Planning for a brighter financial future.

Hi, I’m Bron Lawson from Westpac’s Davidson Institute, here to talk to you today about ‘Planning for a bright financial future’. Ever wondered why the good things in life seem to come easier for some than others? In most instances it’s not just luck, it’s because they have a plan for life. They know what they want and have actively worked to make it happen. This may be from a career perspective or a personal perspective but generally needs to be supported by a financial plan as well.

This presentation explores some of the key elements to help you plan for a bright financial future.

Before I get started, I need to let you know that the information contained in this presentation is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.

Today we’re going to look at some hints and tips about * Money planning * Spending money * Saving money * Investing money, and * Protecting your money

So, let’s get started with putting together a plan, or budget, for your money

When you mention the word ‘budgeting’, the first things that many people tend to think of are restrictions, or ‘cutting back’ or having to go without the good things in life. I prefer to think of it as mindfully choosing how I want to use my money. By taking the time to work out your personal financial position and PLANNING for how you want to spend your money, you are much better placed to make confident decisions about your money.

Confident decisions that, over time, will help you to effectively plan for the future you want and get the GOOD things you want out of life.

A good starting point is to get an understanding of how you currently spend money. One of the tools that we can use to do this is a money diary. Record every single cent you spend for let’s say one month and this will then give you a very clear picture of where you are spending your money.

You can then start to categorise your spending.

If it helps, think of a chart that represents every $ of the money you earn. From your spending diary, work out how much you spend on each category such as housing, transport, food and clothing. The chart on the screen is reminiscent of many young adults just starting out with the majority of money being spent on enjoying life.

Now there’s nothing wrong with that in the short term however if you have other goals you are looking to achieve then perhaps you need to re-think and plan for how you want your chart to look.

You can then add all those amounts into a budget planner like this one, also available on the Davidson Institute website. Start with your ‘Cash-in’ from your wages or wherever it comes from, noting whether that’s weekly, fortnightly or monthly.

Then record all of the ‘Cash-out’ amounts - take care to match up the timing. Remember, are you working on a weekly/fortnightly/monthly budget? Start with the money you want to save; then record the money for your commitments to other people like loan repayments, phone plans and so on; then all the money you need to just to live on a day-to-day basis like rent, food, power, transport and so on; then record the money you choose to spend to maintain a particular lifestyle.

Add up all these amounts and subtract that from your money in and you’ll end up with a surplus or a deficit.

We’re aiming for a surplus, but if you end up with a deficit, then you should be looking to do one of two things: either increase your income (not always easy) or reduce your spending. The beauty of having a plan for your money is that you can now decide if there are any changes that you want to make to give yourself a better chance of a brighter financial future.

For the more digitally minded you may prefer to use the Davidson Institute’s Spend Snapshot online tool. By entering details of your income and everyday expenses, the tool produces a graph that lets you see very clearly where your hard-earned cash is going. You can also use the tool to test out other scenarios and You can then choose as to whether this is how you want to spend or whether there is a better way that may be more helpful to achieve your financial goals.

As I said earlier, often when we think of budgeting, we think of reducing our spending or ‘cutting back’. In reality though, there is a certain amount we need to spend all the time simply to live. So, let’s have a look at some good spending habits that we can get into to help stick to our money plan.

Our first step is to ‘Plug your money leaks’. Money leaks are those little everyday expenses, that can add up without you realising. Things like a couple of coffees every day, buying lunch every day, and so on. It might surprise you how quickly these can add up. Let’s have a look at an example.

So, I’d like you to meet “Leaky” Luke. Luke lives in the suburbs and catches the train into the city every day for work. He’s always running late but doesn’t miss buying a coffee to give his day a kick start. When he gets into the city, he buys a bottle of water to drink as he walks the rest of the way into work. He never misses coffee with the gang at morning-tea time and loves a good latte.

Because he is always running late in the morning, he buys his lunch every day – which is normally a sandwich and a soft drink.

He and his mates are movie buffs and their weekly trip to the flicks generally costs him $30 Individually, each of these things is relatively cheap. A few dollars for coffee, few dollars for lunch … but what is this actually costing Luke? Weekly, all those little bits and pieces add up to $200 for Luke. Then if we add in the monthly subscriptions he pays for a couple of streaming services, and an online music service … over a year, that adds up to over $10,000!

Does this scenario sound a little familiar to you? Don’t worry, it’s not uncommon and we all have little leaks, including me. Again, it’s not necessarily denying yourself these things. It’s about making the choice whether you want to continue to spend your money in this way and building it into your budget, or whether you recognise that these leaks could be delaying you or stopping you from achieving your goals, and you might decide to do something about it.

Let’s say Luke decides it’s time to make a few changes and get better organised. By getting up a little earlier each morning he can catch an earlier train … one that doesn’t charge peak hour prices. He would also have time to make his lunch most days and have a coffee at home before he leaves. He does enjoy his coffee catch-ups for morning-tea and would like to buy his lunch once a week, but he now drinks tap water from his reusable bottle.

The lure of saving enough for another overseas trip sees him cut back his movies to once a month, and he’s cancelled the subscription he was no longer using and decides to keep just 1 pay TV subscription.

Not huge changes for Luke, but significant ones for his budget! Instead of his leaks costing him more than $10000 a year, these little regular spends are only costing him just shy of $4000 a year. That’s a saving of $6,750 over a year! Imagine what else Luke could use that money for.

Imagine how you may be able to find some little savings that add up for you too.

So, fixing our money leaks is one way of getting our finances into better shape. Here are a few more good spending habits: Firstly, don’t spend more than you earn! Sounds obvious, doesn’t it? However, it’s a very easy trap to fall into using things like credit cards. How do we avoid it? By planning well, being aware of cash flow, and developing good spending habits.

It’s also important to recognise Wants vs Needs: Much of our spending isn’t necessary. So next time you are tempted to splurge ask yourself “Do I really need it?” Now, I’m not saying don’t buy the things you want, but do make an informed choice. Ask yourself “If I buy this thing that I want now, what else might I be missing out on in the future?”

Another good habit is to defer spending. We often buy on impulse but if we can defer the purchase for few days or even a few hours the urge often goes away. Some people do things like leave their credit card at home so they can only spend the cash they have on them, or they might decide to wait until next time they shop to see if the urge is still there.

A lot of impulse buying is emotional spending and best avoided. This is simply where you let an emotional reaction override your careful plans. If you are tempted to make an emotional purchase, ask yourself “Is it really going to make me feel better in the long run? How will it affect the goals I’m looking to achieve? “

It’s also important to use your credit card wisely. Credit cards are a great tool but only if they are used well. Remember each purchase you make will potentially cost you more. Aim to ensure you use any interest-free period you have and clear the card in full each month. If you are going to use your card for larger purchases that you won’t pay off within the month, look for a card with a lower rate and be disciplined to pay it off as soon as possible.

And finally, Value your Money: This is when it pays to understand the value of what it is that you are buying. Some of those “great deals” you see advertised - if you break them down - sometimes don’t stack up at all. Do your research, shop around, and make sure you are getting value for your hard-earned money. Some people even think of things in terms of …”If I buy this now, how many hours work will I need to do to pay for it? Is it worth that?”

So, there you have it, a few simple habits to form to help you make more mindful decisions about how you spend your money.

That then brings us to saving money, which to my way of thinking is all about future spending and having a safety net in case of unforeseen emergencies.

We suggest starting by looking at your lifestyle and how you currently spend money. Is there any discretionary spending that you can reduce? Ask yourself, have you got the best deal on your utilities and telco, or could you reduce those costs?

A tool that may be helpful as you work through this is our handy Cost-cutting Checklist that you can download from the Davidson Institute website, or of course, the Spend Snapshot tool I talked about earlier.

A good habit to get into is to allocate savings as part of your budget before you allocate spending money! Think about it as paying yourself first or putting your future first.

So, how much should you pay yourself? A good guide is about 10% of your total income. I know that this isn’t always possible but even if you start small, start now! Even small amounts add up for you over time. If you get into the habit of doing it, then it becomes less noticeable to the point where you don’t even miss it.

When setting your savings goals, make them SMART goals – Specific, Measurable, Achievable, Relevant, and Time-bound.

It’s also a good idea to keep your savings separate from your regular spending money. That way you’ll be less tempted to use it, and you may also be able to make it work harder for you by keeping it in an account that pays interest.

It may be helpful too, to automate your savings deposits. Have them taken directly from your pay into your savings account or set up a regular automatic transfer from your transaction account to your savings account. That way you don’t even need to think about it.

While saving is about creating the financial future that you want, it shouldn’t mean that the present is all hard work … set yourself some regular milestones that you can reward yourself for achieving to remind you why you’re saving in the first place.

When it comes to savings, there are 3 levels – or tiers – that you should consider. Firstly – there are short term savings, that help with things like medical expenses or car repairs. You will want to be able to get to your savings quickly so keep this type of money in an accessible savings account.

Secondly - there are medium term savings. These savings are for 3–5-year goals such as saving for an overseas holiday, a car, or even a house deposit. You generally won’t need quick access to this, so you can afford to lock the money away, say in a term deposit, potentially earning you more interest.

Finally - there are long term savings, such as saving for retirement. These savings will often be in the form of investments - things such as superannuation, shares, or purchasing investment properties. Accessing this money is generally more difficult. However, that is okay because you generally won’t need to access it quickly. By allocating your savings to short-, medium-, or long-term goals you’ll effectively be covering all bases for the future.

Saving may be about future spending, but Investing is about creating future wealth. In essence, it is simply making our money or assets work for us to earn more money. But investing money for the first time can be daunting because of the sheer variety of different things that you can invest in, each offering different returns and levels of risk.

So, if you’re interested in investing what are some of the key considerations? The first thing to consider is what your investment goals are. Are looking for an investment that will create long-term capital growth? Or are you looking to supplement your cash flow? Or maybe a combination of the two.

Then, what is your time frame? The sooner you start investing the more time you allow for yourself to make additions to your nest egg, to benefit from compounding interest, and to ride out any volatility in investment markets.

Volatility is one of the risks of investing. It means that your returns or even your investment can fluctuate in value over time. Which brings me to our next consideration – that of risk.

What is your risk appetite? Are you prepared to take on a slightly riskier investment with the potential of higher returns? Or are you more conservative? This will be influenced by market volatility and how long you have to recoup any losses you may make.

And it will very much influence the next consideration … what type of assets you invest in.

Broadly, there are 4 asset classes to invest in – each with their own risk and return profile. Firstly, cash. It’s considered to be a flexible, low risk investment but generally doesn’t provide as high a return as other asset classes.

There is also the fixed interest investments, which, for the inconvenience of having your money locked away for an agreed period of time, provides security in terms of risk and more certainty around return, though generally it has lower returns than property or shares.

Property, whether it’s a direct investment in a property or an indirect investment via a managed property portfolio, offers potential for capital growth as well as cash flow but is considered medium to high risk as the market can be volatile and there are no guaranteed returns.

The fourth investment type is shares. Shares also offer the potential to achieve both capital growth, and income. They’re considered to have a medium to high level of risk and the share market is subject to the most volatility of all of the main 4 investment types. Like property, you may choose to buy direct shares in a company, or you may wish to purchase units in a managed fund that invests in shares.

Generally, the most successful investors will have a diverse portfolio with assets from each asset class to reduce risk and maximise returns.

Given you’ve worked hard to earn your money, spend it judiciously, save it, and grow it though investing, it pays to protect your money and the lifestyle it provides.

Insurance is one way of protecting what’s important to you.

Insuring your assets is effectively placing the risk of loss or damage of those assets into someone else’s hands – the insurer. Depending on the type of policy, and the incident that has damaged your asset, the insurer assists with repair or replacement of the asset, so these costs don’t need to come out of your savings. Take time to do the research to get a policy that is best going to suit you and your circumstances.

The next thing to think about protecting is your income … after all if you are not able to work for a period of time then not having an income is going to place some serious stress on your finances. Income insurance, sometimes known as Income Replacement or Salary Continuance, pays a percentage of your fortnightly or monthly income for a specified period of time should you be unable to work due to illness or injury.

The third thing to protect is your health … so you can continue to earn an income. Now this actually starts with a healthy lifestyle but also includes understanding what you are covered for under the government health scheme Medicare and then considering what other health related expenses might be worth covering through private health insurance.

And finally, you want to help protect your family’s future. If the main income earner unfortunately dies or becomes permanently disabled, how will the family pay off any borrowings, and continue to fund living expenses? This is where life insurance can help.

The digital age is also seeing us having to protect ourselves from a raft of new threats when it comes to our money and personal information online. Whether it’s your computer or a mobile device, here’s a few tips on staying safe from online scammers. Install anti-virus software and ensure it’s kept up to date. Software developers constantly make updates to improve an apps security.

Also, back-up your device and it’s apps regularly. If something does go wrong, then you have a fallback to get yourself back on track sooner. Use a strong passcode and set your devices to auto-lock when not in use. Only download apps from trusted sources, and don’t pair or accept files from unknown Bluetooth devices. Similarly, be careful when connecting to public WiFi. Take care when opening emails as links or attachments may infect your device.

Limit the amount of personal information you share with apps and websites and take particular care with what sites you save your credit card details on. Always look for the lock symbol in the browser bar to ensure the site is secure.

Finally, be suspicious. Use caution when receiving unsolicited phone calls or emails and don’t provide personal information without verifying where that information is going to. And remember if it sounds too good to be true then it most likely is too good to be true.

That’s just a few tips to staying safe online, there’s plenty more things you can do which you can find on the Australian government’s website Scamwatch.

So, to wrap up today … we firstly looked at putting together a plan for our money as a way of achieving our financial goals. I then shared some hints and tips for good spending and saving habits. We glanced briefly at investing to grow your wealth, and finally how to protect our finances and the lifestyle they provide.

Thank you for joining us today for ‘Planning for a brighter financial future’. I hope you’ve found the information helpful and I encourage you to check out the other financial wellbeing resources available on the Davidson Institute website.

Bye for now.