Personal Finance: 101
We spend years in school learning about a variety of topics including the necessities of reading and writing, the useful (think Australian History, Computer Skills etc) and the unnecessary (I’m still yet to use Pythagoras’s Theorem in my day to day life). However, despite the great job our teachers do educating and inspiring our youth, many people leave school and next to no understanding of how their finances work.
Money forms such an important part of our day to day lives but it is considered such a personal subject that we rarely talk about it. We all want to achieve financial freedom so I have put together a list of things we all should know about how to do it.
Minimise your expenses. The best advice I can give towards building wealth over the short, medium and long term is to simply keep your expenses smaller than your income.
A little goes a long way. When you first start working getting into the habit of contributing extra to your superannuation goes a long by retirement. You might not notice 5% of your weekly salary going to your superannuation but when you get older that will have a tremendous impact on your retirement.
Maintain a budget. If you don’t know what your expenses are, how are you able to save for your goals? Not only does sticking to a budget help you to track your money but you will find it easier too. As a part of your budget remember to include how you much are going to save/invest each pay cycle.
Write down your goals and stay accountable to them. Goals without a plan and accountability structure are just dreams. While there is nothing wrong with being a dreamer, writing down what you are working towards will help you get there. Most banks will let you rename your accounts, so rather than have your account called “Online Saver” call it “Europe Trip 2020”
Avoid bad debt. There is good debt and there is bad debt. Borrowing money to invest is very different to borrowing to live a lifestyle. Going to University typically involves taking on a debt, however this debt is going towards improving your education/employability and is going to be repaid from your future earnings. Using your credit card to pay for a trip to Thailand when you can’t afford to go, is an example of a bad debt. Personal Loans, Credit Cards and Store Cards are some of the most common examples of Bad Debt.
Don’t waste a pay increase. Unfortunately for many, an increase in salary will coincide with an increase in lifestyle expenses. Work out a plan as for this money will be best used to achieve your goals.
Pay yourself. When you get paid, the first money that should leave your account is to yourself. If you are an employer your employer will contribute to your superannuation on your behalf. However, if you want to retire early with financial independence you need to make additional investments. If you can’t afford you can’t afford to do this, have a closer look over your budget and look to see where you can trim excessive spending. Those $5.50 Extra Shot Frappes add up quickly.
Don’t put all your eggs in one basket. Having an exposure to an array of assets will help diversify risk across your portfolio. Modern investors are able to use investment vehicles such as ETF’s, Managed Funds and Index Funds to invest in a wide array of assets that may not be affordable to you otherwise.
Don’t buy into sensationalist headlines. The media has a habit of getting this one wrong. Famously the Wall Street Journal wrote an article on the 9th of March 2009 asking how much lower stocks could go. It turns out that March 9th 2009 was the start of the bull ran for equities we have experience for most of the last decade.
Buy a house where you can afford. Your current home doesn’t have to be your dream home. Although I confess that moving home is the last thing I ever want to be doing, by buying property with smaller repayments, you are able to pay off your mortgage faster and build equity in your home.
Budget for the things that you love to do.
Your homework for this week is to find an hour to sit down and review/create your budget. Just have a look at how much you are actually spending and you might be surprised at how much is being spent on the unnecessary.