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Your Money

Do-it-yourself plan

It’s times like these when our hip pockets are about to be hit by another bout of home loan interest rate rises, that we should take stock of our total financial position. Yes, I know this is a potentially scary proposition as we fear what the truth might reveal, but playing the ostrich with your head in the sand exposes your rear end for a massive kick that could really hurt your bottom line.

The DIY plan

And if you’re like most Aussies who haven’t shelled out for a financial plan, let me show you what you need to do for a do-it-yourself plan.

The goals
The first step has to be positive, so write down what your financial goals are. This could or in most cases should include:
  • to retire comfortably
  • to buy and pay off a property as fast as possible
  • to build up your superannuation
  • to buy an investment property
  • to cover educational expenses
  • to look after loved ones
  • to use debt sensibly
  • to ensure you’re protected from bad luck!
One bite at a time

As you can see, there’s a lot involved in creating a great financial plan. Don’t be overwhelmed if you’re just starting out. Take it on the same way experts suggest you eat an elephant - one bite at a time. (Apologies to the RSPCA for this old, but relevant cliché!)

Money management

After listing and prioritising your goals, it’s time for the confronting truth - it’s a budget time. In the age of the Internet, you can find lots of websites that will help you do a budget, but you can also do it the old fashioned way by listing all of your income you receive each week, fortnight or month. And don’t forget the interest you might pick up on savings and even the usual tax refund, if you’re lucky enough to get one each year.

Find the savings

Next list all of the expenses. Remember to divide annual expenses such as car registration and insurance by 12 if you are looking at a monthly budget. For a weekly budget divide by 52 and divide by 26 for a fortnightly one.

After taking your monthly expenses from your monthly income, you have your monthly savings or ‘dis-savings’!
Change your position

At this stage if you don’t like the amount that you see, it’s time to review your expenses or resolve to pump up the income. This isn’t always easy to achieve as it might mean asking your boss for a raise, going for a new job or a second job.

Rank your goals

Once you know your financial position, it’s time to prioritise your top goals and these have to be addressed with reference to your long-term goals. And this is where it gets tricky, underlining the benefit of an expert who can help you with the calculations of your relative positions given your options.

Your options

For example, in a perfect world you’d work out if it’s better to pay off the house quickly or if it’s better to salary sacrifice into super to turbo charge your retirement nest egg. And then you have to work out if you’ll need to access your savings over the coming decades before you retire, which means building up your super mightn’t be the best decision.

That’s why you need to visualise what you’ll do and make sure your plan works in with your goals.
One way to go

Here’s a plan lots of Aussies have used with great success, but it doesn’t suit everyone. This would suit the 30-40 age group more than those older.

Step one is to use the budget to identify savings. This might come from cutting most expenses by 10% and taking the saving to increase your mortgage repayments. Those who do this will have a redraw facility to access the money if an emergency happens.

Slash the mortgage

As income grows through promotions, a second job or from setting up a business, the loan could be paid off even more quickly or an investment property might be considered to access tax deductions on an asset that increases in value.

Borrow to invest

Other options could be to borrow to build a share portfolio of blue chip shares to hold for 20-30 years. You also can borrow and get tax deductions for buying units in a managed fund.

These sorts of investments permit you to access your money when you need it, but shares and managed funds are the easiest for this end. Selling a property is a slow process, though you can get equity loans against a property.

Ramp up super
As you have less need for access to invested monies, it can be wise to ramp up your super investments.
Coming next …

There are many options for building wealth through a plan and next week I’ll look at a super-driven strategy for building wealth. There are two important issues and they are having a plan and working out a plan to suit your goals.

Published on: Friday, November 09, 2007

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