Our finances have an enormous impact on our wellbeing, both from an emotional level (stress about bills or competing priorities) and a practical level (affecting your choices and quality of life.)
During periods of inflation this can become an even bigger concern.
This is why becoming ‘money smart’ is one of the pillars I share within my Live Well Principles, under the ‘strengthen’ principle.
Let’s take a look at why this matters and what you need to do to master your money and improve your financial wellbeing.
Why we need to get savvy
Financial literacy isn’t something that’s often taught in schools, yet it’s essential throughout life. Our attitude to money can cause us angst and worry, especially if we don’t really know where our money is going.
Stress over money can become a major problem in relationships. Different risk profiles, competing priorities and unexpected events all create friction.
Becoming money smart is knowing how to get your money working for you. It’s important to understand your finances, set goals, avoid negative debt and know how you want to save, give, invest and spend your money. If you’re a parent, it’s great to role model and teach your children about finances as well to set them up for life!
Seven keys to money mastery
There are fundamental financial concepts to understand so you can make the most of your money and avoid the common pitfalls.
Compounding interest is powerful to help you save faster. If you save $50 a week for 30 years, with an average five per cent interest rate, you’ll have $181,263. It’s the compound interest that will earn over $100,000 of that total. You only have to put in $78,000 cash, but you end up with more than double that amount!
On the other hand, compounding interest on something like credit card debt can cost you an enormous amount more than your original purchase. If you pay your credit card off even just one day late, you’ll get a huge interest bill, as it charges you interest not just for the one day you’re late, but for all the days back to when you made each purchase.
Credit card debt can quickly snowball and get out of hand. One way to avoid this is to set up an automatic payment from another account to pay it off in full on the due date, avoiding this debt spiral – just keep watch that your account has sufficient funds on the payment date. Set up a monthly phone reminder to double-check this.
1. Get clarity
A great place to start is getting clear on your earning and spending habits.
Sit down with your partner or on your own and look up your last few months’ transactions. This will give you an idea of what you’re spending so you can create a budget.
There are fantastic budgeting tools on the Sorted NZ website (sorted.org.nz) that prompt you with categories to make this easy. Outline your key fixed living costs, transport and utility expenses, as well as what you plan to spend on discretionary things like hobbies and entertainment.
Check your income covers your expenses and see how much you can save each month.
2. Set Goals
Set saving goals for short-term and medium-term things like holidays, and for longer-term goals like house purchases and retirement.
Your budget will help you come up with realistic savings goals. Open savings accounts and create automatic payments so you’re saving first, then spending out of what’s left over. Start small and track your progress. Celebrate when you reach each milestone, then set a new one.
Often we value and enjoy things more when we’ve saved up for them, rather than buying things on a whim using credit, then having to pay them off later. Building this cycle of anticipation and reward is great for children, so they learn the value and benefits of saving up for things they’ll really treasure.
3. Track your spending
Do you know where your money actually goes?
Once you’ve got a budget in place, you can track your spending each month to see how much it lines up.
This isn’t about giving yourself a telling-off if you overspend, but simply to raise awareness.
The biggest benefit is the attitude shift a budget can create. You might be tempted to buy that extra coffee or nice-to-have product, but if you can picture a key goal – being at that beach resort spending time with your family – you’ll realise it’s not worth it to miss out on that bigger reward.
4. Have savvy habits
Choose to be a wise steward and make your money count. Aim to save, give, invest and spend certain percentages of your income. For example, you might save 20 per cent, give 10 per cent, invest 10 per cent and spend the remaining 60 per cent. Start with the ratios that feel right to you and adjust them over time.
Remember, money is neither good nor bad. It just gives you options. It enables you to do a lot of good, both for yourself and for the people and causes you care about.
Small things add up. Avoid frittering money on things you really don’t need. Just think, if you spend $15 a day buying lunch, compared to $3 of ingredients if you made lunch to take from home, you’d have well over $3,000 at the end of the year to spend on something amazing or to give to a cause you’re passionate about.
5. Ditch debt
Avoid debt on low-value assets. Debt to buy a house is an investment, as it’s an asset that will appreciate over time. Debt to buy new furniture, a car, boat or other ‘toys’ is not an investment – those things devalue over time.
If you have debt with high interest rates, the best thing you can do is pay it off as quickly as possible.
Beware of hire purchase arrangements, where the minimum repayment is usually designed so that you don’t pay it off during the interest-free period. This means you end up paying a whole lot of extra money in interest later on. The way around this is to take the total amount, for example $2,000 and if it’s a 24-month interest-free period, divide it by 24. This way you know you need to pay $83.30 a month (rather than the minimum amount) to avoid the unnecessary overrun at the end.
6. Build security
Save for an emergency fund. You never know when you’ll have an unexpected bill due to the car breaking down, home repairs or a vet bill.
Protect your loved ones by getting insurances in place and plan for retirement by drip-feeding into your superannuation. If you’ve got a mortgage, consider increasing your repayments to reduce the total interest you pay.
Learn about investing. Regardless of how much you earn, you can always choose to set some aside for savings and investment. It’s an investment mindset and discipline in your habits that will grow your wealth over time.
7. Find the balance
As with so many things in life, managing your finances is a balance. Plan ahead enough to give yourself peace of mind for the long term, while enjoying spending on things that bring you joy now. The more money smart you are, the more it will give you a sense of freedom and wellbeing.
Get yourself a copy of Lauren’s latest book Thriving Leaders, Thriving Teams to hear all 32 ways to boost your wellbeing both in and out of work. Available in all good book stores or at laurenparsonswellbeing.com