19 Steps to Take Control of Your Financial Future
1. Establish Your Financial Goals
The first step in any journey is working out where you want to go. If you don't care where you get to, then it does not matter which path you take. Be specific. Knowing the exact outcome and attaching importance to it just might give you enough motivation to change your actions.
2. Calculate the gap
When you know where you want to be, the next step is to check how big the gap between goal and reality is. Remember to include retirement in these calculations. To retire comfortably you may need over $1,800,000.
3. Understand How Much You Earn
This one may be easy, or exceedingly difficult depending on if you are self employed or not. But just as a business needs to forecast its revenue, you need to understand how much you are going to earn before tax. If you are young, considering ways to increase this variable can pay massive dividends for your financial future.
4. Understand How Much You Spend
Understanding this variable is absolutely vital to making sound financial decisions. This step is not about reducing your expenditure, but just understanding your desired lifestyle costs. Don't include contributions to savings, or extra debt repayments in this figure. Armed with the cost of your current lifestyle, and the knowledge about how much you earn, you are ready for step 5.
5. Understand your savings capacity
Take the figure you worked out in step 3, minus tax and minus the figure you worked out in step 4. Should you be saving money? If the figure is $0 or negative, why is that the case? If the answer to this question is "My expenses are greater than my income", then you are like a business making a loss. Go no further. Do not pass "Go". Do not collect $200. Something has to change.
6. Determine your actual savings rate
If step 5 shows that you do have a positive savings capacity, are you actually saving that amount? If not, What is happening to it? Which item in your budget are you underestimating or overestimating. What things "crop up" that you don't take into account, which perhaps you should. Items like home maintenance or whitegoods often are forgotten from budgets.
7. Get some structure and control
The time for action has arrived! How are you going to make sure you spend what you want to spend and save what you need to save? What structure are you going to use? A starting point would be to spend from a different account than the one you earn into. Alternatively, maybe you will just track it with an app or a spreadsheet. The amount that you will be targeting to save should change over time. In fact, it might change by step 12.
8. Learn the facts about investments
If you have superannuation you have investments. The main investments (or asset classes) that you will need to know about are Shares, Property, Bonds, and Cash. You need to know the answers to the following questions about each of them. What is the average long-term performance of each investment? What is volatility (or risk) and how is it different between the asset classes? How long until I need to access my investment? What can go wrong with each investment?
9. Understand Fear > Facts
Your behaviour when it comes to investments will arguably matter more than if the investment grows at 5% or 10%. Most people make decisions emotionally, which is a huge mistake for their financial fitness. They will buy a share because it is "hot" then sell it when they feel they don't want to lose anymore money. They will buy a property because it is a place they would like to live, not because it has strong investment fundamentals. They feel safe in term deposits - but get killed by inflation. Don't be one of those people. It is much, much harder than it sounds.
10. Get your Superannuation humming
If you understand investment fundamentals, and you understand how your emotions are the biggest risk to investment return, then it is time to have a look at where your money is being invested by your superannuation. By default you will generally be in a balanced fund where the money is spread out all over the place. This is sometimes like waring a high heel on one foot and a flat on the other in the hope that you will look good, thanks to the heal, and won't fall over thanks to the flat. That being said, sometimes balanced is the right option. As with everything about action, it depends on what you discovered in previous steps.
11. Create a plan
A plan can be something written on a napkin, to a modelled and tested work of beautiful mathematical precision. It generally needs to have 3 components. What you are trying to achieve (generally the gap in step 2), and how you plan on achieving it, and how can you manage the things that can go wrong. The how should address saving the money you will need to save to make the plan work, paying down debt, investing for the future and maybe saving tax. What can go wrong should be addressed with step 13, and 16.
12. Monitor your progress
You could have the best plan in the world, but if you are not actioning it and achieving it, are you any better off? What are things that you can measure to see if you are on track with regards to your plan. Your income? Your expenses? Your savings rate? Your investment level? Your debt? Your bank balance? You need to have some kind of system here, otherwise it will be another one of those things that you will need to get around to it when you have time.
13. Establish an emergency fund
Some Australians are two pay cheques from financial oblivion. What do you do if you lose your job? Or an unexpected medical bill crops up, or interest rates go to 10%. Well, if you are financially fit, you will have an emergency fund. This might be in an offset, or as a redraw of debt, but getting you hands on money quickly might just save your financial skin.
14. Get your Insurance coverage right
An emergency fund can only stretch so far. If you have a stroke or mental health illness, and can't work, what happens? You can get personal insurance to cover the financial implications of death, total and permanent disability, a critical illness (or trauma) or inability to work due to a medical condition. You may already have some of this in your superfund. Work out how much you need, how much you have and how much it would cost to cover you adequately. They take that cost and add it into your financial plan.
15. Maximise your tax return
A lot of people don't bother claiming everything they are entitled to in their tax, while others have not done a tax return in years. This is money that you could be putting towards improving your financial fitness. There are strategies, which I (and my clients) use, that have a side effect of reducing tax. However, these strategies should be handled with care at all time. If not set up right they can have unintended consequences.
16. Create your Estate Plan
Another thing that can go wrong is you losing the ability to legal make a decision. You husband or wife can not just call your superfund and give them instructions, no matter how desperate they might be for the money to pay for your medical treatment. Yes - they can go through the legal system and get the access, but they will have more than enough on their plate if you are in hospital. Sort it out before hand. See a solicitor and get a Will and Enduring Power of Attorney.
17. Consolidate debt
Hopefully by now you have a plan to pay down your home loan and private debt if you have any. You may receive benefit by talking to the bank or mortgage broker about putting all the debt in one place, at the lowest interest possible, so you can focus on step 18.
18. Smash Your Home loan
The banks offer home loans over 30 years. Rest assured this is not a favour they are giving you. A $400,000 home loan (at 7% interest) will cost you $558,000 in interest (and you still will have to pay back the $400,000 you borrowed on top of that). Half a million dollars going in interest will cripple your financial future. You have to pay down you home loan... fast.. Make sure this is addressed in step 11, and then make it a priority.
19. Get The Right Help
GPA Financial Planning offer a free 2 hour consultation which will help you learn how you can take these steps and detail any other actions that will specifically help you Get Financially Fit. Alternatively, you can register for an upcoming webinar below.