As a financial adviser I often get asked this question (in fact it’s high on the agenda for most people): how do I get my finances back on track?
Make your money work harder!
With the ever increasing costs of daily living i.e. bills, food, rent or mortgage, kids’ education, sporting activities, car loans, personal loans, etc. etc. it’s not surprising that most people are finding it hard to get ahead financially.
We often find ourselves tempted to live “beyond our means” by taking on a personal loan for that overseas trip, furnishing the house, or buying that expensive car we just “had to have” (on borrowed money). Sometimes we’re forced into situations beyond our control due to a change in personal circumstances (i.e. job loss) or even a family emergency resulting in over using the credit card to get you out of the situation today. If not managed correctly, this can create financial issues for tomorrow.
So here are some simple tips on how to get your finances back on track:
1 Establish where you are today
As laborious as it might sound (and no matter how disheartening you think it will make you feel), you need to know how you are tracking financially. Most of us would have a reasonably good idea, but by going through the exercise of creating a personal or family budget you’ll be able to see a clear picture of how much you’re earning versus how much you’re spending. You can download a free budget planner here
Having a realistic budget can help you understand where your money is really going, and most importantly give you a good platform from where to begin.
2 Plug the ‘leaks’
Look at the areas where you could be saving money and take action. Even taking your food to work instead of buying lunches could save you up to $40-$50 per week, and dare I say it: giving up that coffee each day can make a difference of $20 – $25 per week (I can just picture all the coffee aficionados cringing!). Ok, so maybe you’re not willing to give up that coffee, however these simple measures (as “drastic” as they may seem) could save you between $3,000 to just under $4,000 a year! – could you do with that extra money? Now here’s something to really think about: imagine if BOTH of you got on board and took action! Yes, that could be a grand total of $6,000 to almost $8,000 a year – does that make sense now? Do the numbers and work out what’s best for you.
3 Have a realistic goal and commit to it
Conquering your finances goes beyond having a comprehensive budget in place (Step 1). You need to have a goal and the relentless drive to accomplish it (elite athletes will relate this!). It’s no different to wanting to lose those extra kilos or wanting to partake in this year’s City to Surf (or the Gold Coast Marathon if you live up this way), only dedication, commitment & perseverance will get you there. So whether it’s paying off your mortgage, buying an investment property or putting money aside to secure your future, write down your goal(s) and give it a realistic timeframe.
4 Start by eliminating high interest personal loans and credit card debt
Personal loans, credit cards and car finance loans usually have a much higher interest rate than a standard variable home loan. Even a 0% store card (used to entice people into buying a new TV, computer or furniture) can quickly get out of hand if the full amount isn’t repaid on or before the due date, often reverting to a ‘sky high’ interest rate. Tackle them one at a time and start by repaying the debt with the highest interest rate first.
5 Consolidate costly personal debt into an easy to manage monthly repayment
Talk to an independent & experienced finance specialist to help you with this. Banks are limited in this way and don’t always have your best interests in mind as they only have one product to offer you – theirs! If you’re looking for advice or someone to talk to in this area, contact me via email and I will refer you to an expert in this field.
6 If your budget’s in surplus, make extra repayments on your home loan
Did you know that the interest you pay on your home loan could be as much as 1.5 x times the original loan amount over the life of the loan? For example, if your mortgage is $400,000 and you have a 25 year loan, the amount of interest (av. 6%) you will pay is a staggering $600,000! You then have to add the original principle amount of $400,000 and you will have repaid $1 Million over that 25 year period. Did you know that by paying an extra $500 per month off your home loan (in the same example above) could see you paying it off sooner by almost 8 years? You’d also be saving over $125,000 in interest – that’s a lot of money to be leaving on the table. Becoming debt free is only a pipeline dream for some but it doesn’t have to be that way if you take action and get started straight away.
7 Always have a plan ‘B’ for life’s uncertainties
Building up cash reserves can be the best way to safeguard against emergency situations or hard times. You can complement this strategy by also having adequate insurances in place to help protect your biggest asset: YOU! (and your ability to earn income). An insurance broker once told me: if you had a money machine in your garage that produced $1,000 per week, every week of the year would you insure it? of course you would! It’s interesting that most people insure their cars (an object that depreciates in value over time) without thinking twice, yet they baulk at the idea of protecting themselves
Don’t underestimate the value of having contingencies in place such as personal insurances, you’ll certainly appreciate it if something unforeseen happened and you had the financial windfall to protect everything you’ve worked hard for.
8 Get in the habit of saving for now AND the future
We all need to face up to the fact that one day we’ll be retired. What sort of lifestyle will we be able to enjoy when the income stops? The bills won’t stop coming, and as Generation X’ers it’s questionable whether we would even be able to fall back on the old age pension. As former treasurer Joe Hockey once famously said: “the age of Entitlement is over”
So it’s really up to us to find ways to make our money work harder and to put money aside to provide for our needs in the future, and getting your finances in order should be your first priority. It might be hard in the beginning, but you’ll feel better once you get started.
Ps. If you feel you need a little help, or you want more advanced strategies to help get you there sooner, talk to us (in confidence). Elite athletes and successful people know the real value in having mentors that help them develop the skills & strategies to succeed – they could never have done it on their own!
by Steve Luman AFP,TPB, ADFP