How to make a start often baffles people but nothing in the world happens without a plan. “Begin with the end in mind,” said Stephen R. Covey in his best-selling book The 7 Habits of Highly Effective People.
According to the most recent survey by the Commission for Financial Literacy (CFFL), an impressive 78% of New Zealanders have financial goals – although only 31% say that they have written these goals down. And only 28% say that they have a written financial plan.
Having a financial plan in place – ranging from a household budget to paying off debts to saving for retirement – is key to creating a better financial future this year and beyond.
Getting to grips with your finances means making better decisions today. Here are some important points to help you get a clearer picture of where you are and where you want to end up.
For the short term and plan for the long term. Becoming debt-free is a good short-term plan, while saving and/or investing is required for long-term financial independence at the end of your working life.
2. Write down your plans…
… and it’s more likely they will happen. While only 28% of New Zealanders have done it, commit your plans to paper in any sort of fashion from no-nonsense text to colourful images – then make sure you put your plan in a prominent place to remind you daily of the road map you are travelling on.
3. Set savings goals
You need savings goals for both the short term and goals for the long term. Once you get past the daydreaming phase, you’ll want your savings goals to be more concrete. They should be specific, measurable, achievable, realistic and trackable. For each goal, estimate what it will cost and calculate how much you would need to save each month to achieve them.
4. Write down your savings goals
In much the same fashion as you have written down your short and long-term plans, it’s important to write down your savings goals. These are the master blueprints for your future financial success so don’t dismiss them lightly. Refer to them daily for added motivation.
5. Track your spending
This will help you to find out exactly where your money is going. It is only by doing this that you will see areas you need to change in order to make financial headway. Try some of the Sorted calculators to get you on the right track.
6. Create a budget
Instead of looking at it as deprivation, think of budgeting as making sure your spending reflects your priorities and values. A budget is the cornerstone of a financial plan and the CFFL tells us that around 61% of New Zealanders have a budget. When it comes to spending, half of adult New Zealanders
(51%) earned more than they spent and a further 28% earned as much as they spent in the three
months leading up to the most recent CFFL survey. The remainder (20%) earned less than they spent over the three months preceding the survey.
7. Take stock of your net worth
Your net worth is essentially the difference between what you own and owe. Then you can work out how much you can afford to put towards a savings investment plan. While around 62% of Kiwis save money, 43% don’t pay their credit card in full each month.
The golden rules of investing cover important concepts like diversification and asset allocation, which are about spreading your money across a number of investments in order to manage the risk of losing all your money on one investment. If you want to start investing this year, read up on the golden rules first.
8. Control your debts – and clear the slate.
High-interest credit card debts are a good place to start. A debt of $2,000 could take you over 12 years to pay off and cost you about $2,150 in interest, if you pay only the minimum repayment. If you do juggle credit card debt, then compare current credit card interest rates.
9. Maximise your Kiwisaver…
… by developing a close relationship with it now. Make a habit of going to your Kiwisaver fund’s website to check your balance, or at least diarise some time to go through your Kiwisaver statement.
10. Pay extra on your mortgage – and save thousands.
There is a lot of money to be saved by increasing the amount that you pay onto your home loan. For example, a couple with a $400,000 mortgage could potentially save up to $50,000 and pay off their debt almost four years earlier by contributing $200 extra each month. Even paying more frequently into the home loan will help. For instance, dividing up the monthly repayment by two and paying this amount fortnightly will mean making the equivalent of one extra monthly repayment per year. There are 26 fortnights per year and the extra will come off your loan principal, reducing the amount on which future interest will be calculated. You won’t even notice this slight change and it will help you get home sooner with your loan.
11. Insure your assets
This is critical advice. After all, why work hard to accumulate assets and wealth if you don’t protect yourself against their loss? It’s only natural to insure your home, car, boat and any other material possession but make sure you compare policies every year to check that you are getting the best price for the coverage that suits your situation.
12 Stick to the plan – come rain or shine.
It’s important to stick to your spending targets or you could end up accumulating debt. Your budget is a key part of your overall plan and savings goal sheets, set out in points 1-4 above. Use as many free apps as you need to monitor spending and track expenses but sticking rigidly to your plan is the key to make savings a habit. The reward in the end will be much greater than any short-term frustration/pain/injustice or deprivation you may feel you have suffered at certain points along the way! Believe in the plan guiding you and it can happen.