There is no one single rule which will help you sort out your finances and be prepared for the future. Instead, you need to follow a series of steps and strategies to put positive financial plans in place and then stick to them, like the following.
Step 1 – Cut spending
Step one of your wealth building strategy should be to curb your spending. You can’t save for the future or invest in opportunities if you don’t have any spare cash to do it with. Therefore, consider these money saving steps:
- Downsize your house
For most people this option seems unthinkable, until you actually think about how much space you really need. Do you need a big backyard or are your children grown and how many bathrooms do you really want to be cleaning each week? With a smaller home you’ll save money on mortgage repayments, utility repayments, maintenance and more.
- Work from home
When you work from home you can save on fuel and car registrations because you can probably downsize from a two car family to being a one car family. You’ll also be able to make your own coffee and your own lunch to save at the cafe near the office.
- Lose weight
You will be surprised how much you can save by eating well and exercising regularly. You will save money on expensive junk food, you will make fewer trips to the doctor and your life insurance and health insurance will be more affordable.
- Live in a more affordable area
Look at moving to a less expensive part of town or part of the country. It is no secret that everything from groceries to cafe coffees are a barometer of the average income of the residents of the area, and if you move to a more affordable area, you can save on your incidental purchases and of course your housing costs.
- Buy second hand
Cars are an excellent example of something you should buy second hand, and you shouldn’t stop there. Look for used kids’ clothes and baby accessories by searching places like eBay, or simply community noticeboards.
- Bring your own lunch
It only takes a little organisation to make a bit more at dinner time so there are leftovers for lunch, and you can save around $10 a day and be eating a healthier, tastier lunch.
Step 2 – Start saving
Now that you’ve freed up some space in your budget, make sure you put those extra funds to work in the following ways:
- A high interest savings account
A high interest savings account will give you at call access to your funds in case of an emergency, and make it very easy to deposit to your savings and watch them grow using online banking. Plus, because these accounts are online they are often fee free making your money work harder. Set up a direct transfer each week from your wage and you’ll have a regular savings plan and a growing, compounding nest egg.
- CD deposit account
When you lock away your savings for a longer period of time, you can earn an even higher interest rate. Therefore, if you’ve saved up a deposit amount, put it to work where you won’t be able to touch it until the end of the term.
- Save consistently
Not only is a consistent savings plan a good habit to get into because you are spending less than you earn, it also allows you to take advantage of the benefits of compound interest. Even if you can only put away $20 a week into your savings, $20 each week in a high interest savings account will earn interest and compounding interest throughout the month, month after month, year after year.
Step 3 – Stick to your new budget
Once you’ve worked hard to curb your spending and save and invest for your financial plans, make sure you stick to these new strategies by following your budget. You can do this by setting out your budget with the following elements.
First know your committed expenses, these are not negotiable and include things like:
- Basic food and clothing
- Essential household expenses
- All bills you currently have, even luxuries such as cable TV
- All taxes
These expenses should be able to be covered by roughly 60% of your income. You can then divide the remaining 40% in the following four ways:
- Saving for retirement
This may include the amount which is deducted from your income to contribute to your retirement account, or you may be able to afford an extra 10% on top of that.
- Savings for long term goals
This 10% should be saved for things in the future like your retirement or your children’s education for example. Make sure you keep these savings in a form which is not easily accessible.
- Savings for short term goals
We all need something to look forward to, so make sure you save 10% for holidays and purchases around the house. You may also need to use this fund for emergencies such as car repairs or unexpected Christmas purchases.
- Freedom money
The final 10% of your income is yours to spend in any way you like, as long as you have met all of your other commitments.
Step 4 – Invest in the future
The reason you’re putting all of this effort into the wealth building steps of this strategy is the same reason you put in so much effort at work each day – so that in your retirement you will have the financial security to be able to sit back and enjoy the fruits of your labour and a life well lived in any way you choose.
To make sure your investments are there for you in strength in the future:
- Maximize your retirement contributions
No matter what type of retirement account you are using, or whether you earn a wage or are self employed, you need to be contributing as much as you can to your future. In some cases when you contribute a certain amount, your employer will match it, so try and meet this contribution level to boost your account. Each year you are working, increase your contribution by one to two per cent to accelerate your savings, and keep your contributions in line with inflation and your increasing income. Remember that the money you contribute to your retirement fund isn’t taxed, so you can sacrifice some now, for more in your retirement.
- Invest in stocks, bonds, funds and currency
Investing in paper assets will help you learn about the principles of money management, capital, rates of return, risk and all the other important lessons you need to be successful in the future. You will find various levels of risk with paper investments, but you don’t have to be an expert on the stock market to succeed.
- Real estate investments
Investing in property helps you build wealth when you buy a property, hold onto it until it has increased in value and then sell it for a profit. During that time you are able to use your asset equity as leverage for other investments which can build your wealth further.