posted in: Building Wealth
5 key initiatives to achieve financial health in 2021!
If you’ve set your sights on 2021 as the year to bolster your financial position, you’re not alone. For many of us, 2020 was a year where we largely laid low – spending less and saving more – as we waited out the uncertainty. Now in 2021, with the economy growing and the pandemic largely contained, there is a big opportunity to build wealth and establish strong financial foundations.
Here are five commitments you can make for 2021 to help you boost your financial position.
Identify and create financial goals
If up until now you’ve only had loose financial goals – such as saving more than you spend – now is the time to get really specific on what you want to achieve.
What position do you want to be in in one year, five years, twenty years, or at retirement? What do you need to do to get there? Do you want to buy a home? Invest in property? Afford childcare or private schooling? Renovate your home? Have you considered what lifestyle and income you want in retirement?
Identifying and considering your goals at every stage of your life will enable you to map out what you need to be doing financially to achieve these goals. It’s all about creating a framework for how you should be building wealth to create the life that you want. Without this you’re essentially going in blind and hoping for the best – that’s not generally a pathway to financial success.
Develop good habits
Good financial health comes down to adopting good habits which will ensure you don’t deviate from achieving your financial objectives.
Creating a budget and tracking your spending is a good start. You may decide on a weekly, fortnightly or monthly budget. A good budget should anticipate all of your regular expenses such as rent, food, entertainment, health, insurance, vehicle costs or transport, as well as include less regular expenses such as gifts and holidays. A budget will highlight where you’re spending money and for those who are overspending will provide an opportunity to identify where savings can be made.
Other good financial habits include reducing credit card limits or replacing them with debit cards. People often take out credit cards to seek rewards such as frequent flyer points, however, too often the ability to overspend can far outweigh the potential rewards.
Organise direct debits for regular costs such as rent or mobile phone bills to come out just after pay day so you don’t suffer surprises later in your pay cycle by which point you may have already spent your money.
Ensure you always have a cash buffer outside of any investments so you can cover any unexpected expenses as they arise. This may involve automatically transferring a small amount from your wages to a separate account each month.
Depending on your life stage and your overall asset base, if you have surplus cash flow then making additional voluntary contributions to your superannuation can be an effective and tax efficient way to build for your retirement.
Make your money work for you
Australians have amassed a record $200 billion in savings in the last year. If you’re one of the many Australians who have more savings under their belt than usual, well done. Now is the time to make sure that money is working for you.
For those in a wealth accumulation phase, keeping too much money in cash may not always be the best strategy. Having a suitable buffer is always wise, however with interest rates so low there is little to no return on cash in a savings account. In fact, over time, that money is unlikely to outperform inflation which means you’ll actually be going backwards. The best way to make your money work over the long term is to invest into growth assets.
Options for creating wealth typically include investing in property and shares. It’s best to talk with a financial adviser about how to structure your investments to meet your financial goals. This may include a tax efficient investment into shares via superannuation to maximise your long term retirement savings. Or it could include accessing available equity from your home to purchase a cash flow efficient investment property to fund the future costs of your children’s schooling.
Be smart about your debt
If you have high interest debt such as credit card or a personal loan, your goal should be to clear it before focusing on overpaying your home loan. This type of debt won’t contribute to building wealth, plus the interest rates can often be higher than other forms of debt such as a home loan or the returns you would achieve by investing.
If you have mortgage debt, there may be an opportunity to refinance to achieve a better deal. Interest rates are at record lows and are likely to remain this way for some time. Reach out to your mortgage broker or bank to see if they can secure you a cheaper solution.
Time to take out insurance
Insurance is an important part of the financial mix to ensure you can cover any big unexpected events by providing a lump sum or income to you and/or your family depending on the event. Insurance provides a necessary safety net.
Options include life insurance which provides a lump sum payment to your family should you die, total and permanent disability (TPD) insurance which is a lump sum payment if you’re permanently prevented from working, trauma insurance which is a lump sum payment to cover the immediate medical expenses for a critical illness or injury not covered by Medicare and healthcare funds, and income protection which is typically a monthly payment if you’re unable to work for a specific period of time.
It’s important to note that there have been recent changes to income protection insurance. The Australian Prudential Regulation Authority (APRA) requires that insurers no longer offer agreed value income protection policies. Agreed value refers to an agreed monthly insurance benefit which is decided without needing to prove what you are earning at the time of a claim. APRA deemed these policies to be excessively generous, as the industry has lost billions over the last five years due to a rise in income protection claims. New policy holders will now be assessed on their average earnings over the last 12 months at the time of claim. Some insurance providers are still allowing new policy holders to select the best 12 month’s of income from the last 36 months, however further changes are scheduled for the industry and this feature is likely to be phased out for new applicants. Now would be a good time to lock in an income protection policy or review your existing cover and ensure it is adequate. Talk to your financial adviser about how the potential changes may affect you.
Want to put these New Year’s resolutions into practice? Get in touch with us for a free consultation to bolster your financial position in 2021 and beyond.