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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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