Get Financially Fit in 2009

With the excitement of Christmas and summer holidays behind us, now is the time to get set for the New Year.

Set your financial goals now, and enjoy the benefits for years to come.

There’s no better time to overhaul your finances than at the start of a New Year, before life gets too busy again. Here are some guidelines on setting some lasting goals.

Spend less than you earn

This is more of a guiding principle than a goal. It seems obvious, but in truth many of us struggle with this.

Credit cards, redraw from home loans, line of credit facilities, personal loans and overdrafts – there are so many ways of accessing extra cash. The problem, of course, is that it needs to be paid back, and often at high rates of interest.

This leads to us having less money to spend in the future, which can lead into a vicious cycle of more borrowing to maintain the lifestyle.

If you have trouble controlling your spending and credit card bills, have one bank account for bills and a separate one for spending. Perhaps consider going back to cash for spending rather than credit cards or EFTPOS.

Consider setting a simple budget which includes repaying debt – and sticking to it. With interest rates on the decrease, now is the time to make headway on repaying the principal.

Low cost cards

The reality is that most of us have one or more credit or store cards. Used wisely, then can be a good financial tool. Used poorly, though, they are one of the most expensive ways to borrow money.

For example, ASIC states that a debt of $1,000 could take as long as 13 years to pay off and cost over $1,100 in interest – assuming that you make only the minimum payment (often 2.5% of the debt) and an interest rate of 18%.

If you have no other way of funding this debt, then look around for cheaper cards in terms of low interest rate and no fees. There are always offers of zero interest on balance transfers for six months or more – take advantage of them.

Remember though, that after the free period the interest will revert to the normal rate.

Write down your goals

Write down your short, medium and long term financial goals. Discuss them with your partner or family, and display them where you can see them every day. This will give you a better chance of achieving them. Here are a few examples of typical goals to get you thinking:

• Pay off the credit card in six months and reduce the credit limit – or better still, cancel the card altogether.

• Set up a separate savings account for large items – eg Christmas, holidays, furniture or new car. Calculate how much you want to save each month and set up an automatic transfer.

Rather than using a savings account with low interest and tax liability, save into your home loan or mortgage offset account and reduce the interest on your home loan.

• Review your home loan. As probably the largest loan that you’ll have, your home loan should be “health checked” regularly. What interest rate and annual fee are you paying? Is there a better one? Do you need all of the features which can make the loan more expensive? Is your fixed rate loan worth breaking?

Don’t forget that we are well-placed to help you complete a home loan health check, and to compare your loan to others on the market.

• Set a target year to finish paying off your mortgage and work out what extra you need to pay each period to make it. Then organise with your bank to automatically transfer the right amount.

• Salary sacrifice into your super fund – experts agree that 9% isn’t enough, so take advantage of the generous tax rules and contribute some more. Arrange this through an automatic payroll deduction and you’ll soon not even notice it.

Super is the most tax-effective investment with contributions taxed at 15% rather than your marginal tax rate. Also investment earnings are also taxed at 15%, a much lower rate than you would pay on most investments outside super.

Of course, super funds have fared badly in recent months as stock markets have suffered. However, over the medium to long term share prices are very likely to increase again, so perhaps now is a good time to invest some extra into super.

• Plan to start investing in property or shares. Even if you’re not ready yet, you can still do some fact-finding which will help you move towards this goal. Set some deadlines researching the potential, finding out about the costs and potential pitfalls, etc.

Now could be a good time to invest in property – prices are down, home loan rates are down, and with rental vacancies still low there is good demand. Again, property prices tend to be cyclical so over the medium to long term prices will probably rise again.

Conclusion

Setting some realistic financial goals and writing them down will ensure you feel more in control - and will ensure you have a great year.