Think of your finances like your home: how its foundations are built and maintained determines its ability to stand strong for years to come. Money expert Helen Baker shares how you can get your finances in tip-top shape.

Most of us are feeling the pinch from the cost of living crisis: essentials like housing, groceries, and energy keep ballooning in front of our eyes.

Simply surviving day-to-day is taking focus from planning for the future.

However, having strong financial foundations is critical for both the long and short term, as well as to help you weather any unexpected shocks that may arise.

There are five key foundations on which to build good financial health:

1. Emergency fund

While we can’t choose if or when disasters strike, or what form they take, what we can control are our preparations. An emergency fund provides scope to meet the essentials in a crisis.

Keep it in cash, so that it is readily available in a hurry – such as you need to evacuate your home or unexpectedly lose your job.

Set up an automatic redirect from every pay so you’re not tempted to use the money for something else. (This savings habit also bodes well next time you seek a loan).

Beef it up with surplus cash – tax returns, windfalls, gifts etc. You weren’t counting on this money anyway, so you won’t miss it from your everyday finances.

Keep it solely in your name – ensuring you have money for essentials if, for example, you need to escape violence.

2. Spending and investment plan

I prefer ‘spending and investment plan’ over ‘budget’ – because a plan is about having control and looking to the future. The key is to spend less than you earn and borrow less than you can afford.

Allocate your spending into pots for visibility over where your money goes: essentials (bills), nice to haves (eating out, entertainment), savings and investments, wellbeing (things you need to say healthy and happy), charitable causes.

Update your plan regularly: reflect changes in your income (new jobs, pay rises, investment dividends, inheritances), your outgoings (changed spending habits) as well as your goals (like saving for a holiday or kids’ education, home renovations, or planning for retirement).

Ensure you’re not wasting money, such paying for unused subscriptions, and do adjust to variabilities (such as mortgage interest rates, tax, and fluctuations in monthly credit card balances).

3. Insurances

While an emergency fund gives you immediate cash in a crisis, insurances provide for your longer-term financial recovery.

Don’t overlook your biggest asset: yourself and your ability to earn an income.

An insurance broker can help you find the best and most affordable insurances. Your financial adviser can also help determine your personal insurance needs.

Certain personal insurances can be taken out within your superannuation, so the premiums needn’t come from your everyday finances.

Update insurances regularly. Avoid paying the loyalty tax (paying higher premiums by not shopping around); don’t keep paying for things you no longer need (like maternity cover post-menopause); and ensure your coverage is adequate (e.g. replacement costs for homebuilding have soared since COVID).

4. Superannuation

While you can’t access it until you reach preservation age, super is still your money, so take an active interest in keeping it growing.

Don’t consolidate funds rashly – you may wipe out any savings by merging into a higher fee or poorer-performing fund and may inadvertently cancel insurances held within your super.

If you can afford to, consider making additional contributions: not only does your super grow faster, but there are tax benefits for you or your spouse and government co-contributions for lower income earners.

ALWAYS nominate beneficiaries within your super – your will does not cover superannuation. Update them if your relationship breaks down, you remarry or have additional children/grandchildren.

5. Estate planning

Your will is an important part of estate planning, which should be updated whenever your circumstances change.

Other factors to cover off include your funeral wishes (which is generally held before a will is read) and custodianship of/provisions for underage children.

Plus, there is your care while still alive – including Power of Attorney and Advanced Health Directive provisions for your care should become seriously or terminally ill. Who do you really want making decisions for you if it came to that?

Plan ahead on taxes too – both for yourself and your beneficiaries.

Don’t let foundations shift from under you

The most important thing of all is to banish any ‘set and forget’ mindset about money. Things change constantly.

Fail to shore up your foundations amidst shifting circumstances and your financial house could collapse. But stay on the front foot, and your foundations should stand the test of time!

Source: Flying Solo July 2024
This article by Helen Baker is reproduced with the permission of Flying Solo – Australia’s micro business community. Find out more and join over 100K others https://www.flyingsolo.com.au/join.
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