New year, new resolutions. It may sound predictable, but the new year really is the perfect time to set financial goals for the year. Like many gyms and health businesses, we are experiencing the ‘new year effect’, with many clients contacting our financial planner team to reset their financial goals and make sure they stay on track. The best financial planners will not only help to set achievable goals but hold you to account to get there. We spoke to our highly experienced financial planner Michael Bower to ask for his top 3 resolutions to help anyone start the year right.
Create a solid budget
Make it your year to nail budgeting. No more excuses. Review your costs by going through your bank and credit card statements from the last 3-6 months. Group costs together into a spreadsheet for things like rent/mortgage, groceries, bills, travel/car costs, socialising and take a monthly average. If sticking to a ‘carb-free fat-free sugar-free fun-free’ ridiculous new year fad diet seems easier than creating a spreadsheet, we are here to tell you it’s not! You don’t need to be a financial planner to create a basic budget and there are so many great apps out there which will do this for you. Like we said, no excuses.
Now, where can you trim costs? We challenge you to replace your favourite chips, tinned goods etc with supermarket own brands and see if you can tell the difference. Can you switch to a cheaper energy provider? Or refinance to a better deal? You could save thousands on energy costs and mortgage interest however ensure you won’t incur any early exit/early repayment fees first. And what about that daily coffee and regular breakfasts out? Can they really make a difference to your financial future? We modelled it out recently, and… *spoiler alert* the answer is YES. Read the full article here: Does My Avo On Toast Habit Really Affect My Financial Planning Strategy?.
If you spend a lot on ‘stuff’; clothes, household items etc why not challenge yourself to a month of spending on the essentials only? And by essentials we really mean essentials. Still want to socialise with friends? No worries, make it your mission to find fun “free” things to do – go for a beach walk instead of brunch or have an old school games night where everyone brings a dish instead of going out for dinner and drinks. Challenge yourself to rethink the way you spend. Learn the art of delayed gratification and before you buy anything ask yourself “do I need this or do I want this?”. If your house is full of stuff, double down on resolutions to declutter your home AND make money – put anything you haven’t used/worn in the last year on facebook marketplace and sell it!
If you have children, get them to create their own savings budget. If they want to buy an expensive toy, work back the amount over a few months to teach them that saving small equal amounts can build up quickly to achieve goals. The earlier children can understand the benefits of saving the better!
Salary Sacrifice
Salary sacrifice is an often overlooked area despite the savings potential. It enables you to pay for certain goods or services directly from your pre-tax salary, which effectively reduces your taxable income and therefore reduces your tax bill, saving you money. The arrangement is made between you and your employer and the savings will vary from person to person depending on your tax bracket. The most common items to salary sacrifice include: cars, car loans, school fees, childcare costs and health insurance. Let’s say you earn $110k annually, putting you in the 37% tax bracket. Let’s say you and your employer agree to start salary sacrificing a car and school fees with a combined value of just over $30k. This would bump you into the lower tax bracket as the $30k would be taken out of pre-tax income. This means you would be saving 37% on the $30k which is $11,100. Salary sacrificing into your super fund is also beneficial as you get taxed at the special rate of 15%. This is a good opportunity for higher income earners due to their higher marginal tax rate. Michael Bower, financial planner at Forrest Private Wealth says “Salary sacrificing is a no brainer when it comes to sound financial planning. Not all employers offer it, but if they do you should take them up on it immediately”.
Your employer may not offer salary sacrificing for products and services, however they will be able to set up regular salary sacrificing into super from your pay. Salary sacrificing into your super is one of the best ways to grow your wealth as the extra is going into your super before you’re taxed. When you add extra into your super, your money will generally be taxed at 15%. For most people, this will be much less than your marginal rate, which could be as high as 47%. Just $95 out of your take-home pay each week could mean $3,360 less tax every year and an extra $127,640 at retirement. Read more about this calculation and salary sacrifice as a wealth building strategy here.
Save & Invest every month
Do you save whatever is ‘leftover’ at the end of the month? A financial planner will tell you this is never a good idea as saving should always be a priority and not an afterthought. Do yourself a favour and knock off any high interest debt you may have first and then start to SAVE. If you earn a reasonable salary and are not experiencing financial hardship, take out 20% as savings ‘first’ as soon as you get paid. One of the most effective ways to build wealth is to save consistently, every month and invest the money at a risk level that is aligned with your short and long term goals. Read more about Forrest Private Wealth investment advice and philosophy via our website or get in touch directly.
If you get a pay increase, save the entire new amount and continue to live on your previous budget. A common mistake seen by many financial planners is that spending increases as salaries increase. A person earning $60k who religiously saves 20% every month from their 20s will end up ‘richer’ than a CEO earning $300k who spends everything they earn and makes the odd lump sum saving in their 50s. Why? The power of compounding is real and if you are not familiar with how it works, please read our article here.
Feeling ready for a new year financial detox? Get in touch with a financial planner at Forrest Private Wealth to learn more.