Getting into good financial habits
16 January 2015
Get into good financial habits, lose weight and get fit, travel more, stress less. These are some of the most popular New Year’s resolutions around. Come 1 January, about 45% of Australians vow to make changes that better their lives. Most people however, will collapse long before reaching the finish line with only about 8% achieving their resolution.
The following ten good financial habits that were featured in the Autumn edition of “Financially Speaking” newsletter can help you make the most of your wealth accumulation strategy and get you on the road to achieving your financial goals you set in your New Year’s resolution.
1. Start with the basics. The foundations to achieving your financial goals start with getting organised. This means you need to start with the basics – complete a budget and understand your expenditures. This will also allow you to manage your cash-flow to meet your ongoing expenses.
2. Improve your financial literacy. Financial literacy is the ability to make informed judgements and effective decisions about the use and management of money. It is an essential skill for functioning in modern society and is becoming increasingly important in achieving your financial goals.
3. Take control and build your super. Statistics show that women in Australia earn less on average than men. Lower earnings means lower superannuation balances, so this is particularly important for women. It is important to improve your knowledge and take control of your super. Start by tracking down any lost super and providing your tax file number to avoid paying up to 47 per cent tax on your employer contributions. Consolidating your super into one account is also important.
There are a number of ways to build your super and even small contributions can make a big difference over time:
- Salary sacrifice.
- Government super co-contribution: the Federal Government may match your personal after-tax contribution to super if you meet the eligibility criteria.
- Partner or spouse contributions: if you have a low income, or are not working, your partner or spouse may be able to contribute to your super.
4. Understand investment risk. An integral part of your wealth accumulation strategy will be investing into assets such as fixed interest, property and Australian or international shares. It is essential to understand potential investment risks and be comfortable with the impact of decisions you make (such as how much risk you’re taking on).
5. Understand your investment options. As a consumer, you probably wouldn’t purchase a product you didn’t know anything about – you would complete some research to get a greater understanding. The same principle applies to investments. You need to understand what you are investing in, what investment options exist and if these options are suitable for you.
6. Harness the power of regular investing. Making your money work harder for you is good practice. The easiest way to do this is to harness the power of regular investing. Investing regularly over a long period of time allows you to take advantage of compounding investment returns.
7. Protect your most valuable asset. Your ability to earn an income is your most valuable asset. All of your future plans depend on it. If you’re unable to work due to illness or injury, you lose this valuable asset – unless you have the right insurance arrangements in place.
You should seriously consider taking out appropriate insurance cover, such as income protection and total and permanent disablement cover to ensure your financial stability is protected.
8. Make the right estate plans. It is estimated that nearly half of all Australians die without a Will. Creating one is a vital aspect of your estate planning, which should also include enduring power of attorney, medical power of attorney, guardianship of your children and a binding death benefit nomination within your super account.
9. Appreciate that life changes. Circumstances will change throughout your life; therefore, your goals will too. So that you can continue to make the most of what you have, your financial plan should reflect changes. For example, you may get married or you may have children. You may receive an inheritance or a redundancy and need some advice about the most tax-effective way to use it. It’s your life; make the most of every opportunity.
10. Develop a strategy. Clear direction to help achieve your goals can be formulated in a strategy within a financial plan. Your financial plan can be likened to a road map which will move with you over time as your circumstances change.
Source: IOOF, August 2014