Give Yourself a Special Gift
The Twelve Days of Christmas traditionally refer to the sacred period between the Christ child was born in Bethlehem and when the three magi, or wise men, appeared before him in fulfilment of the prophets.
This is such a busy time of the year that it is difficult to get any cut through at all, much less to expect anyone to read through five articles on various financial issues. So, I thought I would restrict this month’s newsletter to two simple articles, this article, and another on the key trends that will impact all investment markets in 2024.
Hopefully as the madness dies down between Christmas and New Year, everyone will take time out during these twelve days, to just quietly think about their finances and how they might improve them in line with the following tips.
If your finances are not as good as you would like them to be, this will be the best Christmas present you ever give yourself.
1. Take control of your finances or at least understand them.
Many people just go from one pay day to the next. They never really understand where their money goes, and they just hope that if an unexpectant bill should appear, they will somehow struggle to find the funds to pay for it.
Take control of your money. It won’t take long. Just go through your expenditure for a month and add up how much you are spending on essentials such as groceries, how much you are spending on non-essentials and how much you are re-paying on outstanding debts.
This will be the single most important step you can take in terms of improving your finances.
2. Make sure the money coming is greater than the money going out.
Next, make sure you are earning more than you are spending. These days with more and more people having multiple credit cards and loans and other debts, it is easy to start living beyond your means or spending more than you earn.
Finding out whether you are living beyond your means will simple fall out of understanding how you spend your money each month. Once you know exactly how much is going out in a typical month, you should know if you are earning enough to cover that level of expenditure.
Importantly, don’t kid yourself. There will always be one off bills. To really live within your means, you should always allow for unexpected bills to arrive. That’s just part of life.
3. Have some rainy-day funds set aside.
If you don’t accept that unexpected bills are just part of life, and plan for them, you will invariably get caught in a situation where a bill suddenly comes up say for car repairs or to replace a key household appliance and you will be caught short.
This will force you into taking out an expensive short-term loan, paying for the item using a credit card or via a buy now, pay later facility, which in turn will just lead you into a downward spiral of more debt and more interest rate charges.
So, avoid these unnecessary costs and the stress of not being able to pay un unexpected bill when it arrives, by always ensuring you have some money set aside for exactly this purpose. How much you set aside depends on how much you spend each month, but as a rule of thumb, the equivalent of one month’s spending is probably what you should aim to set aside.
4. Proactively look for savings
While you are reviewing your finances, you should really question yourself as to whether you are proactively looking for savings on your regular expenditure and are there ways that you can easily save money.
For anyone over the age of 60 for example, a very simple solution is to proactively use your senior’s card. This is not means tested and is available to all Australians over the age of 60. While not everywhere offers a discount for seniors, it is surprising the number of establishments who do. It never hurts to ask.
Likewise, there are a raft of ways to save money even if you are not age 60 or older. For example, the RACV has teamed up with Woolworths to offer savings at their petrol outlets. You simply need to present your RACV membership card.
Every cent you save is a cent you don’t have to earn. So, looking for these types of saving should always be front and centre.
5. Simplify your finances.
One of the biggest obstacles to taking control of your finances, is having complicated financial arrangements. For most people, you should have one savings account into which your income is paid. Then you should have one credit card from which all your expenses are paid.
This alone will give you a clear understanding of exactly how much money is coming in each month and exactly how much is going out. Sitting alongside these two accounts is a long-term savings account which holds your rainy-day funds.
That’s it. These are all the accounts you should have and if you structure your finances correctly, you shouldn’t be paying fees on any of these accounts.
6. Pay off your debts as fast as possible.
There is one rule that is common to all debts. The longer you owe money and the higher the rate of interest being charged on that debt, the more expensive it will be. So as a result, you should always try to repay debts as quickly as possible.
If debt is a problem in your life, try to focus on the smallest debt and re-pay it as quickly as possible. Then focus on repaying the next smallest debt until you are simple left with no debt or just your home loan.
While it is tempting to consolidate high interest debts into a lower interest rate loan such as your mortgage be very careful if you choose this path. To many people re-finance their debts into their mortgage, only to find within a year or two they are back to square one, with maxed out credit cards and a mortgage that is larger than when they first bought their home.
7. Review your mortgage each year.
For most people their mortgage is their single largest debt and most overwhelming financial commitment. Make a point of once a year reviewing your home loan in terms of the interest charged on it and any benefits your bank might be able to offer you as part of a home loan package.
Reviewing your mortgage is particularly important during periods of increasing interest rates, as it is very easy to take out a home loan with a bank at a competitive rate only to find a few years down the track that it is more expensive than those offered by other banks.
8. Make sure you have appropriate insurance.
One of the biggest mistakes anyone can make during tough financial times is to cut back on insurance cover. London to a brick, it is just when you let a much-needed policy lapse that you find yourself in need of it.
However, what is appropriate in tough times is to shop around and make sure your insurance cover is appropriate for your needs and that you take advantage of any discounts that might be available to you.
Many companies for example will give you a discount if you bundle your car insurance and house insurance together. That’s not always the right choice but it shows you that savings can be made.
9. Consolidate your super.
Beyond buying your own home, the next most important financial decision you can make is ensuring that your superannuation is well managed. What most Australians need to aim for in retirement, is simply to own their own home and have all their savings in super.
By achieving this simple goal, they will find that they never need lodge a tax return again. So just as you should review your home loan once a year, review your super as well. Make sure you only have one super policy and that you are proactively investing your super savings.
10. Contribute as much to super as you can.
Beyond buying your own home, superannuation is your greatest financial asset. Unlike holding savings in your own name, which is taxed at your top marginal tax rate, money you contribute to superannuation is taxed at a benign 15 per cent.
In addition, depending on how much you earn, you can also use your super contributions to reduce your overall tax bill. So that’s a win/win.
So regardless of your financial position, you should be proactively looking to increase your superannuation balance at every turn.
11. Sort out your will.
In sorting out your finances, don’t forget to think about what would happen if you were suddenly not here anymore. Circumstances change and with that so should your will. Make sure that you regularly review what it says and always update it when there is any significant change in your life.
12. Invest in yourself.
While paying off your home and maximizing your contributions to super are important, the very best investment you can make is in yourself. Take this time over Christmas, regardless of your age, to think about what you are doing in life and what you would really like to be doing.
While re-training and educational courses can be expensive, it is always money well spent to invest in yourself regardless of whether it helps increase your earning capacity or not.