Mon 20 March 2017
17 Finance tips for 2017!
1. Put your spending on a diet
Just as many of us resolve to go on a diet after the excesses of the festive season, it is wise to do the same to your finances, and for largely the same reason; being that Xmas is a time when most of us spend significantly more than at other times of the year. There are many tools available to assist you, including the ASIC Moneysmart Budget Planner, bank sites and various smartphone app’s.
2. Save first; spend the rest
It’s YOUR pay packet, so why not pay yourself first, then spend what’s left? If you think back to when you earned 10% less than you do now, you probably got by just as well. So, pay yourself the first 10% and commit it to long term savings, then live off the rest. And, at least in the early stages, one of the best places to keep your savings is in a mortgage offset account. These effectively “earn” interest at the rate of your home loan AND you pay no tax on the earnings.
3. Get rich slowly
If it sounds too good to be true, it most probably is. The only successful get rich quick schemes are inheritances or lotto winnings. So, unless you have an elderly billionaire maiden aunt or know the upcoming set of Powerball numbers, you’re best to use the only proven formula for growing wealth – commit to a regular savings plan, stick to it and don’t touch it!
4. Understand the magic of compounding returns
When The Rolling Stones sang “Time Is On My Side”, they could have been talking about investing. $10,000 earning 5% per annum would be worth just over $23,500 after 9 years, but almost $26,000 after 10; a 23.5% increase on the original investment in that tenth year. The longer money stays invested, the faster it grows.
5. Consolidate/refinance debts
Today, loans are more flexible than at any time in history. This makes it relatively easy to consolidate more expensive loans (credit cards, personal or car loans etc) into available equity in your home loan. A word of caution, though. Before you pay out an existing loan, make sure the payout figure does not include future interest, otherwise you end up paying two lots of interest on the same debt.
6. Pay accounts when due (not early OR late!)
It may seem like a smart thing to do to pay an account as soon as you receive it. But, if the payment is not yet due, leave your money in your offset account saving you interest until such time as the payment is due. This applies to accounts payable in instalments, such as your Council rates. Often, the “charge” for the instalment option is lower than the interest rate on your home loan. So, again, paying in instalments and leaving the difference in offset is saving you money. And, of course, late payments usually incur penalties or interest and are best avoided.
7. Consolidate super
Unless you’re diligent about providing your super account info to your new employer, you can end up with a new super account every time you change jobs. Each account will have admin fees and, most likely, insurance premiums, meaning you may well be duplicating costs. Choose a fund you think suits your situation and provide its details to your new employer any time you change jobs. If you already have several funds, consolidating them is easy. Even the ATO’s “Find Your Lost Super” site is helpful (if you’re patient).
8. Shop around and ask for a discount
We all know the saying, “Every cloud has a silver lining”. In times of sluggish retail figures, most businesses are prepared to transact on lower margins. Even if it’s not marked as on sale, ask! Don’t buy from the first outlet, or the first time you see an item, unless you’re satisfied you can’t do better. And, don’t be fooled by interest free terms offers. Often you can do better if you pay in cash (or EFTPOS).
9. Don’t act on “tips” from the unqualified (the neighbour, Uber driver etc)
It’s amazing how many investment gurus live in your street or drive cabs. They say the time to get out of a market is when such people are telling you to get into it. Typically, these “expert” opinions lag the market by some margin, meaning that, by the time they’ve “got wise”, you’ve probably missed the boat. As with any endeavour outside your own field of experience, the objective guidance of the professional is always your safest choice; the key word here being “objective”.
10. Review ALL your insurance (health, general, personal)
There are two risks with insurance. The minor one is given the most attention (ask Aleksandr Meerkat); that of paying too much. The greater threat to an otherwise sound financial plan is inadequate protection. The rule with insurance is carry every risk you can afford to personally, then insure everything else!
11. Put a bit extra into your super
As it presently stands, superannuation can be the most tax effective way to invest in Australia. So, unless you have already reached your Concessional Cap, $25,000 per annum effective from July 1 this year, adding a bit more is generally quite worthwhile. What’s more, after July 1, even personal contributions will be tax deductible up to that $25,000 cap.
12. Turn unwanted items into cash
There are so many ways to sell unwanted items these days; Gumtree, e-Bay, even the classifieds in this paper! So, it’s easy to turn the dust-collectors in your home that you no longer want into cash. With vinyl music back in vogue, pre-loved fashion, even plants from your garden, there are so many things you may no longer want that others will pay good money for. As they’ve always said, one person’s trash is another’s treasure.
13. Manage your tax liabilities
We are all aware of our responsibility to pay (sometimes begrudgingly) our share of tax. But, two things that catch many people out are “lending’ money to the ATO and paying more than your share. The first occurs every time you receive a large tax refund. If you know in advance that this is the case, it simply means you have overpaid; in other words, lent your money to the taxman. And, since he doesn’t pay interest on it, why let him have it? There are ways and means to either not pay the extra, or get it back sooner than when you lodge your return. Worse still, many people are unaware of their entitlements to tax deductions, neglect to claim their entitlements and miss out, as a result. It’s too hard earned to do that.
14. Understand your credit card(s)
Well managed, a credit card is a powerful financial tool. With the ability to purchase goods and services with the benefit of deferred payment, not to mention the “reward” points, they can be very beneficial. But, start paying interest at the punitive rates they charge and you end up worse off than using other forms of payment. Understand exactly when and how much you need to pay to avoid interest charges and do that. A caution with balance transfers, too. While potentially attractive, most will use all your payments to repay the interest free transferred balance first. This means that, if you are also making purchases with the card, you end up paying interest on those transactions until you have cleared the entire balance, and NOT at the zero or discounted rate.
15. Diversify your investing
Everyone knows you don’t put all your eggs in one basket. But, that logic is rarely applied to investment decisions. EVERY investment portfolio should include some of every option available, in terms of the major asset classes of property, shares, cash and bonds. And, of course, any or all can be owned within Australia or outside our borders. The safest way to ensure a happy outcome from investing is to spread your risk. It’s a lot easier than most people think. So, before you plunge headlong into borrowing money to buy that investment property to go with the mortgaged home you live in, explore your options.
16. Review your estate arrangements
As recently as 2014, the WA Public Trustee expressed concerns that two out of three West Australians did not have a valid Will. Empirical evidence suggests that even fewer have addressed the need for Enduring Powers of Attorney and Guardianship. If you don’t know what those are, you definitely need to do something about them. Many an otherwise sound financial plan has been brought undone by the death or incapacity of a member of a family unit. Insurance arrangements are one thing, but even these are compromised if the legal arrangements aren’t in sync with the insurance proceeds.
17. Have a PLAN!
It’s earned a mention in several of the other 16 tips, so it makes sense that you have a sound financial plan that encompasses all of the preceding issues, plus numerous others. And, like anything else we undertake in life, ensuring the plan is relevant and up-to-date requires a comprehensive periodic review. Make a plan, put it in writing and refer to it often.
Wayne Leggett, Principal, Paramount Wealth Management