When it comes to money, what steps should you take now to set yourself up financially for the future?
For those just starting out in the workforce, it's very easy to adopt a “live today, worry about finances later” attitude.
But the reality is when you are young with fewer responsibilities you often have the greatest potential to start building a strong financial foundation for the future.
This doesn't mean you have to forgo all the luxuries such as going out, clothes, holidays and other fun things to get ahead - it's just a case of finding the balance
Modifying your spending a little can help you free up a small amount of cash so that you can start to accumulate savings.
It’s important to remember that it's not what you earn, but what you learn and do with your money that will determine where you end up financially.
For those at the beginning of their working lives, there are a number of areas that need to be looked at in order to devise the most effective way of achieving their goals and objectives. These include, amongst other:
In this document, we explore each of these areas in brief detail.
By arranging a initial consultation, free of charge with one of our financial advisers, we can begin to determine whether all of these areas need to be addressed and which combination of strategies will provide you with the best chance of achieving your financial goals and objectives.
Budgeting – It really works!
A budget is a powerful tool you can use to help you take control of your money.
Some people say they can't budget. They say it's too complicated or they don't know where to start. Or they think they've got enough money and don't want to be restricted by a budget because it might mean going without.
The truth is, everybody who does a budget can see how it pays off. Basically, it helps you understand where your money goes so you can take control. A budget helps you decide what you want and plan how to achieve it.
How do you get started?
You can start a budget by simply writing down what you spend over a couple of months. Remember, your budget is your personal tool and you can choose how much detail you want to include. When you are starting out, you may find it helpful to put your spending into categories - such as groceries - rather than keeping tabs on individual items such as shampoo, breakfast cereal and pet food.
Think about what categories you would like to use. Some people find it helpful to work with two groups of expenses:
How do you stick to a budget?
If you want to stick to your budget you may need to look at your expenses. If you need to trim your spending, look at cutting down your extras list first. Don't cut them all out. If your budget is too tight, it will be harder to stick to.
How do you manage unexpected expenses?
Some people worry that an unexpected bill will derail their budget. The best way to prevent this is to plan for it. Try to save enough to give yourself a small buffer you can use in emergencies.
When used properly, debt can be a very effective tool that may help you to achieve your financial goals. Debt can be used to purchase a range of items that, otherwise, you would not be able to afford. It is also important to understand the important difference between ‘good’ debt and ‘bad’ debt.
Debt can assist you to buy property, purchase a car or consumer goods and also enable you to purchase investment assets such as shares or managed funds. By using debt smartly, you may be able to reach your financial goals sooner.
‘Good’ debt and ‘bad’ debt
Where debt is used to acquire investments such as shares or property, this is known as gearing and this is often referred to as ‘good’ debt – due to the potential to claim a tax deduction in respect of the borrowing as well as the fact that you have borrowed against an asset that can appreciate in value.
‘Bad’ debt is non-deductible debt like borrowings for consumer goods such as cars and holidays. Even though a loan for the family home is non-deductible, it should not necessarily be viewed as ‘bad’ debt – the value of the home has the ability to grow over time.
Borrow to invest
Borrowing to invest simply allows you to access a greater asset amount than would otherwise have been possible. Gearing is, however, not without its risks – while it may allow you to multiply your gains, similarly, it may also magnify any losses.
First Home Owner Savings Accounts
First home saver accounts became available from the 1st of October 2008. They offer you a simple, tax-effective way of saving for your first home through a combination of government contributions and concessional tax rates.
To open one of these accounts, you need to:
The benefits for you
There are several incentives to open a first home saver account:
You can use the money you save as a deposit and to meet other costs you incur in buying or building your first home. If you decide not to go ahead with buying or building your first home, you generally can’t withdraw the funds – you’ll have to put them towards your super.
How it works
After each financial year, you’ll receive a government contribution based on your personal contributions during that year. When you’re ready to buy or build your first home, you withdraw the funds and close your account.
Take a moment to think about your greatest asset. Is it your home and its contents? Your car? Possibly your life? Many people understand the importance of insuring these assets. Yet, all too often, they don’t adequately protect what is potentially their greatest asset – their ability to earn an income.
Think about it this way. If you are aged 35 and earn $850 per week, you could earn more than $2.9m1 before you turn 65. Isn’t that worth protecting?
Now take a moment to consider what could happen to your lifestyle if all of a sudden you were unable to work for an extended period due to illness or injury. Day–to–day bills and expenses could quickly run down your savings.
Fortunately, there is an alternative. By taking out income protection insurance you can protect your greatest asset and avoid putting your financial future at risk
How does Income Protection work?
If you suffer an illness or injury and are unable to work, income protection insurance can pay you a monthly benefit (typically of up to 75% of your pre–tax income) to replace lost earnings.
You can generally claim the premiums as a tax deduction, which can reduce the after–tax cost by up to 46.5%. Also, any benefits received are usually assessable as income for tax purposes.
You can choose from a range of “benefit payment periods”, with maximum cover generally up to age 65. Most income protection policies also offer a range of ‘waiting periods’ before your insurance benefit starts accruing (with options normally between 14 days and two years).
As a general rule, the shorter the waiting period and the longer the benefit period, the more the insurance will cost. Where cash flow is limited, it is generally better to choose a longer waiting period rather than shortening the benefit period.
The Government Co-Contribution
If you earn less than $60,342 per year, make personal contributions to superannuation and meet other eligibility criteria, the Government will assist your retirement savings by making an additional contribution on your behalf at the rate of $1.50 for every $1 you put in, up to a maximum of $1,500.
Calculating the co-contribution amount
If your total income is less than $30,342 the Government will contribute $1.50 for every $1 you contribute, up to a maximum of $1,500.
However, if your total income is between $30,342 and $60,342, the following formula is used to determine the amount of the co-contribution:
$1,500 – [0.05 x (total income -$30,342)]
Note that the formula gives a maximum amount so that where the eligible contributions are less than $1,000 the co-contribution is limited to 150% of the amount of eligible contributions. This is the case whether the total income is less than the lower income threshold or above it.
How does the process work?
Assuming you are eligible, all you need to do is make the personal contribution/s and lodge a tax return at the end of the financial year. You can relax then as the Tax Office will do the rest.
The Tax Office uses the information from your tax return together with contribution details provided by your superannuation fund to determine whether you are eligible for the co-contribution – and if you are eligible, the Tax Office will lodge the co-contribution directly into your superannuation account.
In terms of timing, most superannuation funds are required to lodge contribution details with the Tax Office by the 31st October each year, so assuming you lodge you own tax return by that date, you can expect the co-contribution to arrive in your account not long after that.
In any case, the Tax Office will send you a letter confirming the amount of the co-contribution and to which superannuation fund it has been deposited. Note that the co-contribution will be paid into the same account that you made the personal contribution, unless you advise the Tax Office otherwise.
So where to from here?
Now that you've made the first step of finding out what financial planning is about, how do you move further down the path to financial security?
All of our clients begin with an initial consultation, free of charge, where we gather together all of the information we need to understand your current situation. This may include details about your assets and liabilities, income and expenses, superannuation, property, investments and insurances. This helps us understand where you currently are at in a financial sense.
We then look at what your specific financial goals might be whether they be short or long term, temporary or permanent.
We also take into consideration any concerns you may have regarding your financial situation and other financial issues there may be for example - your tolerance to risk or your ethical investment concerns.
Once we have identified where you are, where you want to be, and the way you hope to get there, we then move on to preparing a Statement of Advice for you that includes any strategies that may be recommended and explains what is involved in implementing them.
Now that you have read your Statement of Advice, it's up to you to decide whether to implement the recommended strategies or not.
Once your initial strategies have been implemented, we review the financial plan on a regular basis to ensure your strategy is in keeping up with changes in your life, work, relationships and goals.
1 Assumes salary increases by 5% p.a.
|< Prev||Next >|
Monday 17th June 2013 at 12 noon
Navigating The Centrelink Age Pension System
Click here for details...
We like the ‘feel’ of GFM. The staff are friendly, and importantly, the key players have been there for a long time.
Warwick and Susan
Personalised service – you are treated as a person – not a number. Service quality is high and advice is tailored to the individual.
Gilhams is an independent company that is truly responsive to our needs. A very friendly team, and nothing is too much trouble. I like the fact that we receive regular suggestions on changes to our portfolio, unlike big institutions, where once your money is lodged, you hear little more.
Rob and Kaye
Two standout qualities of GFM are that they work well as a team and we have learned that we can trust them completely.
Bill and Ann
Simplicity – I often think that “self managed” can be a bit misleading because the fact is that, because of the GFM service, we don’t have to do much to achieve the continuing excellent results that we enjoy.
Terry and Judy
Frequent portfolio reviews – the ability to contact our adviser or support staff for review or advice. Our fund has steadily grown since inception.
Alan and Lyn
There is a good feeling of knowing it is your own fund, not just part of a huge investment company.
Peter and Kath