7 powerful financial habits to form this year
“Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones.”
— Benjamin Franklin
Financial success is all about adopting good financial habits. It’s important to set good financial goals, but you also must carry them through. After all, taking control of your money is about making it work for you.
Here are seven money habits to develop this year in pursuit of smarter saving, spending and investing:
Powerful Habit #1—Set SMART Goals
The simple fact is that for goals to be powerful, they should be designed to be SMART. There are many variations of what SMART stands for, but the essence is this—goals should be: Specific; Measurable; Attainable; Relevant; and Time-bound.
Set specific goals
Your goal must be clear and well defined. Vague or generalised goals are unhelpful because they don’t provide sufficient direction. Remember, you need goals to show you the way. Make it as easy as you can to get where you want to go by defining precisely where you want to end up.
Set measurable goals
Include precise amounts, dates, and so on in your goals so you can measure your degree of success. If your goal is simply to “reduce expenses” how will you know when you have been successful? In one month’s time if you have a 1% reduction, or in two years’ time when you have a 10% reduction? Without a way to measure your success you miss out on the celebration that comes with knowing you have achieved something.
Set attainable goals
Make sure that it’s possible to achieve the goals you set. If you set a goal you have no hope of achieving, you will only demoralise yourself and erode your confidence.
However, resist the urge to set goals that are too easy. Accomplishing a goal that you didn’t have to work hard for can be anticlimactic at best, and can also make you fear setting future goals that carry a risk of non-achievement. By setting realistic yet challenging goals, you hit the balance you need. These are the types of goals that require you to “raise the bar” and they bring the greatest personal satisfaction.
Set relevant goals
Goals should be relevant to the direction you want your life and career to take. By keeping goals aligned with this, you’ll develop the focus you need to get ahead and do what you want. Set widely scattered and inconsistent goals, and you’ll fritter your time—and your life—away.
Set time-bound goals
Your goals must have a deadline. Again, this means that you know when you can celebrate success. When you are working on a deadline, your sense of urgency increases and achievement will come that much quicker.
Powerful Habit #2—Click and save
Some people might think that saving 20% of their income is nearly impossible. Well, let me tell you it’s not. If you feel like saving 20% of your income is going to be virtually impossible, that’s more reason why you must do so. If you’re living pay check-to-pay check, you might find this very difficult. But, there are always ways to cut your expenses.
Automate, automate, automate. Financial experts love recommending that you automate your savings because it’s so darn effective. Since you only must make the decision to automate once, it’s hands off thereafter so you’re less likely to tinker with your contributions.
Powerful Habit #3—Invest in growth assets
If you save just only to put money into bank account, it will never grow and inflation will erode the value of your wealth for sure. Most commonly, young families with mortgages put their savings into offset accounts to reduce their interest costs. It’s a good strategy to be a part of your investment plan but not as alone itself. Your savings needs to be invested in high quality assets which grow beyond inflation and generate a decent income, like high quality shares have good earnings growth and dividend yield. If you like property, then invest in a high quality residential or commercial property in a high demand location which appeals to most buyers with a good rental income.
Powerful Habit #4—Debt management
If you’re accumulating debt every month and not paying it down, then you’re most certainly not employing one of the sacred powerful habits. Paying down and paying off debt should be a top priority. If you’re not in the green every single month, then there’s a major problem. Immediately make a plan to pay down and pay off your debt, rather than think about ways to accumulate more of it. Focus on your highest interest credit cards and loans first, then move to the second highest ones, and so on, until all of your debt is paid off.
Powerful Habit #5—Make a salary sacrifice
Yes, super is boring but it can be your dearest friend if you are high income earner and planning have comfortable retirement. Super is not an investment, it is just a tax structure where you park your money to save for your retirement. In super you pay maximum tax up to 15% in compare to your marginal tax rate which can be up to 45%. Once you put money into super, you usually cannot access it until you meet your preservation age (60 for most people) or meeting one of early access eligibility criteria. We highly recommend getting professional financial advice before you put money into super.
Powerful Habit #6—Secure your family
Too many people are talked into paying too much for life and disability insurance, whether it’s by adding the coverage to car loans, buying whole-life insurance policies when term-life makes more sense, or buying life insurance when you have no dependents. On the other hand, it’s important that you have an appropriate level of insurance to protect your dependents and your income in the case of death or disability. Normally, you can provide full protection to your family by having Life, Trauma, TPD (Total & Permanent Disability) and Income Protection cover, which costs 2%-3% of your income. You also get tax deduction for income protection.
Powerful Habit #7—Make a will
More than 50% of Australians don’t have a will. If you have dependents, no matter how little or how much you own, you need a will. Protect your loved ones. Write a will. You also need an enduring power of attorney; make sure it is enduring not a general power of attorney. Enduring power of attorney works beyond the mental incapacity while general power of attorney does not, which defeats the purpose of power of attorney. Enduring power of attorney comes in various types—limited financial, medical and guardian. If you have children, you need to have enduring power of attorney (guardianship).
The writer is a licensed financial planner and CEO & Co-Founder of Fortune Wealth Creation Group, an award winning financial planning firm based in Melbourne CBD specialising in providing professional financial advice to C-Suite Executives, CA/CPAs, IT Professionals, Engineers, Doctors and Lawyers.
The above information is in general nature and does not consider your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision, please contact licensed professional or you can contact us directly on 03 8648 6505 or www.fortunewealth.com.au