Financially aware and savvy
Living to a budget, using credit sensibly, reserving money for tax and rainy days all provides a base for a happier life. Many people don’t do these things well and suffer.
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Understanding how to manage money is a basic skill, with many challenges! The most obvious challenge is that our wants are unlimited compared to our finances and a bit like those on a diet we face daily temptations.
Budget to spend smart
Not knowing about your spending is not a case of ignorance is bliss. Time and money are our two great resources and we all need to learn to prioritise how we spend them. For example, if we buy a new car and take a loan we are committing to sacrifice the purchase of other items or experiences, and pay interest often for a few years.
Understanding money involves day to day discipline over spending but also planning for major periodic expenses (like insurance). All of us need to get a good idea of what we spend money on today and what we may need to spend money on in the future.
So how do you start to get a sense of this? For a month it is recommended to record all expenses and income to see how much you have saved and how fast you are either running down your savings or increasing your debts. Your record for each day would include simple entries into a spreadsheet [Opening Balance – Expenses + Earnings/Pay = Closing Balance].
This provides the base level of understanding of your current money habits. During this month, you should find that you are more conscious of what you spent and end up reducing some non important expenditure to make way for things you may value more or even for saving.
After this month of active recording, it is recommended that you move to a new habit of reviewing your income (actual dollars in) less all your expenses (actual dollars out) once a week.
To further improve your financial situation, we recommend having only one spending/everyday account (where your income gets transferred into) and one saving account for emergency purchases or unexpected expenses. We also recommend linking the spending account to a debit card used for most expenses. Credit cards are not recommended unless absolutely necessary. Having a debit card instead of a credit card ensures you only spend what you have, provides an easy way to monitor spending, and ensures you are not building up credit card debt which always has very high interest accumulating.
The weekly money review habit outlined previously will provide the opportunity to identify and then shift money left over in the everyday account to your linked (rainy day/big item purchases) savings account.
Save to provide choices and freedom from worry
By building a saving fund, you position yourself to buy larger purchases. It is common to try and save around 10-15% of your take home income. This is after all expenses including rent, food, utility bills and transport costs.
However there is one time when savings should not be your first priority. If you have any current debts you are normally far better off paying them off as quickly as you can, instead of building savings at the same time. This reflects the often very high interest rates on loans and credit cards for young adults.
Don’t be a debt victim – too many young adults are
Debt allows us to buy things sooner. Credit cards in particular, should come with health warnings.
Too many young adults are seduced by the opportunity for a new car or major holiday and go into significant debt. Buying major purchases on a credit card or taking a personal loan for a car or holiday, involve very high rates of interest.
Often young adults end up paying three times more after interest for the same purchase. This is not the only risk. Many others find that they get into trouble paying back their debts because circumstances change such as fewer hours at work, lost jobs or other costs such as unexpected medical expenses. Having trouble paying debts normally leads to a poor credit record and much greater difficulty and costs in borrowing in future including for a first home.
If for example, you owed $5000 on your credit card at 18% interest and made only a minimum monthly payment (that starts at about $102/mth for a $5000 balance), you’d end up paying $17,181 over the 33 years it would take you to pay off the card.
Other Money Traps
Money trap 1 – many people fail to allow for the full cost of running a car when deciding to buy a new vehicle. The result is that they find a very large share of their income goes to repaying the loan and operating the vehicle. Can you afford perhaps $10,000 per year to own a car to cover operating costs, paying the interest on the debt and the falls in the market value of the car? When you know the full cost you are much better positioned to decide what car to buy or finding alternate ways to get around.
Money trap 2 – An addiction like gambling is a voluntary form of taxation. The odds are stacked in favour of the house, so the more you play the more you can be expected to lose and the more certain you are to lose. Other forms of addiction also have financial as well as health risks. This is most commonly a problem with cigarettes and the exorbitant cost of a habit like this with the average cost of cigarettes at $45 per packet.
Plan for taxes
As one of the certainties in life, too many people are ignorant of their tax obligations. For those starting a full time job for the first time, this is particularly important.
You might be told your salary package is $80,000 per year (for example). However, it’s important to remember that this includes your obligation to pay income tax, repay student loans and make a contribution to your retirement account. You should focus on what your take home income is after these compulsory obligations. It might be that your annual take-home income is only $55,000 or over 30% less.
Your employer will provide you with a statement of your take home pay. However, it is important that you ensure you have completed the paperwork from the tax agency when you were hired to ensure your tax obligations are regularly deducted from your pay, so you don’t face a very nasty tax bill at the end of the tax year.
If you’ve never worked before, the first thing you’ll need to do is apply for a Tax File Number (TFN) to give to your employer. It is highly recommended that you apply for a TFN well before you start applying for jobs because it can take up to 4 weeks to receive your TFN after you have applied for it.