Planning your finances
Your own plan will help you control your money. If you set some goals, make a plan and stick to it, you can make progress even with ups and downs along the way.
What do you want to achieve?
How long will it take to reach your goals?
How much will each goal cost?
What if there's a gap between your goals and your savings?
How can you help your children plan their finances?
What do you want to achieve?
Would you like to:
- Pay off your credit cards?
- Buy a new car and pay it off quickly?
- Buy a home and pay it off quickly?
- Save for your children’s education?
- Put some money aside for your retirement?
These are some typical financial goals. Others include paying off personal loans or saving up for a holiday. Write down your own goals as the first step in your plan.
How long will it take to reach your goals?
Some goals may be urgent, for example getting credit card debts under control and paid off. More about managing your credit cards
Longer term goals, for example buying a home or saving for retirement, can be just as important. Because they cost a lot of money, the sooner you start working towards them, the sooner you can achieve them, even if you can only spare a small amount of money. It can cost a lot more to do these things later.
In the table below, based on Nat and Sam’s situation, we have:
- drawn up some financial goals
- estimated how long they may take, and
- noted some things to do to get started.
| Goals | Time needed | How to start |
| Pay off credit card | In two years | Stop using the cards. Instead, use a card that debits their savings account, so they spend their own money, not pay to use someone else’s.
Check how much they need to pay monthly to get rid of the debt within 2 years, and stick to that amount each month. |
 | | |
| Pay off new car | In three years | Work out how much they can afford to pay per month, including the cost of insurance.
Choose a model within their price range and shop around for the best price.
Make the biggest deposit they can.
Shop around for the best loan, as well as the car. Maybe extend their mortgage, so long as they pay off quickly the extra they borrowed. |
| | |
| Buy a home and pay it off | Long term | Work out how much they can afford each month, and look around in their price range.
Shop around for a low interest rate.
Make payments fortnightly and pay a bit more than required each time.
If it won't cost more in interest, a redraw or offset savings account can let them put any extra money they may have, including their pay cheque, on their mortgage. |
| | |
| Save for children's education | Medium to long term | Set up a long term investment account that they won't touch. Check personal finance magazines about suitable long term investments. |
| | |
| Put some money aside for retirement | Long term | Put more money into superannuation.
If their funds offer investment choice, consider which option best meets their needs. |
How much will each goal cost?
The next step in planning your finances is to estimate how much your goals may cost, and compare that cost with what you are saving. Then you can see if there’s a gap to close.
Estimating costs is fairly straightforward for the goals you have already started, such as loans you are paying off. Useful internet loan calculators can show how much a loan will cost, and how your repayments are affected by shorter or longer term loans. To estimate long term savings and investments, we will show you some calculations for Nat and Sam, which you could use or adjust.
What Nat and Sam's financial goals will cost
| Nat and Sam's goals | On track? | Monthly cost |
|
| Repay a $16000 car loan in three years | Yes | $508 |
Borrowed more against their home loan at 8.9% interest, and increased their payments by $508 to pay the car off in 3 years.
|
| | | |
| Pay off $3,000 credit card debt in two years | Not started | $155 |
Interest is 18.5%. Stopped using the cards immediately.
|
| | | |
| Buy a $350,000 home, and pay it off in 25 years | Yes | $2081 |
Borrowed $250,000 at 8.9% interest. (Their families helped with their deposit of $100,000 plus $15,000 for costs.)
|
| | | |
| Save $21,000 towards children’s tertiary education in 10 years time | Not started | $120 |
Invest an initial $2,000, and contribute for 10 years, earning 5% after tax each year
|
| | | |
| Make extra super contributions | Not started | $242 |
|
| Total cost per month | | $3106 | |
A gap between your goals and your savings?
Is there a gap between what you can save each month and the cost of your goals?
The gap between Nat and Sam’s savings and their goals are shown in the table below.
The gap between Nat and Sam's savings and their goals
| 1. What's the total cost of Nat and Sam's goals each month? | $3106 |
| 2. Subtract the total amount they are already paying for what's on track | -$2589 |
| 3. Here's the cost of what they have still got to pay for | $517 |
| 4. Subtract what they are saving now. | -$286 |
| 5. Here's the gap between their savings and the cost of all their goals | $231 |
Nat and Sam’s goals cost more than they can spare from the $286 they save each month. They can’t afford to start everything today, but they can afford to do some things that will close the gap within a fairly short time.
Suppose they grit their teeth, stop using their credit cards and use what they save to pay off their cards in two years. In a further year's time they will also have paid off the car. Their costs then drop and so their savings increase to $819 per month.
So in two years, there’s extra money to pay off their home loan faster and put some money aside for the children’s education. They can achieve their goals if they make a start, even if it takes two years longer than they would have liked.
Closing the gap means finding ways to free up cash that you can devote to your financial goals. Usually the top priority is paying off high-interest loans. When you achieve that goal, you can channel the extra money you save into your next goal, and so on.
How can you help your children plan their finances?
FIDO urges you as parents to talk to your children about money.
It’s never too early for them to learn about the value of money. Teaching your kids how to manage their money carefully is a great skill that will assist them through life.
Children need to understand that money is a limited resource and does not simply materialise from holes in the wall or from credit cards. These days, children are under enormous pressure to have the 'right stuff' – from mobile phones and iPods through to sneakers and designer clothing. The desire to have such items presents you as parents with a great opportunity to encourage your kids to plan budgets and manage their finances carefully according to their needs and wants. Read FIDO's tips on helping your children manage their money
More about managing your money
FIDO Website: Printed 09/06/2008
