The Personal Finance Flowchart is a universal starting point when thinking about how to approach your budgeting, savings and investing for the long-term. If you are truely starting from scratch sometimes even this is too complicated. If this is you, perhaps start by tackling the six steps below first.
Before you Begin
If you are currently relying on credit cards or payday loans to meet your livings costs contact the National Debt Helpline on 1800 007 007 for free financial counselling.
The MoneySmart website is a fantastic resource for personal finance in easy to read language. spend some time there.
Step 1: Budget and reduce expenses, set realistic goals
Use the MoneySmart Budget tool to develop a personal budget. This will give you clarity for your income and expenses, which can then help you address your surplus (or shortfall).
Once you’ve completed your budget, you can then turn to your financial goals. Saving for a car, paying off debts, growing your wealth, buying a house, and saving for retirement are all common examples.
Step 2: Build an emergency fund
An emergency fund should be a high interest savings account that you only touch touch for unexpected emergencies. Start by building up a fund of at least 1 month of living expenses to fall back on. This is a “small win” and will help build resilience, and reduce the chance of relapsing into increasing debt to deal with emergencies.
Ideally the goal should be an emergency fund of 3 to 6 months of your household/living expenses. You can work up to this over time. Give yourself a year to achieve this.
Step 3: Find out about employer super contribution matching and the super co-contribution.
You should ask your employer if they offer superannuation contribution matching. Not many do, but if you’re entitled to it, you should certainly take it up. It’s free money…
If you’re self-employed you need to pay your own superannuation. This is a higher priority than it would be otherwise. On the plus side, it’s possible to claim tax deductions for your contributions.
Step 4: Pay off your high interest debts (credit cards/personal loans)
Full article: Debt repayment
You’ll need to clear any high interest credit cards or personal loans before you think about long-term savings or investments. Learn about the ‘avalanche’ or ‘snowball’ methods (discussed in the debt repayment article above).
Step 5: Save for larger goals and expenses
These goals might include saving for a house deposit, home renovation or upgrade, university costs for you or your children, new car, study leave, having children/maternity leave and so on.
If you plan to buy a house in the next five years, any funds you intend to put towards this should probably sit in a savings account. If you are planning to buy your first home, learn about the First Home Super Saver Scheme.
Step 6: Invest and Save for other long term goals
Once your emergency fund is built up, high interest debts are gone, and your short-term savings goals are under way, you can think about at other long-term savings plans.
If you have long term goals that you anticipate wanting to achieve before retirement, you can think about developing an investment plan.
The types of investments you might choose will depend on your timeframe and goals.
If you’re thinking about retirement, super is an excellent way to save. There are a number of dedicated aus.finance wiki entries for each age group to help you tackle this. There are online calculators to help you work out what you might need for retirement, and how much you should be saving now to achieve your future retirement goal.