Australians are typically very good at spending money, but there comes a time when many of us need to exercise financial restraint.
This may be due to starting a family, getting a mortgage, educating children, losing a job, or a reduction in income. For some, the need to gain control of personal finances comes with the realisation that their debt has spiraled out of control, and cannot be paid off effectively.
According to American author George S. Clason in his famous book The Richest Man in Babylon there are seven ways to take control of your financial future:
PAY YOURSELF FIRST
Ideally, you should aim to save 10 per cent of everything you earn. This money is not being saved to buy a new car, have a holiday, or even buy a house.
It is being put away for long-term savings and will be used to provide an income when you are no longer able to work. For some, making additional contributions to superannuation may be an ideal way of saving that extra 10 per cent. If you can’t afford to save that much, then save a smaller part of your income and gradually increase it over time. Ideally you should aim to live off 90 per cent, or less, of your income.
MANAGE YOUR EXPENSES
We all have regular expenses that need to be met in order to live including food, housing, clothing, and transport. But, many of us spend unnecessarily. This is called ‘discretionary spending’, and it often consumes most, if not all, of our surplus income.
Start by setting a budget of your known fixed costs, and then allow for some discretionary spending. Look back over past bills and identify your regular expenses. Bills often arrive at irregular intervals.
For example, a phone bill might arrive once each month (or once each quarter) but you might be paid weekly or fortnightly. Expenses should be calculated over a full year, and then divided by the number of pay days, in order to work out how much needs to be set aside out of each pay to cover bills as they arise.
GROW YOUR WEALTH
Now that you have started saving part of every dollar you earn, you should look to having it grow in value. The investment earnings achieved should be added to your growing pool of savings.
PROTECT YOUR CAPITAL
In order to protect your savings from loss, care must be exercised to ensure the security of the principal. Before investing understand the associated risks and, if the risk is unacceptable, look for a more suitable alternative.
Take advice from a qualified financial adviser. There are many good investment savings plans that allow small amounts to be saved on a regular basis while providing access to a wide range of investment options including fixed income, shares, property and overseas investments.
INVEST IN YOUR HOME
Eventual home ownership is the desire of many Australians, and owning your own home provides security for you and your family. Home ownership also delivers favourable tax concessions. This means that any gain achieved on the sale of your home is, generally, exempt from tax.
It therefore makes sense to maintain and improve your home, within reason and without over capitalising, to ensure you maximise the price you achieve when you come to sell.
We all understand how important it is to insure our possessions, but how many of have adequate insurance on our life and our ability to earn? You should seek the advice of a qualified professional adviser to ensure that you are adequately insured against events that might rob you of your life, or your ability to earn. Yes, you can insure your future income.
INVEST IN YOURSELF
One way of building wealth is to increase your capacity to earn. To achieve this you need to be willing, irrespective of age, to increase your knowledge and skills through continuing education and training. Many people expect their employer to provide additional training. However you should take personal responsibility for increasing your knowledge and experience by investing time and money in suitable training that enhances your opportunity to increase your earnings over time.
Taking control of your financial future takes time and discipline. It will involve making some hard decisions, but if you make a plan and stick to it, over time it will become a habit and will deliver financial security and prosperity.
PETER KELLY | CENTREPOINT ALLIANCE
PREPARE FOR LIFE | ISSUE 21 | 2016
The information provided in this page is general in nature and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information you should consider the appropriateness of the information with regard to your objectives, financial situation and needs. You should seek independent advice from your financial adviser before making any decisions.
AUSTRALIAN MORTGAGE AND FINANCIAL ADVISERS (AMAFA)
Phone: 07 3378 2056
Fax: 07 3378 2069