Friday, 1 February 2008

Money Matters #3 - Get Set for 2008

I got the February Money Magazine in the post today. I have a subscription to the magazine and I always love receiving it in the mail.  This month's Edition has  inspired me to write the third of my Money Matters posts. Susan Hely did a special report on getting financially fit, and with all the doom and gloom in the US, now seems like a good time to be financially fit.

I usually start the New Financial Year with financial resolutions, and the best of intentions, but the article says that the beginning of the year is a great time to 'overhaul finances'. I don't necessarily want big changes, just a little more effort in key areas (like insurance). With the US recession deepening, who knows what 2008 will bring, so it is best we be prepared.

Susan's personal goals are: switch to low-rate credit cards, stop being a slob about financial records, shop around for big-ticket items, write down what she spends and plan and pay for holidays well in advance. Sounds good to me. For the rest of us, here are her key messages:

1. Spend less than you earn - You may need to limit access to your money to acheive this. Two suggestions on how to do this a) Have two bank accounts - one for bills, the other for spending or b) go back to spending cash, rather than EFTPOS or credit cards.
2. Control your debts - If you are using credit to fund your living expenses, this means you. Firstly, stop using your credit cards or line of credit attached to your mortgage. Then, set a budget that includes repaying debt and stick to it. Sometimes getting someone with a fresh pair of eyes to look at your situation will help you get back in control. There is another way to manage your money. Do not despair.
3. Set your goals - Start with a short, medium and long-term wishlist. Once you know what you are trying to acheive with your money, it will be easier to make a plan and stick to it. Next work out what you own and what your owe, then you can ascertain how much you can afford to invest. The DIY Statement of Financial Position available from http://www.asic.gov.au/ is a great tool that can help you work out your personal assets and liabilities.
4. Low-rate, low-fee cards - Rule 1 - Try not to use your credit card - use alternatives such as cash, EFTPOS, debit cards (your own cash) and lay-bys (old fashioned but awesome). Rule 2 - If you have a credit card, pay it off IN FULL each month. Rule 3 - If you cannot pay your card in full, you need the cheapest credit card you can find. Think low or no ongoing fees. Think low interest. Think interest free days. But read the fine print before signing the transfer papers. There are a lot of "introductory offers" out there. Rule 4 - If you have credit card debt, you MUST pay more than the minimum monthly each and every statement. It will literally take you YEARS if you don't.
5. Live on less - After the plan and the financial goals comes 'control your expenses'. Live on less is a golden rule of financial success. Trim your spending by 5% initially and when you adjust to this, cut it by another 5%.
6. Diversify investments - Spread your money across a range of investments in order to reduce your exposure to market risk. The idea is that returns from better-performing investments will help offset those that under-perform. Always think long term when investing. It is difficult to pick a winner every year. Let the law of averages help you out. In the long term, diversify across the major asset classes, fixed interest, cash, property, Aussie shares and international shares. The exact way you hold your assets in each class will be determined by your risk approach and your financial adviser. Then regularly re-balance your investments back to your long-term benchmark, as the large professional investment managers do.
7. Don't over borrow - Base your borrowings on sensible growth and investment returns. Don't get caught up in the hype.
8. Best mortgage deals - Compare your current interest rate and annual fee with others. http://www.cannex.com.au/ is a great resource. Check if you are paying for features you don't need.
9. Pay yourself first - Pay yourself first and then pay your bills is one of the oldest pieces of financial advice. Setting up an automatic payment into your savings account from your pay is the easiest way. Direct it into a diversified managed fund with the appropriate level of risk and take advantage of compounding returns and time (you don't need a financial planner to do this. There are a number of funds you can contribute to directly these days).
10. Make your cash work - 3 words - online savings accounts. High-yielding, easy to access. Look for the best interest rate.
11. Boost your super - Superannuation is the most tax-effective investment (15% on contributions rather than your marginal tax rate AND earnings are also only taxed at 15%). You can access this money tax-free as either an income stream or lump sum when you are 60. A great long-term investment. Three key superannuation tips:
  • Keep as few super funds as possible to save on fees/charges
  • Give your Tax File Number to your Super Fund (to get the 15% tax rate)
  • Select the best investment option for your age/stage
So, according to Rick Arnheim, head of financial planning firm Shadforths, the rules of prudent finances are: "spend less than you earn, use credit cards wisely and pay them off fully each month, never borrow for large lifestyle expenditures like holidays and furniture and contribute regularly to your superannuation plan at a minimum of 12% of your gross earnings throughout your working life".


What are your financial goals this year?

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