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Taking stock of your financial situation is the first step in managing your money. Ask yourself two important questions:
1. Are you better off today than a year ago? Look at what you own and what you owe.
Write down what you own and what you owe today and a year ago in a table, like the one in our example opposite for Nat and Sam. It’s fairly easy to make a few estimates, and then use your mortgage, credit cards, bank accounts
and superannuation statements to fill in the blanks.A year ago, Nat and Sam bought a home and a new car. Now, their home is worth more, their super has grown and their car loan is coming down. Unfortunately their credit card debt has gone up, and they don’t have much saved for unexpected bills or time without work.If Nat and Sam were 25 years old, they’d be pretty comfortable, because they have plenty of time to pay off their mortgage and build up their super. If they were 55 years old, they’d be facing some serious problems with so much debt and so little super, even if they kept working till 65.
When you draw up a similar table for yourself, first look at what changes have occurred. Then think about your age and how much longer you expect to work to see if you are likely to be comfortable or if you face some serious issues.

2. Are you saving any money? Look at your income and your expenses.
Record all your income and expenses for a month, as we have for Nat and Sam in the table opposite.

Nat and Sam, who both work and have two children, are doing well to save $230 each month. However, their debts take up a lot of their money, and $230 won’t stretch far. There’s also not much room for them to put extra money towards paying off loans or building up money for their children’s education. Looking at your own income and expenses is a first step in budgeting, and shows if you’re making progress, standing still, or going backwards.

TIP: List each loan repayment as a separate expense, then convert everything into monthly figures.

Your own plan will help you control your money. If you set some goals, make a plan and stick to it, you can make progress even with ups and downs along the way.

What do you want to achieve?
Would you like to:

Pay off your credit cards?
Buy a new car and pay it off quickly?
Buy a home and pay it off quickly?
Save for your children’s education?

Put some money aside for your retirement? These are some typical financial goals. Others include paying off personal loans or saving up for a holiday. Write down your own goals as the first step in your plan.Your own plan will help you control your money. If you set some goals, make a plan and stick to it, you can make progress even with ups and downs along the way.

How long will it take to reach your goals?
Some goals may be urgent, for example getting credit card debts under control and paid off. Remember how Nat and Sam’s credit card debt had gone up? Paying almost $500 each year for just $3,000 (16.5% interest) is
very expensive, so they would probably need to fix this soon.
Longer term goals, for example buying a home or saving for retirement, can be just as important. Because they cost a lot of money, the sooner you start working towards them, the sooner you can achieve them, even if you can only spare a small amount of money. It can cost a lot more to do these things later. In the table on the next page, based on Nat and Sam’s situation, we have:

drawn up some financial goals estimated how long they may take, and noted some things to do to get started.

 TIP: Using your own goals, you could draw up a similar table for yourself. If you’re not sure about some of the things you need to do, come back to them after reading the ideas in this website.

Nat and Sam’s financial goals, time needed and how to start

Pay off credit card (2 years) How to start: Stop using the cards. Instead, use a card that debits their savings account, so they spend their own money, not pay to use someone else’s.
Check how much they need to pay monthly to get rid of the debt within 2 years, and stick to that amount each month.

Pay off new car (3 years) How to start: Work out how much they can afford to pay per month, including the cost of insurance. Choose a model within their price range and shop around for the best price. Make the biggest deposit they can. Shop around for the best loan, as well as the car. Maybe extend their mortgage, so long as they pay off quickly the extra they borrowed.

Buy a home and pay it off (long term) How to start: Work out how much they can afford each month, and look around in their price range. Shop around for a low interest rate. Make payments fortnightly and pay a bit more than required each time. If it won’t cost more in interest, a redraw or offset savings account can let you put any extra money you may have, including your pay cheque, on your mortgage.

Save for children’s education (medium to long term) How to start: Set up a long term investment account that they won’t touch. Check personal finance magazines about suitable long term investments.

Put some money aside for retirement (long term) How to start: Put more money into superannuation (more on super later). If their funds offer investment choice, consider which option best meets their needs.

How much will each goal cost?
The next step in planning your finances is to estimate how much your goals may cost, and compare that cost with what you are saving. Then you can see if there’s a gap to close. Estimating costs is fairly straightforward for the goals you have already started, such as loans you are paying off. Useful internet loan calculators can show how much a loan will cost, and how your repayments are affected by shorter or longer term loans. To estimate long term savings and investments, we will show you some calculations for Nat and Sam, which you could use or adjust. Later we’ll offer some extra figures on super and saving for retirement.

A gap between your goals and your savings?
Is there a gap between what you can save each month and the cost of your goals? The gap between Nat and Sam’s savings and their goals are shown in the table below. Nat and Sam’s goals cost more than they can spare from the $230 they save each month. They can’t afford to start everything today, but they can afford to do some things that will close the gap within a fairly short time. Suppose they grit their teeth, stop using their credit cards and use what they save to pay off their cards in two years. Around the same time, they will also have paid off the car. Their costs then drop and so their savings increase to $665 per month. So in two years, there’s extra money to pay off their home loan faster and put some money aside for the children’s education.They can achieve their goals if they make a start, even if it takes two years longer than they would have liked. Closing the gap means finding ways to free up cash that you can devote to your financial goals. Usually the top priority is paying off high-interest loans. When you achieve that goal, you can channel the extra money you save into your next goal, and so on.

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Getting into debt is far easier than getting out of it. If you shop around and manage your loans, they won’t make a mess of your finances.

When should you borrow?
Look at the total cost including all the interest before you borrow. Only borrow if you are sure you can afford the repayments. For things you just want, such as a holiday, it’s cheaper to save up for them. For example, Nat and Sam’s $3,000 two-week holiday, paid on their credit cards, took them two years’ hard saving to pay off, and cost them an extra $534 in interest. Even for things you may need, such as a car, it’s cheaper to save if you can.If you do borrow, pick the shortest repayment period you can afford, especially for anything that you use up quickly, like a holiday, or that loses value, like a car. For a home, almost everyone has to borrow because it’s hardly realistic to save up for one. In this case, it can make good sense to borrow, because a home could increase in value, perhaps even faster than the interest rate you will pay.
How much should you borrow?
It pays to be cautious. Lenders may offer you a bigger loan than you would feel comfortable with. They may increase your credit card limit without asking and without checking if you really can repay higher debt. Interest rates could go up, and if you borrow too much even a small rise could get you into trouble.

TIP: Do a trial run before you borrow.
Try saving an amount equal to your loan repayments each month, or saving the difference between your rent and home loan repayments (include the one-off costs, such as stamp duty and moving house).

Could you afford to do that for the full term of the loan, maybe for 20 or 25 years?
You may be overstretching yourself if: l your total loan repayments cost more than half your take home pay l your home loan repayments cost more than a third of your take home pay.

What’s the best loan?
Usually it’s the loan with the lowest interest rate. This is often the single most important thing to get right, so shop around. Even small differences in interest rates can make a big difference to the total amount you will pay, especially with long-term loans. Extra features that cost you more in interest rates may just waste money. Look for the ‘comparison rate’ which takes fees into account. ‘Honeymoon’, ‘introductory’ and ‘low start’ loans may sound appealing, but once the honeymoon ends, you could end up in a more expensive loan. Check that your loan allows you to make extra payments, and if there are any fees for doing so. Loans with fixed rates may:

• not allow extra payments or, if they do, will commonly limit the amount you can repay over the life of the loan
• charge very high extra fees for paying out the loan early.

Where to find loans?
The CANNEX website at www.cannex.com.au is an excellent place to start. Magazines and newspaper columns also give a good idea of current rates. Do consider all types of lenders: credit unions, building societies, banks and non-bank lenders. Loans with the lowest rates of interest may not be the most heavily advertised. Mortgage brokers may not offer all the low interest home loans available.

Which loans should you pay off first?
Pay at least the minimum amount due to every lender on time. If you can afford extra payments, start with the loan charging the highest interest. Only put extra into other loans once the most expensive one has been paid off. The lowest-priority loan is one that has taxdeductible interest – for an investment property loan, for instance.

Why pay loans and mortgages off faster?
Paying off your loan faster can save you thousands in interest payments. One simple way to get ahead is to pay your loan fortnightly instead of monthly. In effect, you make the equivalent of 13 monthly payments a year instead of 12.
Fortnightly payments will cut four years off a 20-year home loan of $200,000. And if you can pay an extra $100 per fortnight, you will cut seven years off your loan. If you have some money to spare, consider reducing your loan balance. Paying $1,000 off a credit card charging you 16% interest obviously beats putting the same money into a term deposit earning 5.5%. Also, remember the effect of tax. Paying $1,000 off a loan charging interest of 6.5%, saves a full $65. Even if you could invest the money somewhere else that earned $65, you would then have to pay tax. Be careful about claims that refinancing will pay off your loan faster. You can only pay off loans faster by paying more money. Only refinance if you are sure the savings outweigh the costs.

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Why insurance really matters Insurance helps cover the costs of unfortunate events, such as losing your living because of illness or disability, or your home in a fire. It protects the financial safety of you and your family, and your property.
Common risks and how to insure against them
Common risks: Death and total and permanent disability Insurance product: Increased life and total and permanent disability insurance through your superannuation fund or a personal policy What can reduce your insurance premiums: Using your super fund if the policy suits you Common risks: Damage or loss to a home building and fixtures Insurance product: Home building insurance What can reduce your insurance premiums: Adequate maintenance, smoke detectors, sound electrical wiring
Common risks: Loss of home contents Insurance product: Home contents insurance
What can reduce your insurance premiums: Window and door locks, burglar alarms, smoke detectors
Common risks: Damage to someone else’s vehicle or property
Insurance product: Third party property insurance
What can reduce your insurance premiums: An accident-free driving record
Common risks: Loss or damage to your motor vehicle
Insurance product: Comprehensive insurance
What can reduce your insurance premiums: Security

Common risks: Sickness and temporary disability
Insurance product: Income protection insurance (this is tax deductible); Private hospital medical insurance; Trauma insurance
What can reduce your insurance premiums: Check if your super fund offers suitable insurance
Common risks: Unemployment
Insurance product: Generally you can’t insure against unemployment
What can reduce your insurance premiums: Not applicable
TIP: Before you make a choice, read about the risks and returns for each investment strategy you are offered.

How much cover do you need?
If you make a claim, the maximum an insurer will pay you is the amount of money, or ‘sum insured’, in your contract. That sum has to cover everything.
Most people underestimate the value of what they own and ‘under-insure’. If you under-insure, you won’t get enough money to cover the total cost of your loss.
For example, the ‘sum insured’ for your home must be enough to cover all your costs if your home were destroyed, including rubbish removal, alternative housing and rebuilding costs. Check your cover regularly, so that your sum insured keeps up with building costs and any renovations. Increasing your sum insured won’t necessarily cost a lot of money. Shopping around, or choosing a higher excess, could get you more insurance at about the same cost as
your current policy. Although many insurers have internet calculators to help you work out a reasonable sum insured, not all calculators are the same. Use a calculator that asks you lots of questions (up to 30) about your home, because you’re much more likely to get a more accurate sum insured.

How do you get the best cover?
Shop around and get a few quotes. To give you a quote, the insurer will ask you various questions. Answer all questions fully and honestly. You must tell them all the facts that could be relevant, otherwise the insurer may be entitled to refuse or reduce payment on a claim. You may save on insurance premiums by agreeing to pay an ‘excess’.Compare the actual cover offered in each quote. Go through what the policy covers and what it excludes with a fine-tooth comb. Many people find out only too late that something was not covered. Insurance covers only what’s defined in the policy and nothing else. A cheap policy that doesn’t cover what you need could be worse than a more expensive policy with unnecessary features. If you have special needs, seek expert advice before you take out insurance cover.

EXAMPLE: If you can afford to pay for the first $500 of damage to your home or contents, you may get a reduced premium. Packaging several insurance policies with one insurer may also save money.

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Income Analysis – Work out your regular income vs Expensis

Household expenses

Debt repayments

Education expenses

Work out your regular expenses.
Remember to use the same time frame that you chose for your income. Next, add up the subtotals to get your total expenses.

Click Here for the live calculator

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Put yourself in charge

Have a plan for your money and stick to it.
Prepare a budget for yourself and keep it up to date.
Establish a savings habit – save as much and as regularly as you can.

Take control

There’s more you can do too:
• Take a hard look at your loans and credit cards and see what scope there maybe to consolidate them or adjust some of your spending habits.
• Look for opportunities to make your money work harder by investing, and check if you’re contributing enough to your superannuation.
• Think about strategies for protecting your money, such as making sure that you have the right insurance.
• Shop around and get information and advice if you’re not sure about managing your money or if you need help.

This website will provide information on these and other issues to help you better understand your money.

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