Improve Financial Decisions
No matter you are a young adult or a senior, personal finance and investments are among the most complicated topics facing you. Financial decision making is a critical skill. You are probably faced with some kind of choice that involves money every day. But when you need to make a financial decision how do you go about it?
Most of the time we just make our financial decisions off the cuff. But often we would be better off being a little more careful about the ways we make decisions that affect us financially. Often using a tool of some kind, even if it is just a piece of paper to figure on, a calculator, or a simple structured form will help you to make a better decision. Here are some advises for you on making improved financial decisions covering the key areas of saving money, paying off debt, purchasing a home, buying insurance and investing.
Start Saving Early
One of the first decisions most young adults need to make as they are entering the work force is how much to save. It is hard to give a specific answer, but it is important to save as much as you can, as early as you can.
Here is an example how early savings can be beneficial. Imagine this the year 2051 and two friends Kate and Ashley are 65 years old. Ashley started saving $2,000 per year in an IRA when she was 20. After 20 years of contributions, she stopped making new contributions. Her investments returned 7 percent per year. Kate, on the other hand, did not start saving until age 40, and she saved $2,000 per year in her IRA for 25 years. She made her last contribution in 2051. She also earned a 7 percent return on her investments. Kate saved for five more years than Ashley, but she started saving much later. Who do you think ended up with more money? Ashley wound up with $476,151 while Mary-Kate’s ending balance was $135,353.
Let’s make a change to this example to emphasize the importance of saving early. Let’s say Kate earned 14 percent while Ashley still earned 7 percent. Kate’s ending balance of $414,665 still fell short of Ashley’s $476,151 despite Kate earning more than twice as much as Ashley on her investments. So early savings always wins!
Paying off Debt
Making smart decisions about debt can be more important than making smart investing decisions. Debt is one area where diversification is not your friend. Diversifying your sources of debt is not a good idea. To the furthest extent possible, it is best to consolidate your debts to the lowest interest rate.
Another important decision with respect to debt is whether to save or pay down debt. When deciding which debt to pay down first, you should start by paying off the debt with the highest interest rate and work your way down to your debt with the lowest interest rate.
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Set-up a Budget
Knowing where you spend your money and how much is a great step toward balancing out your spending and saving. There’s no better way to figure out what you can really afford. The easiest way is to dedicate 50 percent of your take-home pay to must-haves (like housing and food), 30 percent to wants, and 20 percent to savings. For some people, especially for those in areas where the cost of living is high, this breakdown might not be realistic. Once you’ve chosen the budget that works for you, use an online financial tool to ensure that you stay within your limits. Our financial adviser can help to revisit your plan every three months or anytime you experience a financial change (say, a job loss or a windfall), then adjust the amount of money you allocate accordingly.
Manage your accounts at one place with Free Wealth Tracker program, It will help you plan your budget effectively and also help you build better financial life.
Making decisions with respect to insurance can be complicated and often depend on your specific circumstances. The best insurance lesson is that you want to insure against catastrophic losses, regardless of the probability. For example, it might be highly unlikely that you will die in the next year, but if you have a spouse and children who depend on your income, the financial impact of your death would be profound. If this situation applies to you, it would appear you have a clear need for life insurance.
Taking Investment Decisions
The most important action you can take with respect to your investments is to diversify and not own concentrated positions in individual stocks. Try to understand your risk appetite and risk profile and manage your investment accordingly. Don’t just rely on your fund manager to make the decision for you. Our financial adviser can help you to identify your investment opportunities matching your risk profile. Taking informed investment decisions is always better to keep your invested amount safe and sound with good returns.
Make Saving Automatic
If you deposit your entire pay cheque into your account, it’s just too easy and tempting to spend it all instead of saving. Thankfully, this is an easy problem to fix – all you need to do is funnel money into savings before it hits your account. One of the best ways to do this is contributing to a retirement savings plan. Not only is the money automatically deducted before you receive your paycheque, but your employer might match your contribution, essentially giving you free money.
There are other ways to automatically save, too. You can set up direct deposit to allocate some funds for your checking account and some for your savings account. Many banks also offer the option to set up an automatic transfer from one account to another.
Avoid the Credit Card Trap
Australian’s currently have more than 16 million credit cards and have an average credit card debt of $4,300. This is a national debt of around $32 billion! Credit cards are a quick fix to purchasing, but they often come with high interest rates. Making sure you make the full repayment on time can prevent large amounts of interest being charged.
Find your Lost Super
With the average national job tenure in Australia across all ages sitting at just over three years, it’s easy to see why people end up with more than one super account. If you’ve ever changed your name, address, job, or done casual or part-time work, you may have lost track of where your super is. We can help you find your lost super and consolidate it today.
Purchasing a home
Purchasing a home is a decision that should not be taken lightly. In fact, making a poor decision with respect to a home purchase can drastically alter your financial future. One main reason is that by purchasing a home, you’ve tied yourself to some extent to your current community. This can limit your future job opportunities to your current city. While you may not see this “cost” come out of your checking account, it is what is a called an opportunity cost, which is the cost of a forgone alternative.
Invest time in your financial education
One of the main causes of financial problems is “financial illiteracy.” Some companies make a great deal of money off of the financial ignorance of otherwise intelligent people. Spend two hours or more per month learning about wealth building, debt elimination, investing, and real estate. Read books or articles. Attend a seminar. Learn from those who handle their money well. The more financially literate you become, the better off you will be.
Apart from the above mentioned tips, you need your willpower. Willpower isn’t an unlimited resource. Rather, it’s like a muscle, as exercising willpower in your decision-making becomes harder as the day goes on. If you have the option to make financial decisions earlier in the day rather than later, do it – you’ll be more likely to make the smarter decision. And if you’re having trouble with a decision later in the day, recognize that your willpower might be tapped. If that’s the case, consider putting off the decision until the next day.
The financial choices facing you as you move on with your life can be confusing. But by educating yourself, you will give yourself the best chance of making the right decisions. To get help with your financial decisions, talk to our financial adviser today!
Speak to an Expert Financial Advisor
Theo Karoumbalis is director & senior financial advisor at iadvice Melbourne (a privately owned wealth management firm in Melbourne, Victoria). He helps successful individuals manage their wealth effectively. Theo’s graduated in Commercial Law, Commerce, Accounting and Financial Planning, is a best Advisor and have significant direct markets experience.
B.Law, (LLB), B.Comm, (Accounting & Finance)
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