Will your 2022 new years resolution be getting your finances in order?

That’s Great!

In simple terms managing finances means you’ve got to get your head around:

• Income and expenditure. Spend less than you earn
• Assets and liabilities, grow one and reduce the other.
• Tax and structures, pay as little as is legally possible
• And investment risk vs return. Grow your net worth without risking the farm!

As usual, the best place to start is at the beginning

Where are your finances at now?  It makes sense that before you can figure out what you should be doing you’ll need to understand what you’re doing right, & what you’re doing wrong, doesn’t it?

Collect the following:

Your income from all sources: convert it to an annual figure.

Now take the time to identify exactly what you’re doing with it.  Yep! It’s called a budget.

Like most people you’ll probably find a few surprises when you detail where your hard earned money goes. If you’re doing this as a couple, try not to point the blame finger.

Convert these expenses to an annual figure.

Now collect all loan & credit card statements,  List each of your debts and their total. Identify the interest rates & monthly repayment of each of these. These are your liabilities.

Next, write down & total up the details of your assets.

Start with your home, any cash you have, your investments, superannuation, cars, toys furniture jewellery & so on. Add up to arrive at a total.

Once you’ve completed this, you’ll have something known as a “Current Position Statement”.  It details what you own, what you owe & what you earn compared to what you spend. It’s the starting point for any financial plan.

Understanding what it means & how it relates to what you want to achieve may not be as simple, so let’s take a few steps down the review path.

Here are a couple of key points to measure:

A:        Is your income greater than your expenditure?  If you’ve got a surplus, this can form the basis of your wealth creation strategy.  Don’t worry if it doesn’t add up to thousands, even $100 a week can go a long way to getting you on the road to riches.

On the other hand, if you’re spending more than you earn, you’ve identified your first task.

Reduce your spending.  If this is you, take a closer look at where your money is going. By reviewing your budget, highlight the expenses you can control.  This is called discretionary expenditure, you have a choice, things like entertainment, hair care, clothes, alcohol, toys, money for weekend race meets, & so on.  You don’t have to spend if you choose not to.  See what you can do to bring the budget back into the black.  If you’re good with computers you can use a spreadsheet program to make this easy & powerful.

Another important point is to review the interest you’re paying on the loans or credit cards. Often there are considerable savings in this area that can bring a sick looking budget back into the positive, without changing lifestyle at all.

B:        Are your assets worth more than your debts?

If yes great stuff!  You’ve got a great platform to start investing.

If not, once again you have arrived at your next step.  Work your budget to create a surplus and then direct this surplus to your highest interest loan or credit card.  You must get the value of your debt to be lower than the value of your assets.

Discipline is critical here.  Hold the course, stay focussed and regularly review how you’re traveling.  To help maintain focus it’s always helpful for you to set goals that have some personal reward at the end.  A dinner, a quiet weekend some new shoes whatever you associate being spoilt with.  Don’t overdo it and undo your hard work of course.