Back in the office and ready to tackle a new year? Kickstart your own finances with an eight-point plan that’s more about inspiration than just a mechanical checklist.
1. Pick a dream
What’s the one thing in 2014 that is within reach and that you would love to achieve? Is it getting more into superannuation, paying a big chunk off your mortgage, setting aside more for school fees or getting your credit card under control? Picking one or two rather than a huge list of money ‘wannabes’ means you’re more likely to feel it’s achievable and thus gun for it.
2. Take action
Work out what you need to do to achieve your target. If you’re concerned about whether you’ll have enough for retirement, play with online calculators like MoneySmart to see what your current super balance will give you in annual income when you retire. Financial planner Craig Wilford of Nexia Australia points out economists say we will need about $1 million to retire comfortably but it’s probably more helpful to think in terms of what your end super balance will give you in annual income after retirement. Working with the calculator helps show you how your annual retirement income increases in line with bigger super contributions, for example up to the $25,000 annual ‘concessional’ (or pre-tax) cap if you’re under 60 or $35,000 if you’re older. If it’s your mortgage you want to focus on, there are terrific online calculators that show how compelling it can be to pay extra and save potentially hundreds of thousands of dollars in interest and cut the term of your loan. Most of the banks have these calculators, as does MoneySmart, the consumer finance website of government watchdog the Australian Securities & Investments Commission (ASIC). Look for credit card calculators if this is where you want to concentrate your efforts. The ideal is to get to a situation where you pay off the card in full each month and so don’t pay any interest. If you think the calculations on mortgages are compelling, this is even more so with credit cards where interest rates can be around 19 per cent compared with mortgage rates of, say, 5.5 per cent.
3. Tailor-make a budget
You’re better off drawing up or refining your budget once you know what your main financial goal is going to be. Otherwise it can be a reasonably pointless exercise trying to cut back discretionary spending just for the sake of it – far better to know exactly where you’re going to redirect funds and know it’s going to make a big mark.
4. Tidy up tax
While this sounds like a no-brainer, financial advisers tell me there are many, many instances of clients paying tax that could very easily have been avoided. One example was of someone who had sold a business and ‘parked’ the proceeds of several million dollars in a joint bank account with his wife. As a top taxpayer he ended up paying 46.5 per cent on half the interest earned on the account for the several months it took him to realise that the bank account should have been in his wife’s name as she is not in paid work so has a much lower tax rate. Wilford points out this is also a good time to review investment structures like a family trust, DIY super fund or a company structure. If you have one, is it still working for you? If you don’t have one, are there good reasons why you should consider one?
5. Understand investments
Whether these are held directly or in a super fund, if you don’t understand the investment should you be in it? Key is knowing your risk profile, says Wilford – how much risk is appropriate for you depending on your age, and whether you’re getting as much return as possible without taking on too much risk.
6. Plan for rainy day
If you have debt and dependents, do you have enough insurance in place so that loans would be covered if something happened to you or your partner? Review your cover each year – especially as you pay off debt and kids grow up when you may not need to keep the cover at current levels.
7. Sweat the small stuff
At the time of the year when many households are still recovering from high credit card bills thanks to Christmas spending. David Simon and Rachel Stocker from BT Financial Group suggest budgeting for this in a separate account – starting now. ‘Look for an account that has low account-keeping fees and a high interest rate. Set up a regular savings plan, where a regular amount is allocated from your pay or automatically withdrawn from your everyday bank account and deposited to your Christmas savings account,’ the pair say in an address to the Davidson Institute, a Westpac financial education initiative.
8. Be inspired
Keep plugged in to how other people reach their financial goals and what you can learn from that. Joe Sirianni, executive director of mortgage broker Smartline, tells the story of how a young couple about to have their first child who wanted to buy a house with a garden near family but could not afford it. So they approached it differently and bought two investment units with the intention of reducing the mortgage as much as they could in five years. They then used the equity in the apartments to buy the home they wanted.