Lauren Parsons shares the essentials to becoming money smart
As a busy professional, your finances have an enormous impact on your wellbeing, both on an emotional level (stress about bills or competing priorities) and a practical level (affecting your choices and quality of life). This is why becoming money smart is one of the pillars of my Live Well Principles, under the ‘strengthen’ principle. Let’s look at why this matters and what you need to do to master your money.
Why We Need to Get Savvy
Financial literacy isn’t something that’s often taught in schools, yet it’s essential throughout life. Our attitude to money can cause us angst and worry, especially if we don’t really know where our money is going.
Stress over money can become a major problem in relationships. Different risk profiles, competing priorities and unexpected events can all create friction.
To get your money working for you, it’s important to understand your finances, set goals, avoid negative debt and know how you want to save, give, invest and spend your money. If you’re a parent, it’s great to be a role model and teach your children about finances as well to set them up for life!
Know Your Stuff
There are fundamental financial concepts you need to master to become money smart. For example, it’s critical to understand the power of compounding so you can make the most of its benefits and avoid the common pitfalls.
Compounding interest helps you save faster. If you save $50 a week for 30 years, with an average 5% interest rate, you’ll have $181,263. It’s the compound interest that will earn over $100,000 of that total. You only have to put in $78,000 cash, but you achieve more than double that amount!
On the other hand, compounding interest on something like credit card debt can cost you an amount that is enormously greater than your original purchase. If you pay your credit card off even just one day late, you’ll get a huge interest bill, as the company charges you interest not just for the one day you’re late, but for all the days back to when you made the purchase.
Credit card debt can quickly snowball and get out of hand. To avoid this, you can set up for your bank to automatically pay it off in full on the due date, from another account, avoiding this debt spiral. You just need to keep an eye out that your account has sufficient funds on the payment date. A monthly phone reminder to double-check this can be a lifesaver here.
Here Are Seven Essentials:
1. Get clarity
A great place to start is to get clear on your earning and spending habits. Sit down with your partner or on your own and look up your last few months’ transactions. This will give you an idea of what you’re spending so you can create a budget.
There are fantastic budgeting tools online, such as the www.sorted.org.nz website, which prompts you with categories to make this easy. Outline your key fixed living costs, transport and utility expenses, as well as what you plan to spend on discretionary things like interests and entertainment.
2. Set goals
Set savings goals for short- and medium-term things like holidays and important purchases, and for longer-term things like house purchases and retirement.
Your budget will help you produce realistic savings goals. Open savings accounts and create automatic payments so you’re saving first, then spending out of what’s left over. Start small and track your progress. Celebrate when you reach each milestone, then set a new one.
Often, we value and enjoy things more when we’ve saved up for them, rather than buying things on a whim using debt and then having to pay them off later. Building this cycle of anticipation and reward is great for children so they learn the value and benefits of saving up for things they’ll really treasure.
3. Track your spending
Do you know where your money actually goes?
Once you’ve got a budget in place, you can track your spending each month to see how much it actually lines up. This isn’t about giving yourself a telling-off if you overspend, but simply about raising awareness.
The biggest benefit is the attitude shift a budget can create. You might be tempted to buy that extra coffee or nice-to-have product, but if you can picture a key goal – being at that beach resort spending time with your family – you’ll realise it’s not worth it to miss out on that bigger reward.
4. Have savvy habits
Choose to be a wise steward and make your money count. It can be helpful to aim to save, give, invest and spend certain percentages of your income. For example, you might save 20%, give 10%, invest 10% and spend the remaining 60%. Start with the ratios that feel right to you and adjust them over time.
Remember that money is not good or bad. It just gives you options. It enables you to do a lot of good, both for yourself and for the people and causes you care about.
Small things add up. Avoid frittering money on things you really don’t need. Just think: if, instead of spending $15 a day buying lunch, you spent $4 on ingredients to make lunch to take from home, you’d have almost $3,000 at the end of the year to spend on something amazing or to give to a cause you’re passionate about.
Too many people spend money they haven’t earned to buy things they don’t want, to impress people they don’t like.Will Rogers
5. Ditch debt
Avoid debt on low-value assets. Debt to buy a house is an investment, as it’s an asset that will appreciate over time. Debt to buy new furniture, a car, boat or other ‘toys’ is not an investment, as those things will devalue over time.
If you have debt with high interest rates, the best thing you can do is pay it off as quickly as possible.
Beware of hire purchase arrangements, where the minimum repayment is usually designed so that you don’t pay it off during the interest-free period. This means you end up paying a whole lot of extra money in interest later on. The way around this is to take the total amount, (for example, $1,500) and, if it’s a 24-month interest-free period, divide it by 24. This way you know you need to pay $62.50 a month (rather than the minimum amount) to avoid the unnecessary overrun at the end.
6. Build security
Save for an emergency fund. You never know when you’ll have an unexpected bill due to the car breaking down, home repairs or a vet bill.
Protect your loved ones by getting insurance in place. Plan for retirement by drip feeding into your superannuation. If you’ve got a mortgage, consider increasing your repayments to reduce the total interest you pay.
Learn about investing. Regardless of how much you earn, you can always choose to set some aside for savings and investment. It’s an investment mindset and discipline in your habits that will grow your wealth over time.
7. Find the balance
As with so many things in life, managing your finances is a balance. Plan ahead enough to give yourself peace of mind for the long term while enjoying spending on things that bring you joy now. The more money smart you are, the greater your sense of freedom and wellbeing will be.