Making a few simple changes to their financial arrangements now, rather than putting it on their wish list for “next year” or “one day”, is the best way for people to achieve a solid financial future, says Jonathan Philpot, wealth management director at HLB Mann Judd Sydney.
“People shouldn’t wait until New Year and then make a list of resolutions that rarely get implemented. Sorting out finances needs an immediate action plan with deadlines, and December 31 is a good target date itself to achieve one or two of the steps needed.”
Mr Philpot said people often think it is just too hard to take action to sort out their financial situation but they should think of it as an ongoing journey rather than one huge task to be completed.
“It might seem daunting to begin with but developing five or six activities, and setting target dates, can make positive action surprisingly easy,” Mr Philpot said.
“People think they’ll need to fill out lots of forms, remember lots of passwords, dig through old files to get at information – it all becomes hard work and they put it into the ‘too hard’ basket.
“However, it doesn’t require a huge effort make a small difference, and once that first step is taken, the second and third steps are easier, and the journey to good financial health is well underway.
“Building wealth doesn’t necessarily mean complicated investments and techniques such as negative gearing or margin lending. Indeed, often the simplest approaches are the most effective.”
Mr Philpot’s top five tips include:
1. Start a small savings plan
Wealth is built on the ability to save, says Mr Philpot.
“‘Saving’ includes making additional repayments on the mortgage or, once that is under control, commencing an investment account.
“Rather than savings being sporadic, people should establish a regular transfer into an investment that automatically takes place when they receive their pay – that is, before they spend any of their income.
“For those who struggle to meet bill payments and find it very difficult to save, starting a budget will assist with better understanding of where their money goes, and will enable them to start saving on a regular basis.”
2. Review debt
Mr Philpot says paying down debt and avoiding new debt is the best investment most people can make.
“It is well known that credit card debt is outrageously expensive, yet people still use it. Putting together a plan to consolidate all credit card debt to take advantage of a special low rate offer, and committing to paying it off within the honeymoon period of the special offer, is an excellent strategy.
“It takes discipline and a change in spending habits, but it is very worthwhile.
“Repayments saved in this way can be used for other activities such as investing, saving, or adding to mortgage repayments.
“The interest payable on a mortgage is usually very significant and, as it is non-deductible, it makes sense to reduce this kind of debt as much as possible, before starting any other strategies.
3. Build up superannuation
While people can’t control what markets will do, they can take control of how much they put into their superannuation.
“Making additional contributions to super over a long period of time is still the most effective way of building up retirement savings rather than hoping that the market performs well,” Mr Philpot said.
Usually salary sacrificing into superannuation will also result in substantial personal tax savings, particularly for high income earners where the top tax rate including the Medicare levy is 49%.
“However, be careful not to go over the contribution caps, as this can prove very costly.”
4. Protect income
“People often overlook the fact that their most valuable asset is their ability to earn an income. If this is taken away – because of injury or illness – then families can very quickly find themselves in long-term financial difficulties if they don’t have some form of income protection insurance.
“Income protection insurance premiums are tax-deductible so the millions of dollars of future income being insured can cost, after tax, the same as insuring the family car, and we all insure the car!
“Life cover is generally held within superannuation, and Total & Permanent Disability is held with life cover, but these should be checked as part of the overall financial strategy to make sure they are still appropriate for your circumstances,” Mr Philpot said.
“For example, if a couple has started a family in the last year, any income protection and life insurance may no longer be adequate to protect the family.”
5. Make an estate plan
Most working Australians now have some sort of an estate, whether they realise it or not. Personal savings, the value of a car and their home, all form part of an estate. Yet 40% of Australians die without a valid Will, which can create uncertainty and difficulties for their loved ones.
“There are different rules in each state and events such as marriage (but not divorce) will revoke existing Wills, so it is almost always worthwhile to get professional advice if you want to be certain your estate goes where you want it to,” Mr Philpot says.
“Superannuation assets can also add complications. Super is not covered by a Will, and the tax implications for the nominated beneficiary can be complex,” Mr Philpot said.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.
For more information please contact:
Jonathan Philpot – Phone: 02 9020 4196
15 October 2014