Part one of a two-part series, here are five tips to get your finances under control (Source: Getty)
You don’t have to be a financial genius to be financially secure. Really.
But there are a few simple things to know and simple strategies that can take you from worry to rich.
Your final ingredient is the focus. Focus on the future. And that’s the perfect place to start.
These five tips are part of a two-part series that will help you take control of your finances.
Tip 1: don’t hesitate and invest today
Money is for expenses, just not all at once because you want to stop working one day, right? That takes a little restraint. But the life changing insight is this: the sooner you start, the cheaper it is.
Suppose you are 20 years old today. If you diligently tuck away just $ 6 a day and have an 8 percent return on investment, you will be a millionaire by 65.
However, if you wait until you’re 40, you have to save a far more painful $ 35 a day. Delay to 55 and that daily amount jumps to a pretty impossible $ 180.
Still not sitting bolt upright? Then you need to know this too: Our smart 20 year old only needed to find about $ 100,000 of his million dollars.
Meanwhile, our literally poor 55-year-old has raised around $ 656,000.
That’s the magic of compounding. In order to use it for yourself, you need to save immediately, anytime. In fact, you need to invest immediately, anytime, and what is known as an Exchange Traded Fund (ETF) makes it easy for beginners to buy a decent, safer distribution of companies and sectors on the stock market cheaply and regularly on a regular basis.
Tip 2: Put 2 percent extra in super
As lucky as we are to have a retirement program running in the background for us in Australia, it’s unlikely that will be enough, especially if you are planning on taking on the unpaid job of raising children and not earning it for a while.
There are also two compound factors for women:
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We still earn an average of 13.4 percent less than men.
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We live about four years longer on average, so we have to stretch a smaller super pot over a longer period of time.
For these reasons, the actuarial firm RiceWarner successfully applied to the Australian Human Rights Commission to pay its female employees 2 percent more super.
The story goes on
For everyone, regardless of gender or circumstances, this is a sensible strategy.
Tip 3: Avoid stupid debts
What exactly is stupid fault? It’s debt that isn’t intended for a home or asset that you’re tax deductible on – like an investment property (stick with it).
But the dumbest guilt is for something that you have nothing to show for (except maybe pictures in the case of a vacation) or that immediately depreciates.
You guessed it: a car falls exactly into this last category.
While you can make some of your borrowed money disappear virtually instantly, you still pay interest on it.
Instead, save up for that cost (and buy the cheapest car you can tolerate for driving).
Tip 4: Get Smart Debt For A Home
For years I’ve heard cocky finance professionals say, “We believe house prices are going to crash, so let’s wait and rent.” Some even sell to outperform the market.
You know what always happens? Instead, prices will rise by 20 percent.
While the interest and cost of your home are non-tax deductible (more on that below), a mortgage is a great means of forcing savings, and your home is your own tax haven with no capital gains tax ever levied.
And assuming you don’t become a “foreclosed seller” because you’ve borrowed too much and / or interest rates go up dramatically, a drop in house prices is only on paper anyway.
Ideally, you want to buy with a 20 percent down payment for several reasons:
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To avoid getting paid for extortionate mortgage lender insurance
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To secure the cheapest loan rates
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To try to avoid negative equity (more on your property than it’s worth).
Tip 5: Consider Smart Debt For An Investment Property
Now this is especially good for those who have a higher tax rate. But it’s also potentially smart for budding first-time buyers who feel left out of the market to buy their own home.
If you buy an investment in place of your home, you can get tax deductions on interest and expenses. This means that the government is basically throwing in money to help you get the cost back and repay the property as well.
It will cost you less than usual and this can help you get a loan on the approval line.
This strategy also means you can buy a cheaper property than you might want, perhaps further away from a suburb of your choice.
Of course, you’ll want to identify an area where rental demand is strong (many places have low vacancy rates today) and ideally where prices will be lowered to move forward.
Then when you have a fair chunk of equity built into your investment property, you can use it to buy your own home.
