Mapping out life's finances can be tough, but there are tricks to constructing a healthy outcome, writes David Potts.
Saving more and spending less aren't the only ways to wealth, though they sure help. Even then, how you save and what you buy will eventually count for more.
Investing early and often, not to mention avoiding common mistakes, will get you on top faster than a regime of self-sacrifice, denial or a grapefruit diet. Promise.
But where to start?
Pay yourself first
Setting aside some money for yourself anybody can handle, except this is for your future self. Big difference.
Direct debit some of your pay into a special account that's hard to get at. Advisers suggest 10 per cent, but that's easier said than done. If you're already overwhelmed with bills, just start with 1 per cent. Your secret is safe so long as you promise to lift it over time.
Think you can manage that? Then here's the catch. These aren't savings as in you can spend them on a holiday or a new car, but an investment as in a deposit for a home or a foothold in, say, the sharemarket. They're for the long haul.
You can see why. This has to come straight out of your pay before you can touch it. Pay the bills first, which is probably your inclination, and chances are there'll be nothing left and you'll never save. But when 10 per cent of your pay is packed off, you'll find a new urgency in budgeting.
Here's a tip: keep a diary for a week of everything you spend. You'll be surprised how much you fritter away.
Bank on it
To help get you going, here are some low-hanging savings that are for the picking.
Don't pay bank fees. The banks have no-fee accounts, so ask. If yours has too many conditions, such as the number of free withdrawals, then go to a website such as canstar.com.au and check out the best fee-free account. These days it's easy to move accounts, regular direct debits and all, between banks.
And restrict your use of ATMs. Take the cash-out option when you do the weekly shop. If you don't do a weekly shop, you're probably frittering money away.
Check what your super fund is up to as well. You should be paying no more than 1 per cent a year in fees and a lot of funds charge only half that. Halving the annual fee could add up to 20 per cent more in your super in 30 years, according to the Australian Securities and Investments Commission.
By then you'll be glad you did.
The rich love property and often it was how they succeeded. But they do it by investing. Despite the financial advantages in living in your own home, most notably avoiding rent and paying no tax when you sell it, it should be considered more an end than a means.
Buying an investment property first can be a better route to your dream home because it'll be cheaper, earn you income and give you equity you can draw on later.
Yes, maybe even give the first home owner grant a miss because even with it you'll probably be stretched financially buying your own home.
You can borrow more for an investment property because "the lender factors in the benefits of rental income plus the tax deductibility of the loan in their calculations," says Miriam Castilla, an adviser at mortgage brokers Smartline.
Buying an investment property doesn't disqualify you from a grant later. "If you don't live there for six or more months, you'll still qualify for the first home owner grant down the track when you're ready to buy the home you want to live in," she says.
Sometimes gearing, where you borrow to buy an asset that will appreciate, can be a fast way to wealth.
But back to property. These days, with smaller households, and first-home buyers vying with seniors downsizing for the same space, apartments do better than houses.
A mortgage on wealth
A mortgage isn't always your worst enemy. Take it in hand and you'll be surprised what it can do for you. The trick is to get on top of it from the start, which invariably means saving more for a deposit so you have some spare money to make extra repayments.
The interest is loaded into the loan upfront, which is why in the first few years it gets bigger despite your punctual payments. But adding a bit more - such as paying fortnightly instead of monthly, which makes 13, trust me, instead of 12 repayments - cuts into the interest with dramatic results.
For example, on a 30-year $400,000 mortgage at 6 per cent, paying an extra $100 a fortnight from the first repayment would save about $104,000 because it comes straight off the principal. Waiting two years before you pay the extra $100 a fortnight saves a more modest $88,000.
Note that putting the money in a savings account, where the interest would be taxed, wouldn't earn anything like this. Saving with the offset account of your mortgage makes more sense because then there's no tax.
Financial advisers say the best way to save money for the kids' education is by paying more off the mortgage using the offset account, then drawing it back down when the school fees fall due.
The equity built up as you pay off the mortgage can also be used for gearing into investments or value-enhancing renovations. No other form of borrowing will be cheaper. A good trick is to put all your pay into the offset account and use your credit card for the month's spending. When the due date comes round, draw it back down from the offset account. The interest saved adds up.
Treat the sharemarket with respect. If you view it as a casino - only without James Packer - then ou can expect a wild ride. Punting everything on a speculative stock might make a fortune but the odds are you'll come a cropper.
Anyway, as a growing number who run their own super funds are discovering, well over half the return comes from dividends, including the 30 per cent tax credit when they're franked. They're more stable, though never guaranteed. A relatively safe way to play the market is with an exchange traded fund. These are a one-stop stock that gives you the entire market or parts of it.
For example, the iShare covering the whole market has the code IOZ.
These funds trade just like shares and have a very low annual management fee.
Another strategy is buying the 10 biggest stocks. That makes them blue chip and reliable dividend payers.
Go rate chasing
Do you know the interest rate you're paying on a mortgage, credit card or personal loan?
Yet you probably know to two decimal places the interest you're getting on a term deposit. Funny that, because the chances are you'll pay far more in interest than you'll ever earn from it. It's worth checking because banks will discount their variable mortgage rate by up to 1 per cent if you ask, or threaten to take your debt elsewhere.
Even if you have no luck there, websites such as canstar.com.au show what else is on offer. Variable rates start as low as 5.09 per cent or you can fix for one year for even less. Thanks to the abolition of deferred establishment fees, refinancing has become much cheaper.
Credit adviser Tony Harris of easyliving finance.com.au says there is more "rate chasing" with some borrowers "refinancing again after only a short period of time, like six months". Still, it's the credit card where you're most likely to come unstuck.
Axe the tax
Collecting receipts so you can claim more and shuffling spending out of next year into this one are all very well, but the big tax breaks lie elsewhere.
Negative gearing is one, though it lies at the other extreme.
Honestly, investing in something that makes a loss just for the tax break isn't going to make you rich. By all means gear, but let it pay its own way. An easy, legal way to dodge tax is to income split.
Put investments - especially if they're on behalf of a child because the tax is punitive - in the name of the lowest-income earning partner, or the highest if there are deductible borrowings.
The same goes for super, for different reasons. Salary sacrificing to the older partner's fund could mean a couple get a tax-free pension earlier.
Holding an investment for at least 12 months will also halve the capital gains tax when you sell it.
Don't forget the 30 per cent tax credit on franked dividends is neither means-tested nor restricted to taxpayers. Even if your income is too low to lodge a tax return, you can still get a refund for the 30 per cent credit on a franked dividend you were paid. You can even do it over the phone to the Tax Office.
Other tips to get on top
Choose the lowest fee accounts for your banking and in your super.
Use your mortgage offset account to save tax-free for the kids' education.
The sharemarket is volatile but rises with economic growth — invest in an index fund for safety.
Negotiate a better rate on your mortgage and fix part of it if you can get it more cheaply.
Set financial goals
Decide whether you need an adviser to realise them.
First home buyers should consider buying an investment property first.
Pay yourself first
Direct debit some of your pay into a special account.
Couples can income split to avoid tax..
Get life insurance and
Get it through your super - it's cheaper and doesn't come out of your pay.
Despite rule changes, choose the right investment option for your age.