You're not alone if you have set 2022 as the year to strengthen your finances. As we waited out the uncertainty of 2020 and 2021, many of us laid low - spending less and saving more. Due to the growing economy and largely contained pandemic, there are significant opportunities for building wealth and establishing a solid financial foundation in 2022.
If you would like to boost your financial position in 2022, consider these five commitments below:
1. Identify and create financial goals
Now is the time to get specific on what you want out of your finances. Successful businesses, families, and individuals plan for success, it doesn’t happen by accident. Set SMART (Specific, Measurable, Achievable, Realistic, and with a specific Time frame) goals.
What do you want your life to look like? This determines what finances you need) in one year, five years, 10 years, or at retirement. What do you need to do to get there? Do you want to buy a home? Invest in property? Afford childcare or private schooling? Renovate your home? Have you considered what lifestyle and income you want in retirement?
You may map out what you need to do financially to reach your goals by identifying and considering them at every stage of your life. It's all about establishing a framework for accumulating wealth so that you can live the life you desire. If you fail to plan, you are planning to fail.
2. Develop good habits which are easy to maintain
Adopting healthy habits that ensure you don't stray from your financial goals is the key to sound financial health. Making those habits as easy as possible to maintain, increases your chances of sticking to them.
Making a budget and keeping track of your expenses is an excellent place to start. Some may even consider having financial buckets when budgeting. You can set a budget for yourself that is weekly, fortnightly, or monthly. A solid budget should account for all your regular expenses, such as rent, food, entertainment, health, insurance, vehicle costs, and transportation, as well as non-recurring items like gifts and holidays. A budget will show you where you're spending money and, for those who are overspending, it will show you where you may cut costs.
The next step is to automate your budget. If you are using buckets or even just have a single savings account, set up direct debits to move money into the right spots on each payday. This makes it easy and more visual to monitor and manage the buckets and involves more guilt when you must move money from your savings to another account if you have overspent.
3. Make your money work for you
In the past year, Australians have built a record $200 billion in savings. Congratulations if you're one of the many Australians who have more protection than usual. It's now or never to ensure that your money is working for you.
Keeping too much cash on hand may not always be the ideal plan for those in the process of building wealth. Having a proper buffer is usually a good idea, but cash in a savings account earns little to no income with today's low-interest rates. In reality, that money is unlikely to surpass inflation over time, implying that you will be losing money. Investing in growth assets is the best strategy to make your money last a long time.
Investing in real estate and or shares are common ways to build wealth. It's best to consult a financial advisor on structuring your investments to achieve your financial objectives. This might include a tax-efficient superannuation investment in shares to boost your long-term retirement savings. It could also mean using the equity in your home to buy a positive cash-flow investment property to cover the costs of your children's education in the future.
If you are renting, the end of the year may also be a good time to start looking around for a more affordable place to live – get into the habit of keeping an eye out for something more affordable.
4. Be smart with your money
If you have high-interest debt, such as a credit card or a personal loan, your priority should be to pay it off before concentrating on paying off your mortgage or putting money aside into your superannuation fund. This type of debt won't help you grow wealth, and the interest rates are generally significantly higher than those on other types of debt, such as a home loan or the returns you'd get from investing.
If you owe money on your mortgage, you may be able to refinance to get a better rate. Interest rates are at all-time lows but are expected to rise so now is a good time to refinance. Ask your mortgage broker or bank if they can find you a better deal.
5. Review your Personal Risk Insurance
Personal Risk Insurance can play a crucial role in your financial plan. Depending on your circumstances, the right insurance can ensure that you and your family have the income and capital you need if you are unable to work due to illness or injury or pass away.
Life insurance, for example, pays out a lump sum to your family if you die. Total and permanent disability (TPD) insurance pays out a lump sum if you're permanently disabled from working. Trauma insurance pays out a lump sum to cover immediate medical expenses not covered by Medicare or healthcare funds, and Income Protection insurance pays out a monthly payment if you're unable to work for a specified period.
It is important to know that our insurance needs change over time as do insurance products and pricing. Therefore, it is important to review your insurance amounts and policies every few years or if your circumstances change (e.g. a bigger mortgage, school fees, higher income, etc). If your circumstances have changed and you have not reviewed your insurance, you may be underinsured (e.g. you and your family will not have the income or capital you need if you are unable to work or pass away). However, as often as not, we find clients can be over-insured (they have repaid some or all their mortgage, saved a substantial amount of money, or received an inheritance) and so are wasting money on the insurance they don’t need. By reducing their insurance amounts or switching to better / cheaper policies they can save money on premiums and increase their savings and investments.
Recently, there have been some material changes to Income Protection insurance policies. According to the Australian Prudential Regulation Authority (APRA), insurers must no longer issue agreed value Income Protection products. The term "agreed value" refers to a monthly insurance payment that is determined without the requirement to substantiate your income at the time of a claim. As a result, insurers are increasing the premiums on older-style policies and offering lower premiums on the new types of Income Protection insurance policies. Therefore, now is a good time to review your income protection policies to see which type of policy best suits your needs and your budget.
Do you want to make these New Year's resolutions a reality?
@Paul Barrett of Absolute Wealth Advisers is one of Australia's most experienced Private Wealth Managers. He is a financial expert in high net wealth divorce, estate management, and inheritance. Contact him here