Yahoo Finance 5 money moves that will change your life
You don’t have to be a financial genius to get financially secure. Truly.
But there are a few simple things to know, and straight-forward strategies to put in place, that can take you from worry to wealthy.
Your final ingredient is focus. Focus on the future. And that’s the perfect place to start.
These five tips are part one of a two part series helping you take control of your finances.
Tip 1: Don’t delay, start investing today
Money is for spending, just not all at once, because you want to be able to stop work one day, right? That requires holding a little back. But the life-changing realisation is this: the sooner you start, the cheaper it is.
Say you are 20 years old today. If you start diligently stashing away just $6 a day, and make an 8 per cent investment return, you’ll be a millionaire by age 65.
However, if you wait until you’re 40, you’ll need to save a far-more-painful $35 a day. Delay until 55 and that daily amount leaps to a pretty impossible $180.
Still not sitting bolt upright? Then you need to know this too: our clever 20 year old has had to find only about $100,000 of his or her million bucks.
Meanwhile, our literally poor 55 year old has stumped up some $656,000.
That’s the magic of compounding. To harness it for yourself, you need to save immediately and all-the-time. In fact, you need to invest immediately and all-the-time, and a thing called Exchange Traded Funds (ETFs) makes it easy for novices to cheaply, regularly buy a decent, safer spread of companies and sectors in the stock market.
Tip 2: Put 2 per cent extra into super
As lucky as we are to have a retirement savings scheme ticking away in the background for us in Australia, it’s unlikely to be enough, particularly if you plan on taking on the unpaid job of raising children, and stopping earning for a bit.
There are also two compounding factors for women:
We still earn on average 13.4 per cent less than men.
We live approximately four years longer on average, so have to stretch a smaller super pot across a longer period.
For these reasons, actuarial firm RiceWarner successfully applied to the Australian Human Rights Commission to pay its female staff 2 per cent extra in super.
For everybody, regardless of gender or circumstances, that’s a sound strategy.
Tip 3: Avoid dumb debt
So what exactly is dumb debt? It’s debt that is not for a home or for an asset that is going to earn you tax deductions – like an investment property (stay tuned for that).
But the dumbest debt is for something for which you are going to have nothing to show (except maybe pictures in the case of a holiday) or that will immediately lose value.
You guessed it: a car falls squarely into that last category.
While you’ll effectively immediately disappear a chunk of your borrowed money, you’ll still be paying interest on it.
Save for these expenses instead (and buy the cheapest car you can tolerate driving).
Tip 4: Get smart debt for a home
For years, I’ve heard too-cocky-by-half finance professionals say things like: we think property prices are going to crash so we’re waiting and renting. Some even sell up to try and out-smart the market.
You know what invariably happens? Prices instead go up 20 per cent.
Although the interest and costs of your residence are not tax deductible (more on that below), a mortgage is a great forced savings vehicle and your home is your very own tax haven, with no capital gains tax ever.
And provided you don’t become a ‘forced seller’, because you have over borrowed and/or interest rates have gone up dramatically, a property price dip is only on paper anyway.
Ideally, you want to buy with a 20 per cent deposit for multiple reasons:
To avoid paying extortionate mortgage lenders’ insurance
To secure the cheapest loan rates
To try and avoid negative equity (owing more on your property than it is worth).
Tip 5: Consider smart debt for an investment property
Now this one is particularly good for anyone on a higher tax rate. But it’s also potentially smart for aspiring first homebuyers who feel priced out of the market to buy their own home.
When you buy an investment instead of your own home, you can claim tax deductions on the interest and expenses. This means the government basically throws in money to help you cover the costs and also pay off the property.
It costs you less than it otherwise would and this may help you get a loan over the approval line.
This strategy also means you can buy a cheaper property than you might want to live in, perhaps further away from your suburb of choice.
Of course, you want to identify an area where rental demand is strong (many places have low vacancy rates today) and, ideally, where prices are tipped to forge ahead.
Then, when you’ve built a nice chunk of equity in your investment property, you will be able to use this to purchase a home of your own.
