More Australians could benefit from embracing “old fashioned finance” practices in 2014 to better manage their money, avoid over extending themselves and achieve their property buying goals.
Smartline’s Executive Director Joe Sirianni said our move to a largely cashless society, while convenient, can make it easy to spend without realising it, and accidentally undermine your saving or property buying plans.
“It’s very uncommon for someone with a home loan to get into financial trouble,” he said.
“Unless they get sick and can’t work or they lose their job, it’s unusual for that to happen.
“It’s when people have a home loan, two credit cards, an interest free loan and a car loan – that’s when they start getting into real financial trouble as having to service all these debts proves increasingly expensive and stressful.”
Smartline Adviser Shawn French says it is then at this stage that people look to consolidate these various other debts into their home loan.
“However, that strategy only works if the equity is available in your home and it’s not something you can keep on doing – your house isn’t an limitless ATM, particularly in light of the flat property prices experienced in recent years,” he said.
Anyone can face financial difficulty, and the new year is a good time to set positive money habits in place.
Smartline suggests the following tips to stay (or get) in control of your money, and work toward goals like property ownership.
Determine your priorities & set goals
Determining your priorities and setting life goals allows you to determine what you need your money to do for you.
Set goals for the next one to two years, two to five years, and five-plus years and then put strategies in place to achieve these goals.
“Knowing what your priorities are and setting goals will help you avoid the temptation of spending money which can undermine your long-term plans,” Mr French said.
Have a budget or spending plan
While many people cringe at the thought of preparing a budget, think of it instead as a spending plan which allows you to determine exactly how you want to spend and manage your money.
Understand the “true” cost of your spending
Take the example of a person with a mortgage of $350,000 at 5.25% for 30 years, requiring fortnightly repayment of $892. They spend $15 a day on lunches and coffee, five days a week.
If they cut back to spending that money only one day a week, they would be saving $120 a fortnight which they could then divert to their home loan.
The increased repayment of $1012 a fortnight would see them save $93,802 in interest on their home loan, and take seven years and three months off.
Save for things
Items such as TVs, holidays and outdoor/garden items should be saved for, rather than purchased on store credit or credit cards.
“It shouldn’t be too difficult for most people to save up the money to purchase an item that costs $1000 or $2000,” Mr French said.
“Buying items such as this on credit and then paying in excess of 20% interest really does damage to your financial position.”
Pay cash & avoid credit cards
When you go shopping, decide how much you want to or can afford to spend before you leave home and take the cash instead.
“It’s amazing how different it feels when you pay $150 for something in cash rather putting it on the credit card,” Mr French said. “You actually get more of a sense of what things are worth and are likely to think twice about what you spend.”
Structure your finances
Knowing your priorities and goals allows you to structure your finances accordingly. For example, if you are 50 and want to retire at 65, when you buy a new property, take out a 15 year loan so you know it will be paid out by the time you retire. Or, depending on your income levels, have a 30 year home loan but salary sacrifice more into superannuation for the next 15 years so you will have extra money to pay out the home loan at retirement.
Mr Sirianni said people needed to be aware of their money and how they spend it to fully maximise its benefits.
“A good mortgage adviser will be happy to work with you to ensure you have helpful money habits, and access to the right products and structures to allow you to achieve your goals,” he said.
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