Do You Know Anyone Who gets overexcited about something and jumps right into the deep end, only to get stuck or give up soon after? Often, I meet with investors and they want to jump straight into talking about particular properties and what they should buy. Instead, I ask them to take 10 steps back and start with the most basic questions, in order to build an investing plan.

I can assure you that at some stage the novelty of investing will wear off and unless your goals are clearly defined and 'real' for you, your interest will fade.

In my last column, I talked about the advantage of having a coach to help develop and implement a tailored investment strategy. Now, I will take you through the initial building blocks of that strategy, step by step.

Step 1: Know Your Financial Situation: A vast number of people have a very poor grasp on their finances or have no real understanding of how to move ahead.

Ask yourself these questions:
▶ What is your income or joint income?
▶ Is that income from PAYE or are you self-employed?
▶ If you contract, how stable is that contract?
▶ What is the potential for increasing your income in the short to mid-term and/or is it likely to decrease? (Consider such factors as maternity leave).
▶ Do you have a boarder? Or would you consider having one if that made a difference to what the banks might lend you?
▶ What are you prepared to do to achieve your goals?

Step 2: Budgeting: I’ve seen people cringe when they so much as hear the ‘B’ word. But having a clearly defined budget is the key to any financial plan. So few Kiwis have any real idea of where their disposable income goes. Getting control of that is the first step. A budget is simply a quantified plan based on your income and expenses. Once you start looking at your outgoings, you may be surprised at where your money is going.

Step 3: Use A Mortgage Advisor: Not all lenders are created equal in how they assess expenses; in some cases, having a second car is deemed to be more expensive than a child! This is where working with a mortgage adviser who understands the ins and outs of investment lending will be worth their weight in gold (or approved lending!)

Another common misconception among borrowers is that the advertised interest rate reflects the cost of the loan. This may be true in terms of cash in/cash out. The banks, however, use a 'servicing rate' for their calculations, so your ability to service debt is often much lower than you imagine. A mortgage advisor will know where to place your debt to your best advantage.

Step 4: Identify Your Goals: What do you want from investing? This is possibly the most important question of all. When I ask investors this question, the most common answers

I get are:
▶ Financial freedom.
▶ Security for retirement.
▶ Passive income.

If I probe a little more, I might get something a bit more specific, like 'I want $100,000 passive income in 10 years'. Still, this bears little resemblance to what the investor actually needs or wants. You need to be very clear on your short-, mid- and long-term goals. Then, you can attribute a ‘cost’ to them and forecast the total ‘cost’ of the lifestyle you desire. As a coach, I can then reverse-engineer an investor’s goals to work out exactly how they can get there (in other words, we can start to build an investing strategy). The true cost is often hugely eye-opening for our clients.

Next month we will look at the next stage and how this all ties together, as we develop a strategy to achieve your goals.