Raymond Pecotic’s 12 must-dos for 2018-19
(article originally published in The West Australian, 9 July 2018)
New Years Resolutions are often things we make in the euphoria and excitement of the last night in December, or as a list of “never agains” as we nurse a hangover on the first day of January.
They usually include eating and drinking less, exercising more, or spending time doing the things that make us and our family feel good. Often they revolve around money, and what we’re going to do to be better with our finances.
While most resolutions are swiftly forgotten before January is over, the good news is we get a second chance with financial resolutions, with the dawning of a new financial year 6 months later.
So, if you’ve been dragging your feet with your finances, here are 12 New (Financial) Years Resolutions to work through over the next 12 months. If you can get through one of these every month, you’ll be financially fit this time next year.
Resolution 1: I will create a spending plan
Some people like to call these a budget, but who likes to stick to a budget? Shift your mindset and instead create yourself a Spending Plan, because it’s much more fun to plan how we will spend it rather than save it.
Think about those big annual expenses that arrive, like insurances, council rates, Christmas presents or car servicing, and break the expenses down to weekly or fortnightly amounts that you can immediately divert into a separate bill paying account as soon as you are paid. You can then ensure you’re not caught short when that bill arrives in the mail. This could be an offset account linked to your mortgage, which saves you interest while it eliminates bill stress.
And remember to incorporate paying off debts and savings goals into the spending plan (more on that later).
There are lots of great tools and apps available to help you plan your spending, but ASIC’s MoneySmart online budget planner is a great place to get started.
Resolution 2: I will get my bills under control
Creating a spending plan often leaves people scratching their heads – the app tells me I should have money left over at the end of the month, but I never do.
And it’s often because we are paying too much for the goods and services we consume.
How much is your loyalty (or complacency) costing you?
Have you been using the same company for years and it seems too hard to change? Perhaps you just accept the extra cost for those additional megabytes of mobile phone data, late payment penalties, annual credit card fees, overpriced pay tv, gym memberships, car insurance – the list is endless.
When completing your spending plan write a list of all of your bills and then compare the market, and then call your providers and renegotiate, or switch to the more cost effective option.
With the dozens of bills we pay every year, a few hundred dollars saved on all of them can immediately boost your cashflow and get you to your goals much sooner.
Resolution 3: I will “Pay myself first”
Many people say they have no money left over to pay off debts or invest for the future.
Here’s the key though – when creating your spending plan, factor in your debts and future savings requirements immediately after you factor in your fixed expenses. What is left over you can then allocate to discretionary spending (the fun and sometimes frivolous bits).
This is often referred to as “paying yourself first”, meaning you’ve taken care of your family and personal goals before you allocate the leftover to line someone else’s pocket.
A common rule of thumb is to put 20% of your income towards those extra mortgage repayments, investment plans, or superannuation.
Consider this an essential expense, just like your rent, mortgage or groceries, then spend the rest whichever way you please.
Resolution 4: I will prioritise my debts
Not all debts are the same.
Make a list of all of your debts and prioritise them by their annual interest rate. Those debts with the highest interest rates should be attacked first, while those with lower rates, and particularly tax deductible interest (like investment property loans) should generally be left last.
Typically your highest interest rates are on credit cards, or store cards or unsecured personal loans. It makes no sense to try to invest money elsewhere while you are paying 18 or 19 percent in interest every year on some of those debts. If you have money in term deposits or shares, it may make sense to sell them to pay out those loans in part or full.
Why? Well if you owe $10 000 on your credit card with an 18% annual interest rate ($1800 per annum) while at the same time you have a $10 000 term deposit paying you 2% per annum ($200 per year), you are actually $1600 per annum worse off by holding the cash.
If possible, reduce repayments on lower interest rate loans to the minimum and direct the surplus to the high interest rate loan. Once that is paid off, use that freed up cashflow to double up and attack the next highest rate debt, and then domino effect that over and over again.
Resolution 5: I will review my mortgage rates
This is one of the largest areas to focus on when reviewing all of your bills. In many cases, the mortgage is the largest single expense most households have. It may seem like a hassle to consider moving banks, and often there is a loyalty factor at play, but your first loyalty should be to yourself, your family, and your financial well being.
Make a resolution to check your mortgage statement, and if your interest rate starts with anything other than a 3, it may make sense to review it.
If shopping around is too difficult for you, take the stress away by contacting a mortgage broker to do the running around and comparisons for you.
And at the very least, call your bank, tell them you’re considering shopping around, and ask them what they can do with your rate to keep your business.
That one phone call could save you thousands.
Resolution 6: I will pay extra off the mortgage (or get myself one)
Interest rates are at a record all time low, so now is time to really make inroads into your mortgage. If you manage to reduce your interest rate, keep your repayments the same, or better still, set them where they would be had you been paying a much higher, and more long term normal, interest rate. This will do two things – it will shave years and thousands of dollars of your mortgage, but also protect you from the inevitable interest rate rises that will eventually come.
Don’t get caught out setting your lifestyle and other fixed costs around these very unusual low interest rate circumstances. When they rise, will you withstand the squeeze?
For those who haven’t got a mortgage, with property prices in WA the lowest they’ve been since the early 2010’s, a smart purchase in a buyers market coupled with record low interest rates may get you off the rent merry-go-round and set the foundations for a strong financial future.
Resolution 7: I will stop speculating and start investing.
Many people think that investing is about finding and backing that next big winner. Be it the latest company whose share price is about to go through the roof, to discovering some new technology about to take the world by storm, to the latest darling of the get rich quick brigade, cryptocurrency.
The reality is that this is not investing, this is speculating. Speculating is about taking a punt on an opportunity that often has no firm evidence, track record, or market comparisons to predict future growth. And just like fishing, while most speculators love to boast about the big one that they caught, they rarely tell you about the ones that got away. This is a high risk, high return strategy.
By comparison, investing is about buying into known markets and asset classes that have track records and evidence to support the future probability of a return. While this strategy is not without risk, buying into these asset classes is generally much less volatile and more stable long term.
Unfortunately, many people who speculate and fail think investing is too risky and don’t do anything at all.
This year, resolve to stop listening to all the noise and hype, and instead start buying constantly, consistently and conservatively.
Resolution 8: I will keep track of my tax deductions
This is the time of the year that many of us will contact the accountant to get our tax returns done. Are you one of the masses who will scrounge around in glove boxes, old files or shoe boxes to track down receipts?
Remember, tax deductible expense records are as good as cash at tax refund time, so make sure you treat them the same way you would hundred dollar notes.
Help out your finances, and relieve the stress at this time next year by keeping track of your deductions starting now.
Download a good receipt tracking app onto your phone like the free ATO myDeductions portal which will digitally keep track of deductions over the course of the ear and then export them directly into your tax return.
Be proactive and speak to your accountant to get a good idea of what you may be able to claim. Depending on your work circumstances you may be able to claim for home office, professional development, motor vehicle, or financial advice expenses, or additional personal superannuation contributions.
If your income varies largely year to year, consider prepaying some expenses like tax deductible interest or income protection policies to claim them in the higher income years and get a greater refund on those costs.
Resolution 9: I will get Super savvy
For most Australians, superannuation is the most powerful tax planning vehicle they will ever have access too, so it deserves special attention.
Now may the right time to start taking advantage of extra salary sacrificing or personal superannuation contributions. With the rate of tax in super usually set at 15%, the tax benefits compared to paying up to 47% in your personal name are compelling. And for those with lower incomes or taking a temporary break from work, there are other great incentives like Spouse Contributions, Low Income Super Contribution or the Government Co-Contribution, where the government will match your payment of $1000 with a $500 bonus. That’s a 50% return on your money, courtesy of the ATO.
Getting your head around these options can not only save you tax, but provide a significant boost to how you’ll live when you’re retired.
It’s also important to investigate the suitability of your fund, its fees, investment strategy and insurance cover. Everyone’s financial situation is unique, so don’t just settle for the default options.
Resolution 10: I will review my insurance
The right life insurance strategy will protect you or your family if you are sick, injured or die, to make sure that you can protect the assets you’ve accumulated, keep a roof over your heads, and continue to be able to pay the bills.
Contrary to popular belief, the default Life and TPD insurance in your super fund is rarely enough to cover most families circumstances, and having just enough insurance to cover your mortgage may secure the house, but won’t put food on the table.
And the different types of insurances – Life, Total and Permanent Disability, Trauma and Income Protection – all cover different events and require careful and expert consideration to get the right blend of cover.
If you have existing insurances, it may be time to have them reviewed. The insurance landscape in Australia has changed considerably over the past few years, and you may be able to obtain better premiums or underwriting outcomes.
Just make sure that you don’t cancel any current insurances before new ones are in force.
Resolution 11: I will get my estate planning in order
This is one of the most frequently procrastinated parts of peoples financial affairs. Whether people think they are invincible or are reluctant to consider their mortality, attending to Wills, Enduring Powers of Attorney or Guardianship and Advanced Health Directives is put off by most people year after year.
Dying intestate (without a will) has a far greater impact in today’s society than it did in the past, with blended families, significant family money being passed through generations, and individuals accumulating assets in personal names before they marry or enter defacto relationships.
Lots of people are shocked to learn how many parents, brothers and sisters may legally stand in line to benefit from their assets before their long term de-facto partner if there is no will in place.
If you have accumulated assets before meeting your partner, have a blended family, want to make sure that your children are looked after by people of your choosing if you were no longer around, or want your favourite charity to benefit from the wealth you’ve accumulated, then it’s vital to have your Estate Planning in order.
Resolution 12: I will speak to a financial adviser
Recent press has done a good job of highlighting some poor financial planning practices, and by extension make it easier to identify what constitutes proper, strategic financial planning, delivered by qualified experts.
Like most things in life, we can attempt to do them ourselves, but we will rarely get the same outcome as we would if we hired a professional. You can resolve to address these 12 financial resolutions bit by bit, and never get around to them at all, or you can go to an expert and have them all, and more, attended to at once.
A good financial adviser will help you with your cashflow, tax planning, debt repayment strategies, superannuation, investments, savings goals, insurance, estate planning, and really importantly, keep you accountable to your plan and help you avoid the noise and hype surrounding the latest speculative fad.
Make sure you ask how they charge, and if their fees are independent of where and how much you invest. Good outcomes require an investment in good advice.
If you think hiring a professional is expensive, just wait and see what an amateur will cost you.