There are two key precepts when it comes to money. First, don’t take money for granted. Redundancy, illness or other life crises can always happen. Secondly, earn more than you spend. It may sound obvious, but many people fail to moderate their spending and end up in spiralling debt.
These things are often easier said than done. So how can you implement them in your own life? Speaking as a banking insider, in my view here are a few critical rules to follow:
Don’t live to earn
Never make money your main priority. Do what you’re passionate about, whether that’s taking on big challenges, making a change or helping someone. If you are subservient to that passion, the money will end up following you.
Avoid “hot tips”
Don’t listen to impulsive, hot tips about earning money unless it’s considered advice from a professional. You’ll often have a mate say “I’ve heard so and so” and “You should do this/do that.” But, what I’ve found from trial and error in my own portfolio is that often when I’ve taken that advice on board, and later assessed my portfolio, they’re the underperforming trades. So, seek professional advice, and don’t listen to your neighbour (unless they’re a financial adviser).
Get an offset account
One of the top tips, particularly in the current low interest rate environment, is to get an offset account with your mortgage. This was the second fastest growing bank account last year, after online savings accounts.
The problem is that with many savings rates in the market at less than 3%, when you factor in the tax you pay on your interest, you’re getting an effective rate of only half that. But with an offset account you effectively “earn” the same interest rate as your mortgage rate, because the offset prevents you having to pay that amount of interest on your loan.
Banks don’t like offset accounts as it chews into their profits, but they have to offer them due to competitive pressures. So if you are earning less than 3% on your savings, either shop around for a better rate or take advantage of an offset account. Some only offer partial offsets or have limitations, it’s better to look for a full offset account.
Don’t be apathetic
Financial stress is one of the leading causes of anxiety in Australia, driven by the housing affordability crisis and rising food and utility costs. Anxiety is linked to a lot of health problems which may further exacerbate your financial situation, if for example you lose work through ill health.
If you take charge of your finances you should see a fall in your anxiety levels. My suggestion would be to stop being apathetic about your finances: get a plan and start living well.
Determine what you’re worth
If you want to figure out more easily what you earn and what you spend, there’s a whole bunch of free online tools that can help. Sites such as the government’s MoneySmart portal will help you assess your finances and create and follow a budget. You will also find tips on preventing unnecessary expenditure, from clothes and groceries to power and water.
Diversify according to your situation
My advice is not to diversify just for the sake of diversity. For example in my own SMSF I’m running about 20% in cash and 80% in an “alpha beta” portfolio: a mix of higher and lower risk stocks. As you get closer to retirement, you need to revise your risk allocations, and increasingly mitigate your risk. As I approach that time I’ll be allocating a higher component to cash or more income-generating stuff, and taking the alpha out of my portfolio.
Make debt work for you
There is good debt versus bad debt, with the good stuff being an appreciating asset such as a mortgage. Never get into good debt for bad reasons. For example, if you want to make your debt work for you and you’re looking at the investment property market, do your homework. Make sure you’re on top of simple things like supply and demand, regulations and new developments before you tap into good debt.
It’s never too late to start getting your finances in order. The problem is that a lot of Australians suffer from financial apathy. If I didn’t work in the industry, I would probably be the same. Until the last few years, when high interest savings accounts emerged, most people were happy to park their money in a transaction account.
With online savings accounts now the fastest-growing bank account, people are finally catching up. Obviously the sooner you start being smarter with your money the better, but there’s still a lot you can do at any stage of your life to improve your financial situation.
Disclaimer: This article and its contents are provided as general information only. It is not intended as advice and must not be relied upon as such. You should make your own inquiries and take independent advice tailored to your specific circumstances prior to making any decisions.