the personal finance flowchart

This Personal Finance Flowchart is a universal starting point when thinking about how to approach your budgeting, savings and investing for the long-term. Originally developed in r/personalfinance for US users, it has since been adapted for use in the UK, Canada, and Australia.

You can always find the latest version on this page, or a direct link here.

This flowchart offers a starting point for people to plan how to allocate additional funds they might have. Click for a larger version

Credit for this flowchart goes to The Reformed Adviser. Earlier/overseas versions developed by u/q_pop at r/ukpersonalfinance, and u/atlasvoid at r/personalfinance.

Does this look too complicated? Try the 6 Steps for Beginners here.

Before you Begin 1: Are you reliant on debt to make ends meet?

Relying on debt to meet your livings costs is considered financial hardship. Contact Financial Counselling Australia for a referral, or better yet directly contact the National Debt Helpline on 1800 007 007.

Before you Begin 2: Invest in some reading material

You will get great benefit from reading/watching/listening to the recommended resources.

This is likely to the best investment you can make, at the outset. The page includes podcasts, books, online tools and calculators, Australian personal finance blogs, videos, and online reading, plus glossaries of common financial and investing terms.

Step 0: Budget and reduce expenses, set realistic goals

Read more about this section: Budgeting

The foundation of your personal finance is having a robust budget that is realistic and disciplined.

Fundamental to having control over your finances is knowing where your money is going. Budgeting gives you clarity for both your income and your expenses, which can then help you address your surplus (or shortfall). There are many ways to budget successfully – to explore this further please visit the dedicated FAQ entry for this: budgeting.

Sound budgeting seeks to minimise outgoings. Housing costs, utilities, and basic sustenance are essentials. Discretionary spending is easier to control.

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 1: Build an emergency fund

An emergency fund should be a liquid sum of money that you only touch for unexpected emergencies. This fund is not for you to dip in every time you forgot to budget for a night out, but for genuine and unforeseen financial emergencies. Job losses, emergency home maintenance, urgent medical costs. In the event you need to draw upon emergency fund, your first priority as soon as you get back on your feet is to replenish it. Treat your emergency fund right and it will return the favour.

Even if you have expensive short-term debts, we recommend that you initially build up a fund of at least 1 month of 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.

See the MoneySmart article on emergency funds.

How much should be emergency fund be?

For most people, the goal should be an emergency fund of 3 to 6 months of your household/living expenses. A larger emergency fund (e.g., 9 to 12 months) may be warranted if your job is uncertain or you are self-employed. It is worth spending some time thinking about this, because ultimately it is a personal choice. Have a read about some opinions on this in this thread from r/ukpersonalfinance.

What kind of account should I hold my emergency fund in?

Emergency funds should be held in safe investments you can access quickly. Traditionally this might would be a high-interest easy access savings account. Ideally the savings account would not be connected to your bank card to remove any temptation to access the funds for non-emergencies.

Examples of bad choices for emergency funds: long-term equity-based investments, ETFs, term deposits, accounts with withdrawal penalties.

Step 2: Consider your employer’s super contribution matching and Government super incentives.

Learn more about Superannuation here.

Learn about the Government Co-Contribution, and use the ATO calculator to work out what you might be entitled to.

Once you have your initial 1 month emergency fund you should enquire about superannuation contribution matching offered by your employer. Not many do, but if you’re entitled to it, you should certainly take it up. It’s free money…

It is slightly controversial to recommend this ahead of repaying credit cards and personal loans, but as long as you are not reliant on debt to make ends meet (if you are, see above) it is the best return on capital you’re likely to get anywhere.

What if I’m self-employed?

If you’re self-employed you will need to arrange your own superannuation contributions. 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 3: 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 start any long-term savings or investments. Learn about the ‘avalanche’ or ‘snowball’ methods (discussed in the debt repayment article above).

Step 4: 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.

Click here to use the MoneySmart savings goal calculator.

Buying a house is often top of the list of priorities people have. Generally speaking, 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. Whilst the stock market may look attractive, this is too short-term a goal for the risks to generally be worthwhile.

This is with the notable exception of the First Home Super Savers Scheme (FHSSS). The FHSS scheme allows you to save money for your first home inside your super fund. This will help first home buyers save faster with the concessional tax treatment of superannuation. For more information about this see the ATO website linked above, or the r/ausfinance wiki page linked here.

One important point to note is that the deposit is not the only cost of buying a house. Budget for conveyancing fees, mortgage fees and other less obvious costs like valuations, damp inspections and so on.

In Australia most higher education costs are provided by way of subsidised loans via HECS and HELP. It may seem like common sense to want to repay these loans as quickly as possible, but in reality the cost is usually very low. As with any other debt, your HECS-HELP loan will be compounding over time, although this is still at a very low rate compared to most other forms of credit. While there is no interest payable on your HELP debt, indexation is applied in line with changes to cost of living. In 2020 the indexation factor was 1.8%.

Step 5: Increase your Superannuation Contributions

Once your short and medium term savings goals are under control, you should think about your capacity to add additional funds into superannuation. Super is an excellent way to save for retirement due to the concessional tax treatment it enjoys. There are a number of dedicated r/ausfinance wiki entries for each age group to help you tackle this item. 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.

Step 6: Invest and Save for other long term goals

Next you should look at other long-term savings plans.

Superannuation is a valid way to save and invest for the long term, particularly for early retirement goals. If you have long term goals that you anticipate wanting to achieve before retirement, you should start to think about developing an investment plan.

For goals that have a shorter timeframe (eg < 3 years) you should still just use cash based investments and savings accounts.

For the medium term (3-5 years) an investment portfolio with a more conservative mix of investments such as shares and bonds would be suitable.

For longer term goals (7+ years), you can consider investing more aggressively, focusing on primarily share based investments.

How to achieve Step 6

There are lots of options when it comes to investing. Here are a few:

– DIY investments. The recommended resources section on investments is a good start, as well as our Investing section. See the article on choosing your own investments.

– “Robo investing” apps or websites (notable examples are spaceship & raiz). These will be more expensive than doing it yourself, but offer slick apps and automated investment profiles for their additional cost.

– Dealing with a professional financial planner/adviser. A good adviser will provide a positive return on their fees by helping you clarify your goals at outset, develop a plan in line with those goals, and keep you on the straight and narrow when you’re tempted to stray from your plan.