MANAGING MONEY ESSENTIALS
Being better off financially increases your life choices such as being able to travel more, buy a new car or retire earlier. The harder your money works, the more you have, the more choices you have.
To do this you need good money habits. If you don’t have them but want to be financially better off, kick start them and repeat until they’re second nature. It’s a vital life lesson to share with children if you ever want to retire.
Where to start? With everything finance related online, it doesn’t take many clicks to find a tip, strategy or deal to get your money moving. If surfing the internet, here are some hacks to consider:
No lazy money
The big four banks’ online savings offer an average rate of about 0.33%, despite the RBA’s 1.25% point rises over the past three months.
If you’re getting that, it's time to shop around, especially if you’re in a term deposit returning less than 1% per year.
Smart money moves
Don’t pull money out of a term deposit before the term ends (the maturity date) just to chase a better interest rate. Check the maturity date which is on the paperwork mailed at set up, or login to your internet banking account and check the date.
If you wait too close to the maturity date to change your options from rollover to release, generally 5 days or less, your request might not be actioned.
An early exit from a term deposit that has not matured is a costly mis-step. Not only are you likely to wait around 31 days to get the money, you’ll probably get hit with penalties like an early withdrawal fee and an interest rate adjustment.
For example, if less than 20% of the term has passed, the interest rate reduction could be as much as 90% leaving you with only 10% of the interest - and that’s often before any penalty or fee is deducted.
Budget and Plan
Without a budget, it is easy to find yourself short of money because you haven't checked where it's coming from, and going to.
People with a financial plan are 3 times financially fitter than those without a plan. Committing to a goal ensures you’re on track to achieve it sooner rather than later. This also helps avoid the dive into our credit card to pay for something we didn't save enough for.
Make a plan for your financial goals, whether short term like a renovation or longer such as sending your kids to a private school from Year 7 (start saving for the annual tuition fee of approximately $25,000 before primary school starts, enabling you to save, grow and pay off the total $150,000 before high school ends).
Check in
Some people like having different money buckets which are tagged for a specific purpose. Some require frequent checks against fraud like the monthly bank statement, others might be annual such as when your super fund statement or insurance renewal arrives.
Each bucket should be optimised for maximum financial fitness and sometimes this is further boosted by combining buckets.
For example, saving for the kids' private education. Using your mortgage to fund education costs can be very effective, offering you a ‘guaranteed return’ - if you’re disciplined. It involves:
Directing surplus cash from your budget into the mortgage to reduce what you owe and save on interest.
Use the offset account or redraw facility to pay school tuition fees.
Repeat the process until your goal is complete.
Invest or pay down the mortgage?
Assuming the interest rate on a mortgage is non-deductible, you would have to earn the before-tax equivalent of the mortgage or greater to make investing worthwhile.
For example, if my tax rate is 47% and mortgage rate is 5%, I need a return of at least 9.43% or better on an investment to match paying off the mortgage. It works out like this: if I earned 9.43% over the year and it’s all taxable, I’d have a tax liability of 4.43% (9.43% x 47%).
This leaves me with 5% which is equal to my mortgage (9.43% - 4.43%). Note the outcomes change if capital gains tax is factored in or if the interest on my mortgage is deductible for example.
Getting tax help is essential.
Invest for success
It’s your money so make an informed decision. Consider the following options:
In or out of super? The tax concessions attached to super make it an attractive investment vehicle but it's locked away until you can access it, usually age 60 when you stop working. This might not work with your timeframes.
Gearing involves borrowing money to increase the amount you have to invest. Usually suits investors who can tolerate more risk. Find out more from ASIC MoneySmart.
Does what you owe and own (including your super) fit with your tolerance of risk and what you can afford – especially if you’ve borrowed money?
Do your future plans such as a work break or leaving an inheritance need protecting from an estranged relative for example?
Insurance options
Insurance is a potential money bucket to call on if things go wrong and should be reviewed when the annual renewal arrives, or when a significant event occurs.
For example, life and age events provide an opportunity to increase life, and total and disability cover (TPD) in super without medical checks. Life events offered can include getting married, having or adopting a child, taking out a mortgage or turning 50 (the ultimate gift indeed).
Once sorted, check with your super fund to see what life and age events you could take advantage of, and if an increase is advised.
By: Phillipa Billings - Tax Financial Adviser, Registered Financial Adviser, SMSF Accredited