With the first day of Spring, it’s the perfect time to review your finances. We’ve created a list of the top 10 tips so you can take control of your finances.
Set a budget
The first step in any financial overhaul is to make a budget and stick to it. Work out your income and your outgoings. Every budget will have fixed costs like accommodation, whether that’s rent or a mortgage. Your other fixed costs may be insurance, electricity and gas, transport, phone, and food. Electricity and gas are subject to seasonal changes, with people often having higher power bills in the Winter because of more time spent at home and higher heating costs. Adjust your budget accordingly.
Let’s say your electricity bill is $150 per month in Summer, but $250 in Winter, to avoid a bill shock in the cooler months you could start paying extra. That way you will be prepared for the months when your electricity is higher and you won’t need to make sacrifices in other areas.
If you have children and you know that they go back to school in January or February each year and need to buy stationery or school equipment, you could set aside some money in a separate bank account to cover these expenses.
After you’ve outlined all your fixed costs, you should allow money in your budget for savings. Generally, the rule is that you should save 20% of your income every month. If this isn’t possible, try putting aside a small amount each pay cycle and then gradually increase that.
Your budget should also include a discretionary income. This is money that you spend on things like clothing, entertainment, or hobbies and interests.
If the numbers do not add up, you may need to make cuts. See if you can reduce your electricity usage or switch to cheaper brands of food. When you’re on a tight budget, all these adjustments can make a real difference to your bottom line.
Once you’ve set your budget, you should commit to reviewing it every three months to ensure that it’s still working for you. If it isn’t, go back to the drawing board and see how you can change it. You should also review your budget every time your income increases or decreases so that your finances remain healthy.
Set financial goals
If you were going to the gym, you would set goals so that you remained motivated. Your goals at the gym might be to increase the time or distance you run on the treadmill for, or it might be to lose 20 kilograms.
When you’re reviewing your finances you need to set goals. It doesn’t matter how big or small these goals are. It could simply be that you want to buy a designer handbag, or that you want to save for a new car or a deposit on a house.
These goals will keep you focused and you’re less likely to veer off course. It will also get you in the mindset to make financial changes so that you achieve your goals.
It may be that you want to buy a house. If that’s your financial goal, you’ll be able to take steps to achieve the goal, but if you don’t know what you’re trying to achieve you’ll be less motivated and will be more likely to see money as a tool for the present moment, rather than a tool to help you have a great future.
Cancel unnecessary or unused subscriptions
Everyone loves coming home from work and watching Netflix, but if you have the premium subscription you’re paying $20 per month. That’s $240 per year. You may also have subscriptions for other streaming packages. If you do that could add up to more than a thousand dollars each year.
If you cancel your streaming service subscriptions you could invest that money in shares or ETFs on the ASX. The average return on the ASX is 7.7%. This means that if you’d invested $1000, you would have $1077, which isn’t bad for sitting back and just watching your money grow.
Check your super
All investments need to be checked regularly so that you can assess if they’re working for you. ANZ Bank published an article in October 2020, which revealed that more than $20.8 billion of Australian super was in lost super accounts. This was found in statistics from the Australian Tax Office.
Have you recently changed jobs? If you have, then your super might have been paid into your employer’s default fund rather than your main super fund.
The Productivity Commission put out a report in 2018, which found that a significant number of Australians have more than super account. This is costing members $1.9 billion a year in additional insurance premiums and $690 in excess administration fees. The consequence of this is that the average worker is $51,000 worse off in retirement. If you had 20 years in retirement that would equate to you being $49 worse off in retirement. That’s quite a significant decline in your long-term standard of living.
Even more alarmingly, The Association of Superannuation Funds of Australia found that 40% of young Australians do not know what their super balance is. If you don’t know what your super balance is then you can’t take steps to rectify the situation, leading to you being in a poor financial position in retirement.
Consolidating your super into one fund can save you a significant amount of money. Before you consolidate you should use the ATO’s Your Super tool so you can choose the fund that will give you the best return.
Ditch the term deposits
While it’s good to have a certain amount of your wealth in cash, term deposit rates are at historic lows. The major banks like ANZ, Commonwealth Bank, and Westpac only offer a rate of 0.20% for three years.
Other smaller financial institutions such as Judo Bank offer an interest rate of 1.15% for three years.
Whilst the rate is historically low, term deposits are a safe investment and at the end of the term, you have the option to reinvest the cash so that you can earn even more.
Term deposits are less volatile than other investments and you can choose the term that is best for your needs.
Review your insurance policies
Insurance is important and can give you protection in case something was to happen and you needed to replace all your possessions. If you had basic contents insurance for up to $30,000 (based on replacement value), your premiums each year would be $567, but if you switched to Budget Direct, your premiums would drop to $269, saving you $298 each year. That is cash that you could put into a savings account and leave for an emergency or add to other investments.
Take charge of your savings
Savings is one of the hardest things ever. Most people find that when they’re saving, or trying to save, expenses crop up. Your car might need repairing, or you’ll have huge legal costs, and that will throw you off track.
The best way to deal with unexpected expenses is to take control of your savings. You can do this by setting up an automatic payment so that when you get paid, a certain percentage automatically goes into your savings account and you don’t have to think about it.
If you set up an automatic payment for your savings it’s really important that you do not touch your savings. It’s even better if you do not have your savings account linked to internet banking. If you unlink it from internet banking you are less likely to want to touch it. You’ll probably forget it’s even there until you get the periodic statements.
Pay attention to your finances
On the flip side, many Australians don’t pay attention to their finances. They often don’t check their balances enough and get shocked when they see their statements. You should create a spreadsheet so that you can track your finances each month.
You could have columns with an amount you currently have in savings, the amount you want to save, and the actual amount saved at the end.
Seeing the figures in a spreadsheet will help you maintain your finances and you’ll know exactly where you stand. You’ll also have a clear picture of what you need to change.
Check your credit report
Most people have one or two blemishes on their credit report, but were you aware that every time you apply for credit, that appears on your credit report and lowers the score? You can get a credit report, free of charge from Dun and Bradstreet or other Australian credit reporting agencies.
Knowing your credit score will allow you to fix any errors and improve your credit score.
Consider your investment choices
Although stocks are a risk for older Australians, when you’re younger they’re a better option because the returns offered are much greater than if you were to keep your money in a savings account or a term deposit. The sharemarket or ETFs are a good option for younger Australians and can help you build your wealth while you still have time to fix any poor investment choices.
Before you do invest, make sure you do your research. This may involve chatting to a financial planner or looking at different investment options yourself.
With all these tips you should be on your way to a sunnier financial future.