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Financial Management Basics: Tips & Guide

Why is financial management important?

At its core, personal financial management is understanding your financial situation in order to make the most of your assets in day-to-day life and in planning for your future. Why is personal financial management important? Without personal financial skills, an individual can find themselves negatively affected in areas such as:

  • Health: Financial stress can affect your appetite, mood, ability to focus, and even your blood pressure. High-stress levels caused by financial stress can increase the risk of a heart attack by 25%, risk of heart disease by 40%, and the risk of a stroke by 50%.
  • Career: Your health is not the only thing negatively affected by poor money management habits. Your career can also take a costly toll from stressors caused by mismanaging your finances. We spend 30% of our lives at work so it will naturally take a toll on your performance.
  • Relationships: One of the most common causes of conflict between partners is due to the financial pressure that impacts families.

Matching the time we dedicate to financial management based on its significance in our lives, families and wellbeing is crucial for our present and future. So what can you do to practically manage your finances? We suggest dedicating an hour on the first Sunday of every month to financial management.  3 key points to focus on as you plan your finances include budgeting, avoiding debt, and saving and investing.

Financial management planning book with a calendar

Live on a budget & monitor it monthly: Budget brings happiness.

How can a captain lead a ship or a CEO lead a team without having a clear and defined objective? How can you drive your car without knowing your destination? It all starts with the desired end goal in mind. Budgeting is no different. It starts with understanding what your ongoing expenses are to determine the goal of how much dispensable cash you want to save at the end of the month. 

Once you determine your goal, the next step is measuring and tracking your performance within the month. Generally, limits on spending per day or per account settings are available from bank apps.

Loyalty is likely to be a curse than a blessing: When breaking down your expenses, ensure you compare the current costs of the following to what’s available in the market. Usually, companies treat new customers with better pricing than existing & loyal ones.

86% of Australians don’t know how much their monthly expenses are. Some 82% don’t know what their mortgage rate is either.

UBank Know Your Number Index data conducted and compiled by Galaxy Research in 2018.

Tools:

  1. Budget: MoneyBrilliant (automatically calculates your spending & monitors it for free) or ASIC’s Budget Tool
  2. Insurances Comparison: Health, Car, Home, Contents, Landlord, Income, Life, Pet & Business
  3. Utility Comparison: Electricity, water, gas – and check for rebates
  4. Communication Comparison: Internet, Landline & Mobile plan
  5. Food: Eatclub app (discounts on restaurants), Aldi rated the cheapest supermarket
  6. Fuel: NSW Fuel Check, My NRMA or 7-Eleven fuel
  7. Cashback for Groceries, fashion & online shopping: Cashrewards app or ShopBack app
  8. Clothing: Your clothing budget should comprise no more than 5% of your after-tax income

How can we help? Want a bank that has the best technology available? Speak to us and we can find the right option for you – for free. Plus, after you set up a budget, we can help track your spending automatically. We’ll track both your spending and current interest rates on your loans.

Avoid debt: Particularly depreciating asset debt

Whilst your accountant might have a different opinion on debt, our high-level advice is that any debt with rates over 5% is expensive debt. Credit cards and personal loans are your biggest enemies. At BFG, we encourage our clients to reconsider the importance and urgency of the products that are necessary to be purchased with those products. Consider your needs versus wants.

For example, if we look at cars, a vehicle may be a ‘need’ but the type of vehicle falls under the ‘want’ category. Depreciating assets that reduce in value over time like cars are a double edge sword.

To better manage expenses, we need to understand how we make buying decisions. We can categorize our decision making into 3 types: functional, social, and emotional.

  • Functional: Your purchase decision is influenced by a practical need.
  • Social: Your purchase decision is influenced by how you would like to be perceived in society.
  • Emotional: Your purchase decision is influenced by your emotions.

Prioritise your purchase decisions. With a car, for example, consider prioritizing by its functional requirements; and not being emotionally or socially driven. Social or emotional factors make it is easy to get trapped into making decisions. If you are not aware of your decision making, it could cause huge and long term impacts on your financial position. Particularly when debt is taken on board to purchase this.

How can we help? Speak to us to identify alternative options and all available options in the market to find the cheapest cost for you.

Save & Invest: For a rainy day

Budgeting and avoiding debt are important to consider, yet it is critical to have accessible cash when unforeseen events and circumstance occur. It is not a matter of whether an unforeseen event will occur, it is a matter of when. These events could be in the form of a loss of a job, economic downturn, environmental crisis or health implications to you or your partner. Therefore, it is critical to put a plan in place to prepare for your unexpected life events.

Financial experts suggest having total cash available that is equal to six months of expenses. If your monthly expenses is $5,000, it is necessary to have $30,000 liquidated cash easily accessible is necessary. We suggest that our home loan customers have this cash available in their redraw or offset accounts. Putting that money in such an account will reduce your interest expense on your home loan debt while still allowing you to access it whenever you want.

How can we help? We are partner with Abundant Advisory. They provide exceptional levels of advice on the different options of investments and their expected rate of return. We can organise an initial complimentary consultation to understand your needs.

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