Question

I would like to get my finances in order this year.  What is the best way of going about it?

Answer

I recommend following a systematic approach towards managing your finances and would suggest that you do the following.

Draw up a budget

The first thing that you need to do is draw up a budget.  You need to know how much money is coming into your household each month and how much money is going out. You cannot achieve any level of financial wellness if what is going out exceeds what is coming in.

If you do not have a budget, get hold of your recent bank and credit card statements and list the regular expenses that go off each month.  You would then compare this with the money that comes into your household. If what goes out exceeds what goes in, then you need to look at your budget and make some adjustments.

I have a budget template that I will be happy to share with you to get you started, just drop me an email.

Protect your earnings

Your ability to earn an income is crucial to your financial wellness.   Should something happen to you, and you are unable earn an income because of ill health or disability, all your financial plans can be completely derailed.

I would recommend that you have income protector cover in place that protects your after tax income should you be unable to work because of illness or disability.  This is often provided by companies as part of their overall employee benefits arrangements so check if your company offers it.   If you are running your own business, I would certainly recommend that you get this cover in place as well as some form of cover for your business overheads.

Check your life cover

If you have a family, it is important that they remain on the same financial trajectory that they are on even if you pass away. You need to have sufficient life insurance to cover any debts as well as your annual salary till your children are adults.

Get rid of short term debt

There are very few investment vehicles that will give you an after tax return that is larger than the interest that you’re paying on short term debt.  Before you start doing any investing, you need to get rid of any short term debt.

I would recommend that you use a structured approach by paying off those debts with the highest interest rate first and then using the payment that you were paying on that debt to clear the one with the next highest interest rate and so forth until you have no more short term debt

Once you have all these hygiene factors in place, you will now be able to start investing.

Investing

When it comes to investing, you need to look at short medium and long term needs:

• Over the short term, you need to build up an emergency fund that is worth a couple of months’ salary. These would typically be invested in portfolios where the capital is secure and the returns beat inflation. 

• Medium term investments would typically be planning for an overseas trip, replacing a car or buying a house. Here the time frame is between two and five years and you’d be looking at investment portfolios then look provide a level of capital stability over that period and returns of around inflation +4%

• Long term investments would be those that have a time frame of more than five years. Here you would look at tax-free investments, retirement annuities as well as discretionary investments in portfolios that offer high returns but are volatile over the short and medium term.

By following this structured approach to your finances, could end the year in a much more financially stable state than you are in now.