At the start of every year, I look back on what I achieved the previous year and what I want to achieve in the upcoming year – not just financially but in all aspects of my life. This year is no different. Here are some ideas for your new years financial resolutions.
1. Setup A Budget
The first step to building your wealth is spending less than you earn, and so it is important to find a budgeting approach that suits you.
The traditional budgeting approach works well for some people – creating a detailed breakdown of your living expenses and trying to manage your line by line expenses within certain limits.
As I don’t like creating too much work for myself, I prefer what I call the “no budget budgeting approach”, where I simply put aside a fixed percentage of every pay cheque (eg. 10% or 20%) and then spend the rest.
A variation to the no-budget budgeting approach is the 50/20/30 budget. With this budget, you allocate 50% of your income to necessities (groceries, rent, utilities etc), 20% to long term savings, and 30% to lifestyle choices (entertainment, holidays etc). This approach can be a good starting point if you want a certain level of structure to your budgeting but don’t want the time consuming task of needing to account for every expenditure.
2. Start Saving & Build Up An Emergency Fund
If you haven’t already established a financial buffer, then your number one new years resolution should be to build up an emergency fund. I recommend building up a buffer equivalent to 3 or preferably 6 months of living expenses in a readily accessible savings account. The purpose of the emergency fund is to cover you if for whatever reason you either have no income for an extended period or have a major unplanned expense.
Having the emergency fund allows you to sleep easy at night, knowing that should anything go wrong you have access to funds to see you through.
3. Prioritise Your Debt Repayments
Used wisely, debt is an important tool in building wealth over the long term. However, you should strive to make your cost of debt as cheap as possible, and as tax effective as possible.
Usually credit card and unsecured personal loans are the most expensive debt you will have and will usually not be tax deductible. On the end of the scale debt secured against property is one of the cheapest forms of debt you will have and will be tax deductible if it was used to purchase an investment property.
4. Ensure You Are Not Paying Excessive Fees to Financial Adviser or Fund Manager to Manage Your Money
In my article The Truth About Actively Managed Funds, I discuss that on average professional fund managers will fail to outperform the market index you are paying them to invest in. For example, if you are investing in an actively managed fund focused on investing in the Australian share market then, on average that fund manager will fail to beat the returns of the Australian share market index. It is ironic, that the funds with the best investment returns in the share market are generally correlated with the lowest management fees. If you are paying more than 1%pa in management fees then one of your new years financial resolutions has to be to review what you are doing and how you are investing.
5. Start an Automatic Investment Plan
If you follow my budgeting suggestions, you should be saving around 20% of your income every month. Once you have built up your emergency fund and got rid of any high cost debt, you should then consider starting an automatic investment plan. Two options to consider include :
- Setting up an automatic payment into a retail index share fund every month, or
- Use an online share trading account to buy additional units in a diversified portfolio of exchange traded funds
6. Build Your Financial Intelligence
I do not like entrusting my life savings with a financial advisor to invest on my behalf. You should not as well. Everyone should educate themselves on the benefits and risks of different investment options, asset classes, and tax treatments such that you can make an informed decision as to how you will build your financial security and hopefully financial independence. This does not mean you need to know everything, but what it means is that you know enough to ask the right questions and challenge the advice you are receiving.
Start building your financial intelligence by setting a goal to read a financial newspaper once per week (eg. The Financial Times, Australian Financial Review), an investment magazine (eg. Australian Property Investor) or commit to reading at least one book per month (or every couple of months) on investing or a related topic. You can check out my suggested books you should read to build your financial intelligence here.
Of course, you would also want to ensure you are receiving my newsletter (simply download my free ebook and you will automatically get my newsletter), or depending on which internet browser you are using you might be able to receive popup notifications on your computer each time we publish a new article. If you can select popup notifications there will be an icon in the bottom right corner of your screen.
7. Understand the Tax Implications of Your Overseas Assignment
Have you moved overseas and just tried to avoid understanding the tax implications of living overseas. It doesn’t always need to be that complicated, and if you approach it in a logical manner, it can in many situations be reasonably straight forward.
However, the first thing everyone must do is understand whether you are a resident of Australia for taxation purposes or not. Once you understand your tax residency, you can then understand the tax treatment for each of your sources of income (both in Australia and overseas). Making investment decisions becomes a lot easier when you understand these pieces of the puzzle. To help with this, you can download our Special Tax Report for Australians living abroad.
8. Review Your Personal Insurance Policies
Everyone should have review their life and income protection insurance as part of their new years financial resolutions each year. Many people have life insurance as part of their superannuation in Australia. But did you know the default life insurance is often embarrassingly inadequate and may have been invalidated when you moved overseas?
So the first thing you should do is check what you are actually covered for, and secondly review what it says about moving overseas to work or live.
This is one of the few times I strongly recommend you consult with a financial adviser as to what policy is right for you. I hope to cover a lot more on life insurance and income protection insurances later this year.
9. Review Your House and Landlord Insurance Policies
I personally have arranged for my house and landlord insurance policies to be paid as a direct debit every month. On the annual renewal date of my policy, my insurance company advise me of the revised insured amounts and costs, and my policy automatically extends. I do this principally because I do not want to run the risk of forgetting to renew my insurance. However, the problem with this approach, is I tend to just automatically accept the cost increase each year associated with extending the existing policy, and not shopping around.
So it is important, that every year or two, you review your insurance policies to (1) make sure your house and contents are insured for an appropriate amount, (2) the level of excess is set to the level you are comfortable with, and (3) that insurance premium is competitive. Now it is often possible to obtain quotes online, or spending 10 minutes on the phone with one or two other insurance companies will enable you to determine whether your current policy is competitive.
Last month I reviewed one of my landlord insurance policies, and by increasing the excess and changing insurers I reduced my annual premium for one policy by more than $100 per month.
10. Simplify Your Administration
As I covered in my article 5 ideas to reduce the administrative burden for Australian expats, try and simplify your finances as much as possible – close unnecessary bank accounts, consolidate superannuation, set your bills to automatic payment, and switch to electronic banking and statements where possible.
Finally – Set Some Financial Goals
This article is by no means exhaustive, but meant to trigger some ideas for you. You don’t need to do everything, and some of them may not be relevant. What I suggest is come up with your three main financial goals for 2017, write them down and stick them on the fridge or somewhere you will see them regularly. Make sure your goals are specific, measurable, achieveable and have a time deadline.
Share your goals in the comments below, or let me know what other new years financial resolutions you suggest.
Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way. We may receive referral commissions from companies referred in this article.