Simple steps to control your money
LOOKING at the headlines right now, it's easy to get spooked by the stream of bad news. The sharemarket is volatile, property values are flat, and a question mark hangs over the health of the global economy.
As individuals, there's not much you and I can do to influence these events. But there are plenty of simple steps we can take to protect our own financial well-being.
Sixteen years ago, when I first wrote the first edition of my book Making Money, I explained several steps that provide the foundations of financial security. Back then, the economy was chugging along nicely. But having spent the last few months updating the book, with the new edition coming out in the first week of September, I realise these steps are still as relevant today as they were in 1995.
An essential starting point is to have a plan. It doesn't have to be overly detailed - life is too unpredictable for that. But you do need to include key goals. These might include, say, buying your first home within three years, or paying off your credit card in 12 months. Or you may want to live mortgage-free in ten years. These objectives give you something to work towards.
Next, start taking control of your money by spending less than you earn. If you can save on a regular basis you will become financially comfortable. If you can't, you won't. Drawing up a sensible budget and using this as your spending guide, rather than your credit card limit, is the best way to gain control of your money.
As you move through life, aim to own your home debt-free. Eliminating your mortgage as quickly as possible will see you save a fortune in interest charges and free up cash to invest elsewhere.
You may take some convincing on this one, but I reckon it's important to take an active interest in your superannuation, and make extra contributions whenever you can. Super is tax-friendly, it's generally invested in quality assets and you can't get your hands on the money until you need it most - in retirement. As part of a long term plan, super makes sense.
It's also essential to protect your assets. Most people insure their home, contents, car and other valuables. But the other asset you need to protect is you. It doesn't make sense to waste money having too much life insurance however there are times, especially when we're raising a family, when we need sufficient life cover. Income insurance is also worth having for many people, and furthermore, it's tax deductible
Finally, if there's one thing experience has taught me, it's that risk equals return. Humans seem to instinctively look for an easy way to make money quickly. As a result, each year thousands of Australians lose money to scams. We need to accept that if something offers a higher return than normal, it will have a higher risk. Don't let anyone fool you into thinking you can earn a high return with little or no risk.
None of these steps are complicated, and you don't need to be a money guru to follow them. But over time they will help you achieve financial independence. For more information on managing your money and building wealth, take a look at my book Making Money.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.