It’s an opportunity to round up the usual suspects, but with all the promise and good intentions of an exciting new year, I wanted to go a little further by looking at how to stay out of trouble in the first place and make the most of the opportunities ahead. Many Australians continue to lose sight of the fact that, despite some challenges and things not being as easy as they were in the boom leading up to the GFC, we still live in the World Champion economy, so you’d have to be a mug not to try to make the best of it.
So, here are some hardy perennials that should combine to make a healthy financial garden. Some you might already be on top of, but the statistics say very few of us manage them all:
1. Invest in your self – your skills, your health, your education
Forget the usual debate about property v shares as the best investment – it’s you. Except for a fortunate few, your ability to earn income through your (statistically probable) long life is your most important asset and therefore it deserves care and maintenance. Whatever field you’re in, it’s changing and that means you have to keep up with that change. There’s a strong correlation between educational qualifications and higher income and the more skills you have, the more employable you are. As for your health – it’s only the most important thing you have.
2. Don’t smoke
So don’t smoke – and not just because it’s bad for your health. It also seriously damages your wealth. To steal a line from the Victorian government’s Better Health Channel, a [http://www.betterhealth.vic.gov.au/bhcv2/bhcarticles.nsf/pages/Smoking_the_financial_cost |one-pack-a-day habit over 10 years will cost $56,000 at present prices] - enough to buy a couple of cars or place a deposit of your own home. Despite all but the greatest idiots knowing how bad it is, some 16 per cent of Australian adults are still daily smokers. The especially cruel part is that the poorer and less educated you are, the more likely you are to smoke – the people who can least afford it are the most likely to have the addiction. And the cancer sticks cost you income as well. All other things being nearly equal, the average employer will tend to select a non-smoker ahead of a smoker. Contrary to all the billions spent by Big Tobacco on building illusions, smokers stink and look like losers – and they are. (Written like the long-reformed smoker that I am.)
3. Understand yourself – how you spend
You can’t control what you don’t understand so you have to be honest with yourself about your spending habits. That means doing the boring (and sometimes frightening) task of sitting down and analysing where your money goes. For a start, the process should help you prioritise your spending – the least important costs can be eliminated and the regular big bills budgeted for. On the credit card front, if you realise you’re a person who has trouble paying off your card in full each month, you’re better off changing to a card with no interest-free period but with lower rates and fees. But then read the next point:
4. Pay off credit cards in full or don’t use them
An easy barometer of whether you’re in control of your finances or not is whether you successfully avoid paying the outrageously high interest rates charged on credit cards. If you pay off your credit card (or cards) in full each month, it’s healthy sign. If you can’t manage to do that a couple of times a year, you’re teetering on the edge. And if you regularly or (shudder) mostly only pay the minimum amount required, you are out of control and need serious help. Credit card interest rates will keep you poor and make you poorer. The good news is that Australians have become better over the past couple of years at keeping their credit cards under control, increasingly using debit cards instead for the convenience of plastic without the pain.
5. One get out of jail card: restructure your debt
Half way down the list, if you realise you’re in trouble, there can be a get-out-of-jail card but it can’t be used very often. Restructuring your debt to escape those big credit card interest rates can mean redrawing on your mortgage (if you have one) to pay off the cards once and for all, or taking advantage of some of the introductory offers from rival cards – a few months interest-free on transferring the debt from an existing card to a new account. There’s no point doing that though unless you use the opportunity to make a clean break from previous bad habits or unfortunate circumstances. You really do have to cut up the old card, not start running up debt on both the new and the old. At the extreme, for people who are simply too far down the hole to see daylight, it can be necessary to go bankrupt. It’s not a step to be taken lightly as it comes at a cost to your credit rating and some employment prospects that should not be underestimated.
6. Build a buffer for emergencies – not for fun or fashion
So far, this column might have sounded like a big finger wag at spendthrifts, but most people who get into really serious financial trouble haven’t been buying expensive shoes and French champagne. Because so many of us spend most of what we earn, it only takes a little bad luck to push us over the edge. It might be ill health, an accident, a robbery, a temporary loss of a job or an unexpected need to pay legal bills, but if you don’t have an emergency savings buffer to fall back on, you can suddenly find yourself drowning in a sea of red ink. Credit cards and loan redraws can be a great help in an emergency, but they can only be relied on briefly. You can be paying all your bills every month and have no debt, but it you don’t also have a savings buffer, you’re not really in financial good health. So, open an on-line savings account (Ubank seems to have the best of them at present, as long as you make an automatic deposit of at least $200 a month) and let the money build until, as a rule of thumb, you have enough so that you could survive three months without any income. (And “emergencies” don’t include the need for a sudden overseas holiday or those shoes that are on special for “only” $600.)
7. Check your insurance is adequate
Australians are notoriously underinsured. Maybe we’re hopeless gamblers, forever betting that bad luck will never strike us, but misfortune is out there. Build up a big enough emergency buffer and you can self-insure for some things, but not for the major items of your home and contents, motor vehicle accidents, personal liability and, most of all, yourself.
8. Spend less than you earn
This is the granddaddy of financial advice, as boring and obvious as can be but still the core of being in control and what everything else boils down to. It nonetheless requires discipline and the aforementioned self-knowledge. It doesn’t mean you can’t borrow to buy lasting assets (your home, a conservative investment portfolio) but you have to be able to comfortably service any debt within your income. And there’s an implied warning not to borrow just for consumption, for things that don’t at least hold their value.
9. Don’t try to get rich quick
Get-rich-quick schemes only work for the people selling them, not for the mugs who buy them. No, trading foreign exchange markets is not easy. Gearing yourself to the eyeballs and beyond for a big plunge in the real estate or stock markets is not smart as both can go down as well as up – just ask any Storm Financial victim. Things that sound too good to be true nearly always aren’t true – just ask any Firepower victim. Punters, poker machine players and gamblers in general are, by definition, mugs – in the long run, the house wins, you can’t beat the odds. If you have absolutely spare cash after you’ve ticked all the boxes above – money you wouldn’t miss if it fell out of your pocket – buying a ticket in a multi-million jackpot lottery can be a reasonable price to pay for some idle daydreaming, but only someone desperate would think more of it than that. Instead, regular, boring investment in solid, yield-paying assets does pay off thanks to the “miracle” of compound interest. And it’s not all that hard right now either – NAB shares, for example, are still yielding around 7 per cent plus franking credits, or there are good “old school” listed investment companies like Milton, Argo or AFIC that provide a conservative portfolio at very low management expense. Capitalism is only hard when stocks are booming and, therefore, expensive.
10. Get ready for next year now
If you have dug yourself into something of a financial hole over this Christmas/New Year period by getting carried away with shopping for presents for yourself or others or splurging on too-expensive a holiday, learn from it and prepare for next Christmas now. Once upon a time, a long while ago, when Australians were a little more thrifty and credit was harder to get, banks and credit unions used to promote “Christmas clubs” for just this purpose. It was just a name to put on a savings goal, but it worked well enough. Just as lay-buy and cash have made a comeback, maybe it’s time to create your own Christmas club and have a happier new year.
There are many more than 10 tips for better financial health and control, but if you think about it yourself, you’ll soon enough come up with them. Diversifying your investments is a given, making the best of the tax advantages of our generous superannuation system is another, comparison shopping your utility bills can save real money, eating more fresh produce and less fast food pays off in any number of ways, and so on. Taking financial control is mostly about common sense – but unfortunately that seems far from common.
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