How to Increase your Financial Health

How wealth is allocated in a capitalist society may often be controversial, and according to some fundamentally flawed; with the majority of wealth falling into just the top 1% of the world's population globally; yet the thought of being financially free is something that almost all of us, no matter what class, strive (or at least long) for.

In Australia, the global woes of credit bubbles and exorbitant debt has escaped many, especially those who have ridden on the back of the mining and property booms of recent years. Going into 2019, the majority of Australians however, are unlikely to be in a position to live without financial worry, let alone retire comfortably without working long hours; multiple jobs or be on some form of social welfare.

The guide below will hopefully provide some strategies that you can implement in order to "Increase your financial health."

1. Develop Strategies

There are a variety of different strategies that you can employ to get the most out of your finances - making each dollar stretch further and reducing the time and overhead in managing your finances.

- Automation

One key strategy is developing automation in how your pay is automatically deposited. 100% offset accounts, High-Interest Saving Accounts and other types of bank accounts can be given to your employer and for most, allocated automatically as a figure or percentage distribution.

For example, I have 2 High Interest Savings Accounts, 1 Term Deposit Account and 1 Offset Account where I split my pay; the majority goes into my offset, which is also my primary spending account where direct debits and other automatic payments are drawn out of.

Automation is important, as life can often take over and you end up getting hit with fees for overdrawing your account or you may not get the interest reduction you want, because you keep forgetting to move money into your Offset account.

There are various "rules" or frameworks that you can use to try and automate this process, the 50-30-20 rule states that 50% of your income is to pay bills, 30% is for everyday spending and 20% is saved.

- Coordinate with your Employer

Employers can also deposit After or Before Tax Superannuation contributions automatically. This provides you with potential tax benefits at the end of the FY, and also prevents you from spending your money on bad decisions.

- Check your Credit Report and Understand your Credit Score

Use sites like Creditsavvy.com.au or simplecredit.com.au and determine your credit score. Read up on things that influence your score and try and reduce things like credit inquiries, etc. Understand the different between hard vs soft enquiries, and use the available resources online to try and curb further damage to your score if it is low.

- Increase your Superannuation Contributions

If you want control over your money, then make sure you put in your own contributions once you've paid all your bills and saved a portion of your pay.

- Maintain Weekly Cashflow

Maintaining overall cashflow is important - Debt is not always a bad thing, and if you pay off your credit cards and other debts on time, then having a buffer of $1000 or more, can ultimately provide a financial benefit in terms of an extra month of interest or if you have a significant amount of spare cash - a significant reduction in your interest repayments, if you have a 100% offset account.

- Opportunity Cost vs Opportunity Loss

A lot of University graduates start paying down their student debt (HECS and FEE HELP) as soon as they get their first graduate role. Many often pay additional amounts come tax time to pay off their debt faster - however, a HECS debt can often be one of the cheapest and one of the most unrestrictive debts someone can have. With repayments governed by your before tax income, there are a plethora of other options that you could invest in, or simply use your money on that could potentially be far more beneficial in the long run.

This is where you need to understand "Opportunity Cost" in comparison to "Opportunities Loss." In your younger years, you are likely to take more risk on, with entrepreneurship, business and career opportunities that you are less likely to pursue in later years; especially with the responsibility of a family and other things. Why use your money on paying down your HECS debt straight away when you only have small opportunities or windows while your younger?

This isn't always the case for every person, but if you have the opportunity, the network, the connections and also the risk appetite, then taking a risk and using your money to get into property, travel the world or take up a business opportunity may end up paying off in the future.

- Develop Cost Benefit Analysis before making Key Decisions

Understand the concept of a cost benefit analysis. Map them out on a piece of paper, an excel spreadsheet or a whiteboard. Play through contingencies and play through various scenarios before you make key decisions in your life.

This could be: looking for a new job, asking for a pay rise, investing in the sharemarket, etc.

If the numbers don't stack up, or the risk is not something your comfortable with, then weigh up the cost vs the potential benefit and put some science behind your "gut feel."

- Calculate your Debt-to-income Ratio

Debt-to-income ratios are a quick way to quickly analyse and index your personal net worth and compare it against a healthy benchmark. Firstly get the sum of all your debts and divide it by your income - point to note, always use the same period, for example convert all of your debts to annual, weekly, etc, then divide them by the same amount you earn in that period. If you use an after-tax figure, this will generally be a more accurate figure.

Aim to have a DTI ratio of approximately 30% (0.3) anything higher will tend to attract scrutiny about your ability to pay back debts and also influence your ability to gain new lines of credit. If debt is reaching the 40-50% mark for the period, then it is important for you to get your expenditure under control.

Example:

Sum of all your debts (Monthly) = $2450 per month

Sum of all your income (Monthly) = $7000 per month

Debt-to-income ratio = 0.35 or 35 percent

- Calculate your Net Worth

Using apps like pocketbook, pocketsmith, XERO, etc, are great. They enable you to automatically link your accounts and track your expenditure. You can develop various budget scenarios and forecast your net worth over time.

These apps make calculating your net worth easy. They take the hassle out of looking at receipts and transactions, and ultimately provide you with a more accurate picture of where you are spending your money and how much you are worth.

2. Reduce & Manage Debt

Do at least a monthly review of your debt; take a look at where your money is going and how much overall debt you have. Review subscriptions, utility providers and any expense that you are routinely paying for.

- Review Recurring Expenses

For the majority of people, reviewing expenses is a slow and arduous process that can take hours. A budget spreadsheet helps, but ultimately, the best way to go about it is the run data exports from your bank and credit card accounts, and go through your major expenses making sure you capture recurring expenses.

From memberships, subscriptions to weekly grocery shops, I've put down some action items I use in order to keep my subscription and other costs down - you can read them at the bottom of this article.

- Consolidate Debt

Generally speaking consolidating debt is your first point of call when you want to get your finances in order. Consolidating debt enables you to take stock of your net worth, and put in place a scheduled plan of attack in order to decrease your debt. Some of the most common ways for debt management include:

- Balance Transfer Credit

Throwing this out there from the very beginning - this can be a risky gambit. Balance Transfers are not good for your credit score, nor do they change your attitude towards debt and spending. By transferring debt from existing lines of credit, you potentially risk adding more debt if you are not careful or put in place measures to curb your spending. However, if in unison with a sound repayment plan (automated payments weekly, etc), this can be a great way of taking advantage of bonus offers and other perks that many banks, and card providers give in order for you to become a customer.

Recent findings from the Royal Commission into the financial sector have also brought many providers in line with treating their customers more fairly, especially when charging fees on BT cards.

Before you take this step, google "compare balance transfer cards" and use aggregate engines, to quickly peruse deals, offers and the most savings that you can get, from signing up to a credit provider. Make sure you take advantage of the interest free period, but don't go over it, or else, the interest fees charged, will make this an expensive lesson.

- Peer to Peer Personal Loans

Peer to peer lending has in recent years taken off significantly. Many providers go through strict lending criteria, as they have reduced interest rates (paying back mum and dad investors, and other personal lenders) in order to provide you with a loan. Examples include ratesetter, societyone, etc.

If you have a good credit history, and you want a low fixed rate, then P2P lending is a good investment opportunity for lenders and a great way to consolidate debt for consumers.

- Bank Consolidation/Personal Loans

For the majority of Australians however, Personal Loans from larger banks and credit unions will be the only available lines of credit. This year, stricter lending criteria and the introduction of more comprehensive credit reporting has meant that people are less likely to be able to get personal loans especially from the big banks, however, if researched well, many banks can combine their home loan and credit card packages to also include personal loans, whilst also waiving or reducing any fees associated with them.

- Bill Smoothing

A great way to manage debt, especially with billers who don't accept credit cards, or if they place surcharges on their use, is through bill smoothing. Bill smoothing is generally a direct debit, bpay or bpoint arrangement, in which money is taken out of your account in smaller amounts but in greater frequency so that you are either in a surplus or you are not hit with an exorbitant amount at the end of a billing period.

Many electricity providers, and regional councils, etc provide direct debit and bill smoothing plans where consumers can incrementally pay off their debt in advance to reduce their repayments or obtain a refund of the unused balance. Electricity Retailers like Dodo for example, give you a 15% discount on top of your bill if you use this payment option and pay fortnightly payments in advance.

3. Reduce Costs

Reducing costs is more than likely the main area where money can be saved and your financial health can be best repaired. Many who live paycheck to paycheck live above their means, spending more than they earn and so are trapped in a cycle of continuous debt. Here are some ways of reducing your living costs.

- Develop a Budget

There are various spreadsheets and templates that can do this for your. The main thing is to track all expenses, income > convert them to an annualised, monthly or weekly figure, then track your expenses against the budget, all the while making sure that you categorise and record your expenses properly.

- Cut Down on Living Expenses

Subscriptions, memberships and other recurring expenses can often be overlooked as being only loose change, but when you combine multiple accounts, Amazon, Youtube, Netflix, Gym, etc, then it really starts to add up. Look for deals, if you're a student - look for student discounts through things MyUniDays or StudentEdge, etc.

- Cut Down on Utilities

Use comparative websites like finder.com.au, iselect.com.au or canstar.com.au and look for cheapest deals for gas, electricity, internet, mobile and tablet services.

For example Vodafone, currently has bundled packages for mobile, tablet and NBN services. The more services you have the greater the savings.

- Shop around for Banks, Suppliers, and Insurances

Just like utilities, shop around for a new home loan, combine your financial packages (personal loans, credit cards, etc). Major banks aren't your only option - brokers can be an excellent resource in finding deals and packages.

4. Save Your Money

Save, Save, Save. Develop saving strategies and implement rules such as the 50/30/20 rule and start developing saving strategies in which you set small goals that are Specific, Measurable, Achievable, Relevant and Timely (SMART).

5. Increasing Your Income Streams

- Rent out a room

Got a spare room? Use resources like flatmates.com.au or Airbnb and start earning cash for your spare room(s). Click on the link above or use the link here for a $38 credit:

https://www.airbnb.com.au/c/bernhardb587?currency=AUD

- Do Paid Surveys

The Thrifty Issue has a great article on the best websites for paid surveys.

- Earn money from Hobbies

Got a hobby? Tutor students, teach an instrument, do odd jobs on websites like airtasker, etc.

- Get a weekend / second (or third) job

- Seasonal Retail Work

Peak periods such as Christmas often require extra staff, especially in bars, restaurants, etc. Consider getting your RSA licence and get yourself some shifts on the weekend

- Sharing Economy

Got a nice car? Consider setting up an Uber account and drive your car for extra cash. There are a plethora of other apps available where you can rent out your car, driveway, van, ute or even clothes!

6. Sell your old stuff

This one's fairly self explanatory. Take a photo of your stuff and post it online.

- Garage Sale

- eBay

- Etsy

- Gumtree

7. Invest your Money I won't go into detail here, as investments can be a tricky thing. Before making any decisions speak to a financial advisor first. I'll expand on my own strategies over the next few weeks.

- Invest in the Sharemarket

- Invest in ETFs

- Invest in Robo-Advisors

- Invest in Real-Estate

- Pay extra into your mortgage or into your offset account

8. Manage and Keep Really Good Records

This one is a no-brainer. It helps with your tax return and ultimately gives you greater transparency about your financial position at any given time. The better your record keeping, the likelihood of your tax return coming in bigger increases.

- Develop a weekly routine / Use a planner

Break your costs and your income into a routine. Make sure you budget costs daily and track your expenses so you don't overspend day to day,

- Plan your meals

Reduce your expenses on takeaway meals, and start bulk making and freezing your meals.

- Keep an inventory of your Groceries, Freezer items, etc

Make sure you have a good idea of what you have, so that you are not buying more than you need and letting things go to waste.

- Maintain a Home Office Logbook

If you work from home, even a portion of the week, then keep a logbook for your home office. This can then offset a portion of your electricity bills, internet, etc, come tax time.

- Maintain a Car Logbook

Likewise, if you are routinely travelling between different clients, offices, etc, keep a logbook of at 3 months, (especially during a period where you are doing the most travelling) and a lot of your car maintenance and other costs will be tax deductible.

- Get a Quantity Surveyor to do a Depreciation Schedule

If you have a property, make sure you get a professional QS to do a depreciation schedule. This will allow you to maximise your tax return come tax time for costs associated with your property.

- Digitise receipts and Invoices

Whenever you buy something, get a receipt. If you can, then take a photo or digitise it using your phone. If your employer has an expense policy, then apps like expensify are excellent tools to quickly capture and record your expenses for tax purposes.

- Develop a Will

In the event that something happens to you, then it is important you take the time to outline a will and highlight where your assets, and wealth are distributed.

9. Use Technology & Apps

Some apps & websites I use to help me with my finances:

- Raiz - app.raizinvest.com.au/invite/4KU7KS

- Spaceship - https://get.spaceshipinvest.com.au/BBUDIONOT9H

- Stake - https://offers.hellostake.com/nye?refer=bernhardb677

- Cashrewards - http://fbuy.me/fBFwV

- Shopback - https://www.shopback.com.au/referred-signup-bonus?raf=5L1jZV

10. Get Financial Advice

Regardless of the strategies you implement, the best thing to do is always seek professional financial advice first before potentially making decisions that can affect your finances. Cost reductions can impair lifestyle, whereas investments can go bad, there are always safe/conservative options with low yield, but there are high risk/high yield investments as well.

11. Actions Items & Recommendations

- Reduce Temptation

- Home Maintenance

- Keep Recipes and Cookbooks nearby

- Avoid Food Waste

- Learn how to repair things

- Build an emergency fund

- Buy in Bulk

- Declutter your house and live minimally

- Never Pay Full-Price / Use Coupons

- Buy Second-Hand

#finance #investment #shares #budget #investments #frugal #life #personalfinance #personaldevelopment