We all put off jobs we don’t like and sorting out personal finances is often right up with painting the fence and clearing the gutters. But putting off financial planning is costing you money that could be saved and earning interest. Guest writer Anthony Fensom offers us some top tips on planning personal finances.
When it comes to personal finances, failing to plan is planning to fail. But with most of us caught up in our increasingly busy lives, how can we plan personal finances for a better future in 2013 and beyond?
January is the start of the new year and it’s a perfect time to commit pen to paper on your financial goals for the year ahead. Write down your targets, making sure they are measurable and achievable, such as saving $200 a month towards your children’s education. Also, work out a budget for the year based on usual expenditure patterns. Are there areas where savings can be made, such as planning meals instead of buying takeaway, or increasing income through extra work?
Review the mortgage
The mortgage is usually the biggest burden concerning the planning of personal finances. And with recent falls in interest rates, it’s important to make sure your lender is competitive. Comparison sites can provide a guide to what’s available, but before switching be sure to check with your existing lender to see if they are willing to match another offer.
Liam Shorte of NextGen Wealth Solutions says those seeking to refinance should seek a loan with a mortgage offset account.
“Every dollar saved on your home loan is about a 7 to 10 per cent risk-free return on your money, depending on your marginal tax rate,” he says.
For those saving for a first home, Shorte suggests taking advantage of the government’s first home saver accounts.
“If you’re a couple, you can both open a first home saver account and get a 17 per cent bonus from the government.”
“Make sure you’re not paying for more insurance than you need, especially if you have more than one super account,” Shorte says. “Salary continuance insurance only pays up to 75 per cent of your income, so having two policies with different funds doesn’t mean you will get more than that limit.”
Get rich automatically
From doing the budget, you could have identified savings for your personal finances. By organising regular, automatic deductions from your pay and reinvesting the returns, you will build up a large amount through compound interest.
ASIC’s MoneySmart website has a range of calculators that can show exactly how much you need to target for a particular savings goal. For example, saving $5000 for a holiday will require savings of $408 per month over a 12-month period, based on an interest rate of 4 per cent. Similarly, any dividend payments from shares could be reinvested, ideally through a company dividend reinvestment plan (DRP). DRPs offer the benefit of zero brokerage as well as increasing your shareholding automatically.
Another method of automatic wealth is through salary sacrificing from the higher income earner’s wage, such as into a super account. For those on the top marginal tax rate, this can mean an extra $31.50 for every $100 of pre-tax salary into super.
And if one partner is earning a lower income, take advantage of the government’s co-contribution scheme by making voluntary contributions to their super. For those earning $31,920 or less for fiscal 2013, the government will contribute an extra 50 cents for every dollar contributed to super up to a maximum of $500 a year.
Here’s a possible way to plan personal finances for the year ahead:
- January: Set up/review budget and write down financial goals.
- February: Review budget – is it on track?
- March: Check the mortgage to see if it’s comparable with other lenders. If not, negotiate with the current lender or refinance.
- April: Start the tax-planning process. Are there any expenses that can be brought forward to boost deductions?
- May: Consider further tax moves, such as making contributions to charity or selling underperforming shares to offset capital gains elsewhere.
- June: Review all savings and investments. Are there better financial options available?
- July: Conduct a mid-year budget review.
- August: Seek accountant’s assistance or do own income tax return online.
- September: If you have an investment property, review its performance. Is it time for a rental review?
- October: Check your annual super return. Is the fund delivering or do you need to move elsewhere? Is it time to consider a self-managed super fund?
- November: Start the planning process for Christmas. How much will you need and can any presents be bought earlier on special?
- December: Conduct a year-end budget review. Make sure any holiday spending sticks to the budget.