Essential Guide to Financial Management

    • The importance of proactive personal financial management cannot be overestimated. Ignoring your personal finances, whether intentional or unintentional, has serious consequences in the near or distant future.

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      If you don’t save up, you won’t have enough to lead a comfortable post-retirement life.

      Afraid to make financial investments? You will miss out on the opportunity to grow your wealth over your lifetime. No idea about personal financing options? Knowing what to do when you are ready to buy a home, make a big purchase, or start a new business will become more overwhelming than it normally is!

      Key Principles of Personal Finance

      Four basic principles of personal finance are helpful whether you make a few thousand or a couple of million annually.

      1. Spend Less Than You Earn

      Live within your means’ is sage advice that must never be ignored. Nothing depletes wealth faster than spending it on things you desire. While it may seem like a generic finance management tip, caution against overspending needs emphasising as it is a matter of mindset. It is not easy to give up or forego what you really want or have become accustomed to.

      That’s not all. A disciplined approach to spending is one part of the equation. Making careful choices about important purchases made in a lifetime is another. The ‘big four’ expense decisions you can expect to make at some stage in your life include:

    • Buying a house:

      For a majority of Australians, a home is the biggest investment they will ever make. That being said, home ownership is not necessarily a priority for everyone. Many people will go their entire lives without owning a home, preferring to rent where they live.

      This can be an economically feasible decision if your lifestyle requires you to travel frequently. On the other hand, if you seek to put down roots in a region, then home ownership makes good financial sense.

      Getting a mortgage, calculating approximate costs of paying it off over the loan term, factoring in associated costs like insurance and taxes, and estimating the costs of running your home are other financial concerns.

    • Extending your family:

      Children are an important source of joy in our lives. But purely from a practical viewpoint, kids also mean additional expenses: more food, clothes, a bigger car, and education.

      Determine or look up surveys indicating the costs of raising a child by region and household income. If the numbers look unmanageable given your current financial situation, you may want to wait two or more years, and during that time invest and save purposefully to have a comfortable amount before your child is born.

    • Buying a car:

      About 51% of households in Australia have access to two or more motor vehicles. It is quite easy to splurge on the latest model when you could have opted for an older, cheaper car.

      Optional accessories can also add up quickly to shock you with a higher than the anticipated final price tag.

      The financial impact of vehicle purchase is not limited to the price of the car or your financing options. Among other considerations that can help you save money over the car’s lifetime include the trade-in value, car history, and repair record.

      A careful evaluation of various factors, including price comparison, is necessary to strike a good deal.


    • Expenses on essential items

      Some savings strategies don’t require major lifestyle changes. For instance, you have many opportunities to pick a credit card that works hard for you and rewards you for usage. Another strategy is to opt for a 0% introductory rate credit card and switch to a different one when the introductory card’s rate expires.

      Choose a bank that pays you a higher savings rate and/or one that does not charge a high fee. The HSBC Serious Saver Account is currently offering a 3.1% maximum variable rate for the first four months while Citibank Online Saver is marketing a slightly less rate (3.05%) over the four-month introductory period.

      Other strategies include getting the best price for your mobile and internet services. There are innumerable offers bundling data and phone, or television and internet services into one cost-effective package.

    • 2. Budgeting

      No matter what stage of life you are in, it is important to know how to consolidate finances and work towards achieving financial security with smart budgeting.

      How much do Australians spend?

      The general living costs of Australian households was $666 billion in 2016. The average weekly expenditure was in the range of $1400 to $1700 in different states. Collectively, households spend more than $3 million in just three minutes. When compared to past data from 2010, Australians are spending more on categories including education, housing, food, non-alcoholic beverages, household services, power and fuel.

      Over the past three decades, households have been spending more on education, housing costs, healthcare communication, recreation, and personal care every week.

      When it comes to categorising expenditures, there are the “basic” living expenses related to housing rent, healthcare, fuel, electricity, and food while the rest are “discretionary” expenses that include recreation, travel, or other indulgences. Changes in demographic profiles and inflation are the two fundamental factors that influence expenditure. According to the Consumer Price Index (CPI), inflation rose by 14% over the last six years.

      How much should you save?

      Researchers at the University of New South Wales studied the spending habits of Australians to calculate a new budget that would help maintain a healthy, desirable standard of living. In the report, the researchers looked at the typical expenditure related to eating out, holidays, and parties. Researchers took into account expenses related to household services, goods, footwear, clothing and food from the price listings on top retail stores such as Kmart and Woolworths.

      They concluded that while a family of four (two children and two adults) require $1171, a single adult needs $600 every week to maintain a reasonably healthy standard of living.

      Unemployment benefits, according to the NSW researchers, were inadequate to meet these expenses. Minimum wages in many sectors were also not sufficient to meet this standard. While a family would get only $814 per week if unemployed, wages would also fall short by about $100 every week. Growth in wages at 1.9% is the lowest it has been in the past two decades as per the Australian Bureau of Statistics Wage Price Index.

      In an Essential poll, 40% of respondents said they were not able to save money although they could afford the basic essentials, while 19% of people who earned more than $2000 in a week said they were able to save up money.

      Optimum financial management with smart budgeting is the best way to ensure financial security for you and your family.

      Tips on budgeting

      Have a goal: It is important to have clear goals for budgeting related to how much you want to save per week, per month or in ten years. 85% of Australians have a specific target in mind when they make savings resolution.

      Millennials put aside $500 every month while the average Australian saves up $427 in a month that translates to 12% of disposable income. Retirement experts say that a 35-year-old should have saved up twice as much as his or her annual salary while a 30-year-old should have at least $60000 in a savings account.

      The top three goals for saving up money include holiday, setting up a rainy day fund and buying or renovating home. Other top financial goals include:

      • Building retirement wealth
      • Paying off debts
      • Investing in shares, commodities or bonds
      • Buying an investment property

      Evaluate your spending habits: To start out with setting a budget, you need to clearly know your total net income and total expenses in a week or a month. Start by documenting how much you spend every week on various household items, transport, eating out or recreation.

      Being aware of income and spending habits is the first important step in financial management. List your monthly bills related to utilities, mortgage, car payments, groceries, transportation and so on. While it is not possible to save or cut back on fixed bills related to utilities and mortgage, you can evaluate your variable costs related to entertainment, alcohol, eating out or shopping.

      Look at your credit card bill and bank statement to understand where your finances stand. Record daily and weekly spending habits on an excel spreadsheet or in a book.

      Prepare a plan: Apart from these planned investments, you have to also be able to tackle unexpected financial curve balls. Emergencies can occur at any time including car breakdown, dental work, or home renovation due to a freak hailstorm. If there is a sudden loss of job or income, at least 7% of Australians do not have enough to cover three months of living expenses.

      Without a plan, it will not be possible to achieve your savings target. Depending on your goals, whether you are looking to buy or invest in a property, saving up for retirement, or want to be able to afford your dream holiday, start by calculating how much money you need and the timeframe for the saving.

      Financial experts frequently recommend the 50-30-20 plan for optimal budgeting

      50: Financial management experts advise that your monthly expenses should be less than 50% of your take home salary. Divide your take home by 2 and then calculate the fixed expenses. The amount left over is the upper limit for your other expenses related to eating out, shopping, entertainment, or groceries. The lesser the monthly expenses, the more you are able to save up for your other financial goals.

      20: Allocate 20% of your take-home pay for financial security and priorities such as paying off debts, credit card dues, saving for retirement, or other goals.

      30: The remaining 30% of your pay is for discretionary expenses related to entertainment, donations, gym membership, and shopping.
      You can now set a weekly budget or allowance for your discretionary expenses by following this method:

      If you get paid monthly, multiply your total earnings in a year by 12. If you are paid bi-weekly, multiply the total earnings by 26. Then divide this sum by 52 and multiply by 0.3.

      If this sounds difficult, you can come up with your own ratio of savings but it is important to stick to whatever plan you make.

      Start saving: Statistics show 37% of Australians are slow and steady savers while 28% are hard and fast, while some individuals prefer a combination of the two. Whatever your approach to saving, it is important to start saving up as much as you can.

      Looking for fee-free bank accounts with your building society or credit union, avoiding paper bills and opting for soft copies, researching for the best deals on shopping, groceries and mortgage are some ways to boost your savings.

      Monitor your progress: Keeping track of the savings progress helps you address any shortcomings by stepping up your contributions or cutting back spending. If you are right on track with your savings, you can keep up the good work.


    • 3. Invest Carefully

      Robert Kiyosaki, best-selling author of Rich Dad, Poor Dad said: it’s not how much money you make but how much money you keep, how hard it works for you, and how many generations you keep it for.

      Good investment planning is a cornerstone of wealth generation. Any gainfully employed individual can begin investing in one or more financial instruments based on their financial goals and aspirations. The sooner you start investing, the bigger your long-term returns.

      According to a 2017 study by Deloitte Access Economics, 37% of Australian adults invest on a securities exchange, with 31% holding shares, 7% holding derivatives and 11% putting their money in on-exchange investments.

      An increasing number of young Australians are leveraging investment opportunities: between 2012 and 2017, 10% more 18-24-year-olds and 15% more 25-34-year-olds invested their money. Although most Australians invest with a long-term perspective, financial goals can be demographically distinct.

      Investment planning tips

      Are you in your 20s? Now is the time to take risks

      Younger Australians can afford to take risks and ride through short-term market volatility for strong returns over the long-term. High risk may not necessarily translate to high returns, but it does increase the probability of lucrative yields. If you are not keen to invest a significant percentage of your wealth, then consider an aggressive asset allocation strategy whose primary objective is capital appreciation rather than income safety.

      Such an investment portfolio would allocate most funds towards equity and make smaller allocations towards cash and fixed income.

      Diversify in your 30s

      You should continue taking risks in your 30s, while simultaneously minimising unnecessary risk. One way is to diversify your portfolio, a risk management strategy where the loss in one investment is offset by the profits from another. On the flip side, diversification will require you to increase your investment amount, which may not always be feasible. You can consider a fractional investment platform where you invest a small amount as less as a few hundred dollars to diversify in the way an investor with an asset capacity of thousands of dollars might.

      Focus on increasing retirement contributions in your 40s

      A couple that wants to live a comfortable life in retirement will need an income after tax of just over $60,000 annually. However, the idea of a comfortable retirement life is bound to differ across individuals. The general rule of thumb for retirement planning is: if you want your post-retirement lifestyle to be similar to your pre-retirement lifestyle, then you should be saving at least 60%-65% of your pre-retirement income in retirement.

      If you will be retiring in the next 5-7 years, dial back risk but don’t ignore opportunities

      This is often the period when investors take the safe 60/40 stock-bond allocation approach to keep volatility down. However, consider that human beings are living longer and women have longer lifespans than men. While you definitely don’t want to increase risk, you should also not play it too safe and ignore the opportunity to boost the growth of your nest egg or stay ahead of inflation as you inch closer to retirement. Clarity about your financial objectives and personal risk appetite will help you determine the ideal allocation mix.

      Thinking of expanding your family?

      Focus on growing your emergency fund to pay for unexpected expenses and have a fall back in the event of financial problems.

      If your kids will be starting university soon, avoid skimping on retirement savings to fund your kids’ education. At 70, you will not have many options to earn money, so encourage your children to work hard at getting scholarships or advise them to borrow to fund their higher education.

      Property is among the most common types of investments. If you make enough, you can consider direct property investment after comparing its pros and cons. For instance, a property offers you more leverage at the time of borrowing, allowing you to borrow up to 95% of your property value against 50%-60% of the value of your share portfolio. However, if you don’t choose the right locations for property investment, you may not earn much by way of cash flow.

      Never invest without a vision and plan. Reasonable forecasting and accurate number crunching are essential to make informed investment decisions. Actively consider engaging an investment planner and revisit your portfolio at least annually to stay on top of returns, consider additional investments or take action on unprofitable assets.


    • 4. Don’t leave anything to chance

      A financial cushion rescues you against financial devastation caused by unforeseen situations, including job loss, health problems, theft or natural disasters. Financial management is incomplete without a safety net that can protect you against the unexpected.

      Have an emergency fund in place

      You should have stowed away enough in your emergency fund to cover three to six months’ worth of living expenses. Even in a financially debilitating situation, you will be able to stay afloat without having to borrow and pile up debt. An emergency fund also assures peace of mind, allowing you to devote your energies towards solving the problem rather than worrying about where the money for food or other essential lifestyle components will come from.

      Setting aside emergency cash is also useful when you have to pay for car repair, a new guttering system or an expectedly large expense. You won’t have to reach into your investment portfolio or sell a valuable item to pay for an additional financial hit arising from unanticipated expenses.

      An emergency fund should consist of cash or cash equivalent. Any asset that cannot be made liquid immediately will not be of use when you need money urgently. A simple tip is to add a few hundred dollars to an interest-bearing account.

      Buy insurance

      The thought of paying an insurance premium every month or quarterly should not give you cold feet as coverage will save you a lot more in financial costs or damages sustained from hospitalisation, loss of household items from electrical fire, or a vehicular accident.

      If you’ve just started a family, then a life insurance policy will protect your loved ones by guaranteeing them income upon your passing. If you rent, renters insurance – a type of contents insurance – will provide financial protection against damage and loss of personal belongings in your home. It also covers any accidental damage that you may have caused to your landlord’s house and fixtures.

      Preparing a will should also form a part of your overall financial management plan. Creating a will is not a complex process unless you own a complex estate. Estate planning is essential if you own substantial assets; it will help you manage and preserve your assets when you are alive, and set rules for their distribution and control to your heirs after your death.


    • 4. Borrow Wisely

      Borrowing builds up personal debt. Financial planning aims to make debt manageable through a strategy known as debt consolidation where you combine all your existing debt into new debt. The idea is to make debt more manageable by ensuring one or fewer monthly repayments.

      That is not all, consolidation also aims to lessen the financial burden of your overall debt, such as by transferring high-interest debt from two or more credit cards to a single, low-interest card. Debt management is more straightforward when you have borrowed wisely for items that you cannot purchase with your savings alone. This ‘good debt’ you build up will also look good on your credit history as long as you make timely repayments.

      ‘Bad debt’ on the other hand accumulates from borrowing recklessly because it will almost always lead to financial constraints even if you do manage to move to a higher-paying job or have a profitable investment portfolio.

      Good and bad debt apart, there is also the trap of borrowing in haste; the risk here is that you may end up paying a lot more in borrowing costs than what you could have actually managed to get, all factors considered.

      Tips on keeping borrowing costs low:

      • Shop around for the lowest possible interest rate; the amount of periodic payments you make is directly related to the loan’s interest period and maturity rate.
      • Maintain a good credit rating; the higher your credit score, the greater your chances of being offered a low-interest rate.
      • Explore factors that reduce the lender’s risk and lead to a low-interest rate for you, including taking out a variable-interest loan, providing collateral for the loan, keeping the loan term short, and where possible, making a large down payment.

      Debt is a constant companion. A gritty focus on your budget and financial goals will go a long way in keeping excessive or unnecessary debt at bay.

      Should you borrow money from family and friends?

      There is much debate on the topic of whether borrowing from loved ones rather than financial institutions is more financially prudent. While family and friends may be willing to extend a ‘loan’ to you at zero interest, they are essentially giving you a gift. If this notion does not rest comfortably with you, then you should insist on paying them an interest rate that earns them the amount they would have earned from a high-yield savings account.

      Borrowing from loved ones creates unnecessary obligations and may cause a rift should accusations over missed or late payments come up. Of course, you can still ensure a formal relationship in the matter of the loan by fixing the repayment date and maintaining a spreadsheet of loan repayments with corresponding dates and amounts.

      It is possible that a good friend or a relative may negotiate loan terms and conditions with you. A sticky situation like this will once again create discomfort and may potentially dent more than one relationship.

      Line of Credit Benefits

      A Line of Credit trumps traditional loans and the ‘bank of family and friends’

      If you’re looking to take out an unsecured loan or need funds urgently, a Line of Credit is easily the most flexible and advantageous option for myriad reasons. Once you open a Line of Credit, you can use it for additional purchases in the future. And although similar to a loan, you can borrow a specific amount and pay it back over a predetermined timeframe, the associated fees are lower.

      &Solved is a leading provider of Lines of Credit in Australia. After opening a credit line with us, you don’t have to pay a charge to keep it open even if you don’t draw against it. You also do away with the long wait times and substantial paperwork of bank loans as all of our processes are online.

      Contact us today to find out more about how a Line of Credit could be the right financial solution for you or apply online to begin your application.

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