GETTING STARTED
Start off by listing your assets and liabilities.
On the asset side, write down resources such as your real estate, shares, and superannuation but don't include items such as cars and furniture as they have no long-term value. On the liability side, list all your loans and include the interest rate, the monthly repayments and whether the interest is tax deductible. The difference between your assets and you liabilities is your net worth and you should set a goal to increase it by a set amount within twelve months.
There are just two ways to raise net worth - increase your assets or reduce your liabilities and the most effective strategy is to try to do both at once.
Start the process by critically examining each of your assets. Do you own property or shares that have failed to live up to your expectations? If so, consider getting out of it and buying something better. Is your superannuation invested in assets that will perform well over time? If not talk to your adviser about changing the mix. It is amazing how many people leave their superannuation in the low performing capital secure area, when it could be moved at no cost to higher earning assets. Have you money lying idle in saving accounts? Move it to a cash management trust or talk to an adviser about putting it into growth assets.
If you are a pensioner have you made sure that you are earning more than the deeming rates. It's easily done and you won't be penalised for it.
Next set yourself a loan reduction program. If you have loans on which the interest is tax deductible make sure they are on an interest only basis. This will ensure you maximise your tax benefits but would also free up money to use to speed up the payments on the non-deductible loans. Next arrange your budget so that you pay back the smallest non-deductible loan as quickly as possible. Once the smallest loan is paid off you can use the money that is no longer needed for its payments to attack the next smallest loan.
If you have a good job, and little or no debt, think about borrowing for investment. The interest will be tax deductible, which makes it much cheaper, and you will be gaining control of a chunk of quality assets that should perform well over time. The growth in this area will enure your net worth increases with minimal effort from you.
Does this sound daunting? It's no different to any other major job; the hardest part is beginning. Just grab a piece of paper and start to list your assets and loans right away. You'll be pleasantly surprised how easy it is once you take the first step. Best of all, as always, the results will be far in excess of the effort.
Preparing a Budget
Be aware of a basic truth - becoming well off financially is not a matter of earning more money but a matter of using the money you have in a better way. The only way to make the best use of your income is to draw up a money plan. The correct term for it is budget. Remember, you'll probably earn over 1 million dollars during your lifetime, so surely it makes sense to stretch it as far as you can.
The irony is that you are probably aware of the importance of having a budget to help you manage your money. But, you may not have got around to starting, or you may have made an effort, but found that the bookkeeping was all too difficult.
It's too late to change what has been, but you can ease the pain in the future by putting a simple budget strategy into place. I call it the "Claytons Budget" - the budget you have when you aren't having a budget. It's not complicated, anybody can do it, and it takes about an hour to set up.
Find a sheet of paper and write down your fixed outgoings such as house repayments, loan payments, club fees, rates, car registration, insurance and so on. Add these up and divide by the number of times you get paid. If it's fortnightly that will be 26, if it's weekly 52.
Let's suppose it comes to $15,000 a year and you are paid fortnightly. One 26th of $15,000 is $580. That is the amount you will need to set aside from each pay to cover the items listed. Deposit the $580 into a separate bank account and use it for the sole purpose of paying the expenses you listed when you arrived at the original total. Provided you don't fall into the temptation of dipping into the account for other purposes you will now have all those items under control.
Next estimate how much you spend a year or predictable expenses such as power, phone, gifts, newsagent and hairdressing. Divide these by the number of paydays, and put the appropriate sum into a separate account as well.
Next figure out what you spend over Christmas and start making regular deposits into a Christmas account. While you're at it, start a holiday account too.
Look what you have achieved. You have now provided for all your regular expenses, as well as Christmas and holidays, and never again will you have to worry about paying those bills. In fact you will look forward to the bills coming because you will have the money in the bank to pay for them.
If you now pay cash for all other consumer spending you will be on the right track even though you may have to tighten your belt if you get an unexpected costly emergency. In any event you will certainly be ahead of most of the rest of the population - you will be living within your means and in control of your finances. Some people object to this strategy on the grounds that there may be more bank fees involved. True, this is a possibility, but the feeling of being in charge of your life will more than make up for it.
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