Understanding Money So You Won't be Broke
Know where your money goes
Do you find that your money seems to slip through your fingers? Have you ever thought about preparing a budget plan, but put it in the ‘too hard’ basket? Doing a budget and having a plan for your money isn’t difficult, and it can help you do the things you really want. We’ve included a fold-out budget planner at the front of this handbook to help you work out how much you earn and what you spend it on.
How to use the budget planner
Start by writing down all of your income and all of your expenses. You’ll need to decide whether your budget will be a weekly, fortnightly or monthly guide. Some people like to match their budget to their pay period.
Once you’ve decided, make sure all the numbers you write down are for the same time period. When you’ve worked out your income and expenses, you’ll be able to see how much regular income you get and where that money goes over your chosen time period. Take away your total expenses from your total income to get your result.
TOTAL INCOME – TOTAL EXPENSES = ?
Your result will show whether you’re spending more than you earn, or if you have money left after your expenses to use for other things.
Write down your actual
income and what you
spend on things, not
what you think you
should earn or spend.
What do I do with my budget?
Is the result what you were expecting? If you’re spending all of your income (or even more), your budget can show you areas where you might be able to change your spending. If you need to make a change, you might like to sort your expenses into two groups: essentials and extras. It’s your budget, so you can decide what you think is essential and what you might be able to spend less on.
If you have money left over, think about how that money could be used. Getting debt under control is important, and you might choose to increase your loan or credit card repayments. Or you could organize a regular deduction into a separate savings or investment account. Whatever you do, make sure that you put any extra money to good use.
Tips to help you spend more wisely
Make a shopping list for groceries, and stick to a limit.
Leave your credit card at home.
Take your lunch to work.
Consider pre-paid options for your mobile phone.
Think about renting a product before you buy it – you may find it’s not what you expected.
Do you have a plan for your money?
It can be hard to stick to a budget if you don’t know what you want to do with the money you save. It helps to have some goals so that you know what you’re working towards, and they don’t have to be big. Your goals will depend on a lot of things, like your age and family commitments. You might want to:
• save for something that’s important to you or your family
• get your debt under control
• save for a deposit on a home
• save for when you retire.
Think about your goals, and then work out how much it will cost to achieve them. For example, you might want to save for a home deposit. Using your budget, you can work out how much money you have left after your expenses to save for your deposit. Then you can plan how long it will take to get the amount you need.
Tips to help you set goals
Be realistic – if you plan to achieve your goals by cutting out all your extras, chances are that you won’t stick to your budget.
Be specific – you’re more likely to achieve your goals if you know what you want and why. Keep motivated by setting a time frame to achieve your goals.
Planning for unexpected expenses
It’s a good idea to put some money aside to use in emergencies. Build it up gradually if you need to. You can decide how much money you think you need to put aside, but the idea is to use this fund for unexpected expenses, so that you can avoid using personal loans or a credit card. Remember to top the fund back up again when you can.
Keep it up to date
Your life changes, so it’s good to revisit your budget and your goals regularly. For example, if your pay changes you’ll need to redo your income estimates. And big events like getting married or having children will also have a big impact on your expenses. It’s a good idea to go through your budget at least once or twice a year.
Talking about money
Many of us don’t find it easy to talk about money with people we’re close to. It can help avoid misunderstandings if you and your partner agree on what you want to do with your money, and how you want to achieve it. It also helps to be aware of each other’s attitudes to money. Preparing a budget together can be a good start. If you have children, talk to them about money. Your children will learn a lot about money from you.
For younger children, try simple things like comparing prices when you take them grocery shopping or explaining about the value of different notes and coins. You could involve older children when you prepare a family budget. For example, show them how much the family spends on electricity and water and encourage them to think of ways to save on those bills.
Tips to help kids learn about money
Set a good example by managing your money well.
Encourage them to save as much and as regularly as possible.
Set up a savings account with a passbook to help them keep track of deposits, withdrawals and any interest they earn.
Make saving fun by letting them choose a goal.
Make your money work for you
Why worry about saving?
Living from one payday to the next can be stressful. Having some money set aside can reduce your worries and help you deal with large bills or unexpected expenses. As your savings grow you won’t have to reach for your credit card as often and your savings will earn interest for you. If you stick at it, you can achieve bigger goals such as buying a car, having a deposit on a home or paying off your home early.
How to get started
The secret to successful saving is simple: start now. You could start by setting up an automatic deduction from your pay or transaction account so that you won’t forget to put it away. If you’re not sure how much you can save, see Know where your money goes on page 5. Otherwise, you could start by setting aside part of your weekly income into a separate savings account. It doesn’t have to be a large amount.
If you leave your savings to grow, you’ll get the benefit of compound interest. This is where you earn interest on the amount you’ve deposited, as well as on interest you’ve already accumulated. Even if you only contribute a small amount, your savings can really build up over time.
The power of
If you start saving now,
over a longer period
your savings will build
up even more because
you will earn interest on
your interest. Over a long
time it can make a big
Tips to help you save
Start now, no matter how small your savings.
Pay yourself first – deduct savings from your pay automatically.
Put your savings in a separate account that doesn’t have ATM access.
Try to save any pay rises, bonuses or tax refunds.
It helps to have a plan or goals for your savings. This gives you an idea of how much you need to save and it helps keep you focused on the end result, particularly when you’re tempted to spend. You could set a small goal first and then build up to saving larger amounts.
Where can I save?
There are lots of options. Some people like to save in accounts that lock your money away for a while, like Christmas Club accounts or term deposits. There are also a good range of online savings accounts.
Tips to find the best account for you
Choose an account that pays the best interest rate for your needs.
If you think you’ll be tempted to withdraw it, put your savings into an account that’s harder to access.
Compare fees and other charges.
Investing your money
You don’t need to have lots of money to invest – it’s all about making your money work harder. Some people start with a small amount of savings they’ve built up, while others invest regular amounts. The trick is to start and then keep adding to your investments as you can.
Don’t put all your eggs in one basket
You might worry that investing is risky. In general, the higher the earnings or return you expect from an investment, the more risky it will be. Investments that offer lower returns are generally less risky.
You can reduce your risk by spreading your money around and investing in different types of investments – this is called diversification. This is a good way to help protect your money, as it’s unlikely that all your investments will perform badly at the same time.
What can I invest in?
There are lots of different investments to choose from. The four main areas – also known as asset classes – are shares, property, bonds and cash.
You can invest in some of these asset classes directly (such as by buying shares or starting a term deposit). Others can be indirect – for example, where you buy shares or property through a managed fund. With a managed fund, your money is pooled with that of other investors and invested on your behalf.
The right investment for you will depend on a number of things. Ask yourself:
How long do I want to invest for?
Do I want an investment that can be sold quickly if necessary?
What level of risk am I comfortable with, and what can I afford?
What’s my plan? What do I want to achieve from my investments?
If you need your money for emergencies and don’t want to lock it away for a long time, you might want to choose investments that can be cashed in easily, like a higher interest savings account. If you’re willing to invest for a longer period you might choose property or shares, where values may fluctuate more but the returns are generally larger.
If you’re new to investing, you can learn more by reading financial books, magazines and newspapers. You can also get financial advice to help you to choose the best investments for your situation.
Watch out for investments that promise returns that sound too good to be true. It could be a scam and you could risk losing your money.
Fees, charges and taxes
Most investments have fees, charges or other costs and they’re not always obvious. Make sure you do your homework on fees and charges before making an investment, as these costs can really have an impact on the size of your nest egg. Your investments may also be taxable. Make sure you understand the tax effects of your investments. Talk to a registered tax agent if you’re unsure.
Loans and credit cards – be in charge of your debt
Loans and credit cards can be very effective tools to help you achieve what you want in life. Debt isn’t bad as long as you can afford it. In fact, most Australians wouldn’t be able to own a home without getting a loan. A few key steps – such as shopping around for the right loan and paying off your credit card as soon as possible – can ensure that you have control over your debt, and not the other way around.
A few debt basics
There are many types of debt. Different forms of debt have different interest rates, fees and conditions, including the length of time you have to pay off the debt (this is known as the ‘term’).
Choosing a loan
First, look for a loan with the lowest interest rate. This will make a big difference to how much you pay, particularly with long-term loans. Make sure you understand all the terms and conditions. Some loans offer ‘honeymoon’ or introductory rates which may sound good but can be more expensive in the long run.
You may also need to choose between fixed and variable interest rates. Under a variable rate your payments will rise and fall as interest rates change. With a fixed rate you’ll know exactly what your payments will be over a set time. You should also check whether you can make extra payments without paying extra fees.
Pay off your loan as
quickly as you can.
Paying off your loan over
a shorter period can save
Compare the fees and charges – these can vary greatly between loans. All loans advertised have to show a comparison rate. This lets you compare the cost of each loan, including interest payments and most fees and charges. Check magazines and newspapers and use the comparison rate to compare different loans. There are also online services that compare loans, such as Cannex and InfoChoice .
Credit cards are just another form of debt. They can be very convenient but remember that you’re paying your credit card provider to use their money.
Tips to manage your credit card
Don’t get a credit card if you can’t handle the repayments.
Shop around for the best card for you.
Make sure you compare the interest rates, administration fees and the interest-free period for repayments.
Try to pay the balance off before the end of the interest-free period.
Don’t increase your credit limit if you can’t afford it, can’t handle it or just don’t need it.
Do you need to get your debt under control?
If you’re not sure whether you need to tackle your debt, start by writing down the value of what you own and the total amount owing on your loans and credit cards. If you owe more than you own, you may have too much debt. If you’re struggling to make your repayments, that may be a signal that you should try to reduce your debt.
It can also help to sort your debt into ‘good debt’ and ‘bad debt’. Good debt is debt that’s used to buy assets that are likely to pay you income or increase in value over time, like your house or an investment. On the other hand, bad debt is used to buy things that generally go down in value, such as cars and TVs.
If you decide to reduce your debt, you should plan which debt to pay off first. This is generally debt with the highest interest rate, such as credit cards or personal loans. Also try to pay off any ‘bad debt’ first. Interest payments on some loans are tax deductible – these are generally a lower priority to pay off.
Tips to help you control debt
Try not to use your credit card – leave it at home.
Make loan repayments fortnightly instead of monthly.
Make extra payments if you can.
Do a ‘debt check’ at least once a year to keep track of how you’re going.
Cancel all your credit cards except the one with the lowest rate.
See if you can get a better deal by refinancing your home loan.
Look at your budget and think about whether you can increase your repayments so you can pay off your debt sooner. If you haven’t already done a budget, it may help to do one.
You may have several loans or credit cards. It can sometimes help to consolidate these debts into one low-interest loan, so that you save on fees and have a lower overall interest rate. Do your homework first. Remember to check the fees and charges to make sure that you’ll end up saving money.
If you do combine your debt, try to put the money you save in repayments back into paying off the loan faster. If you use a loan to pay off your credit card, think about not using your card any more or paying off the balances at the end of the interest-free period.
Having trouble paying off your debt?
If you think you can’t repay your debts, talk to your financial institution as soon as you can. They may be able to vary your repayment plan. Remember, if you’ve borrowed money, you have a legal responsibility to repay it.
Not-for-profit financial counsellors can give information to people who are struggling with debts. Organizations such as Centrelink’s Financial Information Service also offer free information and seminars.
If you’re having trouble with debt you may also want to think about getting some broader financial advice.
Money for your retirement
Superannuation is an investment that builds up over your lifetime to provide money for your retirement. For most people, superannuation starts when they get a job and their employer starts making superannuation contributions. These contributions are called the superannuation guarantee.
If you’re eligible, your employer should contribute at least 9 per cent of your earnings into superannuation. For example, if you earn $50,000 each year your employer would contribute $4,500.
Putting extra money into your superannuation
You can also make your own contributions to superannuation – even if you’re not working – or into a fund on behalf of your spouse. If you’re self-employed you can choose whether or not to have superannuation.
The earlier you start contributing, the more you’ll benefit. Because superannuation is generally taxed less than similar investments, your nest egg grows faster over your working life. You may also get tax deductions or other government benefits such as the super co-contribution if you make your own personal contributions.
Where is your superannuation?
You should receive annual member contribution statements from your superannuation fund that record how much superannuation is being contributed on your behalf. Make sure you check your statements. The statements should also give you information on how the fund invested your money and how it performed during the year.
Tips to help keep track of your superannuation
Keep your fund up to date with your contact details.
Read your superannuation statements.
Call your fund if you don’t understand your statement
If you can’t track down your superannuation, the Australian Taxation Office’s SuperSeeker service can help you find it. You will need your Tax File Number. See page 37 for contact details.
The Government has introduced laws to allow many people to choose where their employers invest their superannuation contributions. If you’re eligible, your employer must give you a standard choice form. As well as choosing between various funds, you may also be able to choose your investment policy. Some choices may offer higher returns with higher risk, while others may offer greater security but with lower expected returns. Choose the level of risk and return that you’re comfortable with.
If you’ve got more than one superannuation account, sometimes it pays to combine them into one fund so that you pay less in fees and can keep track of your money more easily. Before you do this, make sure you do your sums as you could be charged termination fees for leaving the old fund and contribution fees for joining the new one.
You should also check if you may lose life insurance benefits if you combine your accounts into a new fund. Don’t rush into changing superannuation funds just because there’s been a poor earnings result in one year. Superannuation is a long term investment, and you need to consider the performance of funds over five years or more. Sometimes a fund that performs poorly in one year may perform well the next year.
Learn how to protecting your money
We all hope that things won’t go wrong, but it pays to have some protection in case they do. Insurance is all about protecting yourself, your family and the things you own.
Types of insurance
You can buy many different types of insurance.
There’s cover for things you own – your car, mobile phone, home, and belongings. You can take out health insurance for health services or travel insurance if you’re going on holiday. Income protection insurance can give you an income if you’re sick or injured and can’t work. And life insurance pays your dependents a set amount of money when you die.
Getting the most out of insurance
• Know what you need. If you’re thinking about life or income protection insurance, check if your superannuation fund can provide it or already gives you cover. With health insurance, you may be able to tailor a policy that fits your stage in life. Make sure you understand what your insurance covers.
• Shop around for a good deal. Compare premiums, excesses and details of exactly what the policies cover. For most types of general insurance, you can pay a lower premium if you agree to pay a larger excess if you need to make a claim.
• Insure for the right amount. Most people underestimate the value of what they own. If you’re looking for home and contents insurance, make sure you insure for the true replacement value. It can help if you keep receipts and take photos of valuable items.
• Provide full and accurate information. Make sure you answer all questions correctly. If you don’t, you may have misled the insurer about the risk they’re accepting, and they may be able to refuse or reduce any claim you make.
• Understand your contract. Insurance companies need to give you a policy document. This sets out what you’re insured for, so make sure you understand it. Keep it handy in case you need to make a claim.
• Keep your policy up to date. Let your insurer know if you make any changes that might affect your policy – for example, if you renovate your house or buy expensive household items.
• Keep tabs on what’s available. When your insurance comes up for renewal, think about whether your situation has changed. You may want more cover, or to change your excess. Shop around and be prepared to change your policy if you find a better deal.
Where can I get insurance?
You can organize insurance through an insurance company or by using an insurance broker. It’s important to do your homework and ask questions so that you understand what’s on offer.
What are my rights and responsibilities?
If you buy a financial product or service, you have a number of rights, such as being given the information you need to make a proper choice and having your privacy respected. Some financial products or services might come with other rights.
You should check the terms and conditions to find out what other rights you may have. As a buyer of a financial product or service you also have responsibilities. These might include giving honest and accurate information or agreeing to accept the risks of an investment.
What can I do?
Read any contract before you sign it. Also check the documents that your product or service provider gives you – this could include a financial services guide, a statement of advice or a product disclosure statement. Ask your product or service provider if you’ve got any questions.
What if there’s a problem?
You should contact your financial product or service provider. If they don’t fix the problem, you can contact an independent dispute resolution service. These schemes can help resolve complaints and are an alternative to the courts.
You can also report the actions of your financial product or service provider to your state or territory office of fair trading or consumer affairs or ASIC.
For contact details, see pages 37 and 38. You can also take action through the courts to enforce your rights. If you’ve failed to meet your responsibilities – for example, by missing a number of payments – get in touch with your product or service provider as soon as possible. You may be able to work together to find a solution.
Be careful about promises of quick financial gain.
It may be a scam if:
• it comes out of the blue
• it sounds like a quick and easy way to make money
• it tells you there is almost no effort and no risk
• it sounds just too good to be true.
Financial scammers usually don’t have a financial services license issued by ASIC, even if it looks that way. They may have glossy paperwork, but it’s rarely a proper product disclosure statement or prospectus. If you’re not sure, ask questions and don’t be pressured into making a decision on the spot.
Some ‘top’ scams
• Lottery scams – like the El Gordo and Princess Diana lotteries where you ‘win’ even though you never bought a ticket.
• Cold calling investment schemes – where a call or email comes out of the blue offering you an investment opportunity.
• ‘Phishing’ emails – from criminals pretending to be your financial institution and trying to get your personal details.
If you’ve received what you think is a scam, delete it, hang up, destroy it!
Getting out of a scam
If you think you’ve fallen for a scam, contact the authorities straight away. The sooner you act, the better the chance of finding the scammers. Unfortunately, people rarely recover their money once it has gone to a scammer, especially one that is overseas.
Getting information & advice
Sometimes we need help with managing our money. You might need to make a big decision about your finances and aren’t sure what to do. Or you might want some advice on planning for your future. If in doubt, there are many ways that you can learn more, including by getting some advice. There are many sources of financial information and advice, and who you go to will depend on why you need it.
Where can I get advice?
Good information and advice can come from a variety of sources. Financial counsellors can advise and assist on a range of questions. If you need advice on issues like investing or superannuation, you might think about getting it from sources such as accountants, banks and financial planners. In other cases you may need highly specific legal advice – for example, if you are going to make a will.
There are several government and community services that can give you free information about how to manage your money.
You can also get advice from a licensed financial adviser. The license means the adviser meets certain standards, and offers you extra protection if anything goes wrong. Finding good advice means finding a good adviser. You can talk to family and friends who have used a financial adviser and learn from their experiences. If you can, aim to see two or three different advisers before you make your final choice.
When choosing an adviser, ask to see their Financial Services Guide. This covers issues such as the adviser’s experience and qualifications, how they charge for services and their range of products and services. The Financial Planning Association can help you find advisers in your area.
You’ll have to pay for services provided by a financial adviser. This can be through an upfront fee and / or through commissions charged for making investments on your behalf. Over a longer period of time, commissions on products like superannuation, managed funds and other investments can really add up, so make sure the benefits are worth the costs. Regardless of where you get your information, you should ask questions if you’re uncertain of anything. Don’t make a decision that you’re not comfortable with.
What do I need to tell my adviser?
Your adviser needs to know as much as possible about your needs, your goals and your attitudes to money. So think about these issues and do some research before you go for advice. You’ll probably also need to give information on your income, expenses, assets and debt level.
Tips to get the most out of financial advice
Do your homework.
Give full details about your financial position and needs.
Try to have a clear idea of what you want your money to do.
Be honest about the level of risk you’re willing to take on.
Ask questions if you don’t understand the advice you’re given.
Review your financial plan regularly