By Anthony Bell, Finance Expert www.bellpartners.com
Many of us struggle to cope with the temptation of credit cards. Fortunately, Anthony Bell is here to give us his professional advice…
Debt Detox
Debt can be a like a nice wine, easy to get into, hard to say no to! Having an understanding of debt and how to make it work for you can have an enormous impact on your overall financial well being.
Often our first experience with debt is when we get our first credit card or borrow to buy our first car. Buying something with “someone else’s” money can be an easy habit to take up. From there the temptation to keep consuming and not saving often takes over and leaves us with a big headache that seems out of control.
Know Your Debt
There is “good” debt and “bad” debt. Good debt is money you borrow for assets that will increase in value over time, such as a property. I would also include in this money you borrow for assets that will add to your income earning ability, such as a car that you will use mostly for work and allows you to do your job (this means something practical and affordable, not necessarily the most expensive car you can find!).
Bad debt is money borrowed for consumption like a holiday, a night out, or a car that you don’t really need and will lose its value.
Starting Point
Work out where you stand financially right now. You need to know your starting point and work your way from there. If you have a lot of credit card or personal debt, face up to it. It won’t go away, and acknowledging it and working on it will be a lot less painful than putting it off for another year.
Draw up a list of what you own of value (leave off personal items that lose all their value when you walk out of the store) and all the money you owe. Don’t worry about how good or bad it looks, just do it!
From here, work on a budget and paying any personal debts (see my previous articles for hints and tips on how to do this), and look at ways going forward on how to make your money work for, and not against, you. Your money priorities will change as you go along, so below I have listed a few things you should focus on at different stages in your life:
Your 20s – Laying the Foundation
This is the decade where you start out having not long left school, studying or starting your first job, and probably not earning as much as you’d like!
Often it’s this lack of money that make easy credit very tempting (think the interest free deals at department stores), as it offers a means of having more of the good life than you otherwise get to enjoy. The trap here is not so much what is borrowed, but the habits that you are forming.
Despite the temptations to do otherwise, push yourself to get into a savings habit, and avoid personal debt as much as possible. Even if your earnings are minimal, get into the habit of putting aside at least 10% of whatever you earn into a separate savings account that you don’t touch. Again, it’s not the amounts that are important, but the habit you are setting in place for the rest of your life. Use these savings to build up a bit of a buffer so you have emergency funds if you need them (and no, this doesn’t include paying off the credit card because you overspent). Try to have at least 3 months worth of living expenses saved up and set aside in cash. Having some sort of buffer will give you piece of mind knowing that you won’t be caught short if something unexpected happens.
With any excess savings over this buffer amount, start the next habit of investing. This might include putting a sum of money into a managed share fund every month, or putting together a deposit for a property. Having a chat to a financial planner can also help, as they can show you the range of things you can invest in, and tailor them to your personal preferences and comfort level. Again, what’s important here is the habit of saving and investing that you are getting in to.
If you start these habits as early as possible in your 20s, you’d be surprised how well you are going by the back end that decade, by which time you might just be earning closer to the sort of money you first envisaged when you left school!
Your 30s – Leveraging yourself
By the time you reach your 30s, you might have started and finished a career, and be on to the next one, or even have a family or being looking to start one.
Irrespective of your path, your 30s are when you can really leverage off what you learnt over the previous 10 or so years. If you got into a good savings habit, by now you should have a good amount tucked away in some investments that are starting to add value without you having to do much to them at all. You might even be in a position to consider borrowing some more “good” debt for some investments to accelerate things if you’re comfortable with some extra risk.
You will also have plenty of skills in work and life that are of a lot of use to you and others. Just because you’ve now got experience doesn’t mean you stop learning and growing. Whether it be a university degree, a TAFE course or a short course at your local community college, you will find that the extra education will really multiply your effectiveness at whatever you do.
Keep having goals to work towards. And if you have fallen off the wagon a bit financially, starting over is better than not starting at all!
Your 40s – Maximising your returns!
In your 40s, you will often find the habits you got into in your 20s and 30s are the major factor in where you are in life (both good and bad!). What you want to do is tackle any lingering bad habits you have, and take full advantage of the good ones.
If you’ve been on a good financial path to date, keep it going! Take full advantage of your career and life experiences to maximise your value to your family and your employer or business. Add to your savings and investments and check that the goals you have are still relevant and motivating.
Being organised is important at every life stage, and very much so by your 40s. Think things like wills, insurances and how you hold your assets (for example, how well protected are you if you were involved in legal action?).
Again, don’t beat yourself up if you haven’t got your financial house in perfect order (or any order). If you feel like you are going off track, go back to basics. Take stock of where you are right now, face up to any debts that need tackling, and set some habits and goals that will move you forward.
