Being financially savvy will mean different things to different people. But a common trait that the money-smart share is an affinity for long term financial planning and goals.
Those who are great at it don’t have to make huge sacrifices, but still manage to enjoy a high standard of living while travelling and pursuing a range of hobbies.
To be financially savvy, you should have a plan for the future and manage your cash flow with a budget. A budget and a long-term plan clarifies your goals and guides your day-to-day behaviour so you can avoid leaving your finances to chance.
Whether you are starting out with setting your financial-building goals or trying to get back on track with your finances, the following top tips of the financially savvy are sure to change your life:
1. Plan and budget
If you want to achieve your financial and wealth-building goals, you must have a plan and a budget. Your plan encompasses both long and short-term goals, and it includes leisure and purchase goals (such as holidays, house, and a car) as well as investment goals.
Your plan identifies what you want and tells you how to get there.
On the other hand, your budget sets out the day-to-day things you need to do to achieve your long-term plans. You can use it to guide your behaviour and make smart choices about everyday spending. Your budget also lets you track, review, and adjust your spending and saving habits. Budgeting doesn’t have to be time consuming or complicated, and there are hundreds of apps or free spreadsheet templates that you can use to start budgeting today.
2. Find additional sources of income
Whether you’re working on that ecommerce idea or driving for uBer in your spare time, additional streams of income will see you boosting your savings and wealth by not just cutting back on spend, but by maximising your earning power.
The financially savvy aren’t just cutting back in small and large ways; they’re constantly on the lookout for ways they can generate an extra $500, $1,000, or more each month. Start small by exploring your hobbies and talents. Don’t discount things like renting out your spare room or using extra downtime for some freelance work.
While it doesn’t sound like much, an additional $500 a month translates to an extra $6,000 over the course of a year. This is extra money you can use to invest in shares, drop into an investment property, or start another side business project.
3. Save a fixed percentage of your income
Save for a rainy day. The financially savvy are super disciplined at saving, and many pay themselves first by putting away 5%, 10% or more of every pay cheque received. Always pay yourself first, and then save for specific purchase goals – such as a holiday or a new car – on top of your regular savings habit. Given the concept of compound interest, this will have you maximising the power of your money over the long term.
4. Get advice when you need it
Financially savvy people also know when to get advice when they need it, whether it’s consulting a tax expert, accountant, or financial planner. These experts know the latest tax and legal changes, so they can help you with everything from minimising your taxes and maximising super contributions to structure your wealth-building vehicle for optimal tax outcomes.
Financial experts can also introduce you to investment and savings products you might not be aware of. While you might not need to see an expert right now, keep in mind advice from professionals in the field is money well spent and will help you make the right financial decisions in the future.
5. Be smart when using credit and debt financing
Credit and debt can be useful tools for short-term needs and ‘good debt’ such as mortgages and car financing are used by millions of people to achieve their purchase goals more quickly. High interest debt generators on the other hand like credit cards can impede your wealth-building strategy over the long term. Delays in paying off this type of outstanding debt can increase your interest burden over time.
Always aim to pay high interest debt first and avoid living beyond your means by saving up to buy where possible instead of buying things on credit.
6. Prepare for risk
This is where your rainy day fund comes in handy.
Financially savvy people plan for the unexpected events in life to protect themselves and their family, so they are not easily overwhelmed by the sudden unexpected downturns in life. A good financial risk management plan should include an emergency fund (which might be equivalent three to six months of your living expenses) and possibly taking out income-related insurance. Your risk management strategy will allow you to recover from setbacks more quickly. It can ensure you keep meeting your financial obligations in the event of sudden illness or unemployment.
7. Plan for retirement
People who are great with money know that it’s never too early to start planning for retirement. You will want to maintain a suitable standard of living when you’re no longer earning an income through your salary. So an early start gives you the best chance to build wealth through incremental contributions to super, tax minimisation, and other wealth-building strategies. Start putting away money for retirement as early as possible and work with experts to find out what you can do to grow your retirement funds.
8. Keep emotions far from your money
Money and finances are an emotional topic for most people, and financially savvy people have learned to keep their emotions in check when making financial decisions. This is true whether they are deciding to buy a new household gadget or making a major decision such as buying a house or investing in a business.
Keeping your emotions in check also means avoiding the temptation to spend within your own lane and means.
9. Apply money management insights
Financially savvy people never stop educating themselves, and are constantly investing in their financial education. Staying informed, reading new books on money management, strategy and consulting with financial professionals are all ways you can continually learn, apply, review, and adapt for successful wealth building. In the end, educating yourself means recognising that you are the one responsible for your financial destiny.