Financial advisor David Simon explains how you can live within your means and take the first step on the way to achieving better financial health.
Every individual’s financial health varies, but each circumstance is equally important and it is essential that you fully understand and control your own situation. Generally speaking, people will experience varying lifestyles, some modest, others comfortable and for the lucky few, even luxurious. Even though there are stark differences between different levels of lifestyle, the capacity to generate such means is equally relative. Indeed, although the statement ‘living within your means’ has an array of different interpretations, your ability to live within your own particular means, is what determines your financial health. The best way to determine whether you are financially healthy or not starts with an assessment of your own lifestyle. You can do this by identifying a set of objectives and creating a realistic budget.
Establishing financial objectives in an effective manner can provide much needed clarity about your financial need(s). The SMART goal approach (including Specific, Measurable, Achievable, Realistic and Timely goals) is very effective. Setting a specific savings goal, firm budget and defining exactly what is required to achieve your goals, and by when, will provide a much greater sense of accomplishment.
The establishment of a budget is the single most critical step in being able to determine our financial health. The first step is to gauge your current spending patterns and then calibrate this amount to confirm a realistic budget. The key to success is to keep it both simple and realistic.
This understanding of your financial goals and the creation of a realistic budget will provide the foundation – and tools required – to enable a fundamental assessment of the health of one’s finances. Essentially, if you are unable to meet your specified objectives and lifestyle needs (budget) then the health of your financial situation remains questionable or (and more likely) confirms that you are living “beyond and not within” your means. These two fundamental levers are often the most effective in enabling financial success. They are also the ones which are most easily controlled. Nevertheless, there is a range of alternative strategies which can also help increase your probability of financial success and health. Some of these strategies include:
- financial planning
- superannuation and
- debt management.
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Financial planning is the essential foundation for achieving and maintaining a secure financial position which best relates to your needs and objectives. A financial planner is able to analyse your financial goals and objectives and advise the course of action required to achieve your goals, in the most effective manner. For those who can’t afford a financial advisor – or prefer to do this on their own – there are other tools which can assist people to organise their finances, including the Federal Government’s MoneySmart website. This offers a great resource with a vast amount of information which is easily accessible, interactive and demonstrated in lay terms – essentially it is simple, educational and effective.
Investing offers another way to think about how to make money. People mostly make money from working and drawing wages or salary, but the theory of investing means putting your money to work for you. The earlier you start, the longer you have to smooth out market volatility, create long-term growth and benefit from the power of compound returns.
The Association of Superannuation Funds of Australia (ASFA) says that the average Australian couple will need an income of $58,326 per annum to live a comfortable life in retirement. For many people additional contributions to super may be required as your employer’s 9.25 per cent contribution may not be sufficient to provide this amount. Super contributions can be divided into two types:
- concessional (before tax) and
- non concessional (after-tax)
Each type of contribution to superannuation is subject to different contribution caps and tax treatments. Some examples of concessional contributions include salary sacrifice and employer sponsored contributions, whilst examples of non-concessional contributions are personal after tax contributions, co-contributions and spouse contributions.
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The way you manage your debt has a profound influence on your general financial health. There are many products available on the market and it is highly beneficial to regularly shop around to review the rates and fees which are being offered by providers. Something as simple as switching a $300,000 home loan from a rate of 6.50 per cent to an improved interest rate of six per cent will reduce the monthly repayment by approximately $98 and could save you almost $35,000 in interest over the life of the loan.
Another effective method to reduce debt is to increase the level of repayments. If you have the funds, simply increasing the monthly payment on a $5000 credit card from the minimum $100 per month to $500 per month could result in a saving of over $5000 in interest, as well as a significant reduction in the time it takes to pay off this debt completely.
Another strategy may include aligning the term of your debt with your preferred retirement date. By using a debt repayment calculator, you will be able to illustrate the future date by which you could have your debt repaid and by aligning this date with your anticipated retirement date, you will be able to determine whether these debt repayments are able to fit within your budget and form a realistic goal. If not, you may wish to consider reviewing your budget, altering your debt repayments, extending your retirement date and/or mortgage term.