And the starting point is to save. You don’t wake up one morning and have $100,000 in your investment portfolio — it starts with that first $100 saved and invested. So play offense with your money and invest. It needn’t be huge amounts to being with but make a start.
Improving your income-generating skills is another great offensive play. Deeping or widening your professional knowledge can see your income rise, enabling a higher rate of saving and investment to build wealth. Improved skills also make you more employable, enhancing your overall financial resiliency.
My final financial offensive move is to make an active choice as to how your superannuation is invested. I’m not talking about which super fund so much, but more which investment option. There will be a default, and that may well be the right option for you. But don’t just assume that it is. Look into it, consider your time frame to retirement, and your comfort with volatility. (A hint here, if retirement is a long way off, volatility is your friend).
Make an active choice that fits with your plans.
Now I do like the theory that the best form of defense is a good offense. But that doesn’t mean there’s no room for a couple of sound financial defensive tactics.
The first is to pay down debt. Debt is not a bad thing when used to buy assets that grow in value, but there’s no question that debt makes you vulnerable. Compare the scenario of two people who are made redundant. The first has a $500,000 mortgage over their home, whilst the other has paid off their home and owns it outright. Neither person is likely to be pleased about being made redundant, but it’s a fair bet that the person with the mortgage is a lot more stressed than the person who owns their home.
When it comes to defensive moves, the other fundamental element is insurance.
Insurance premiums are known and can be planned for. Having insurance in place ensures that the hard work that got you to where you are today, is not undone by one instance of bad luck.
Paul Benson is a financial planner and creator of the podcast Financial Autonomy.
