There is one amazing but very common thing that I observe among most of our clients. They come from all walks of life; teachers, truck drivers, business owners, IT specialists etc. Accordingly, they earn different levels of income. I love talking to our clients and learning more about them and from them. Although they acknowledge that they are very talented and successful at their chosen careers, they understand that the importance of financial literacy is underestimated or even neglected in their lives.
In this article I am using a slightly different definition of financial literacy. According to a definition that I found online, financial literacy is the possession of the set of skills and knowledge that allows an individual to make informed and effective decisions with all of their financial resources. However, I believe you can only call yourself financially literate when you practice it and you get good results from it. Knowing is not enough!
The great news about gaining financial literacy is that you don’t have to go to university to learn it. In fact, none of them teach that anyway! What you must do is seek quality information that can help you with financial decisions and then act on it.
Let’s face it:
· IRD will not call you and share ways you can optimise your tax situation, you must get your advice from an accountant.
· The government is not going to invest on your behalf to make you a millionaire before your retirement (I think they have enough of their own issues).
· You are in full control of your financial future!
Below I have shared 3 vital recommendations that will drastically improve your finances over the next 6 -12 months.
1. Pay yourself first
This is my favourite one!
Don’t you feel frustrated that you are the one working your butt off for 40 plus hours every week and then before you can enjoy your well-deserved rewards you have to pay the following parties: IRD, your bank, utility companies, finance companies, supermarkets, petrol station, insurance companies? This is just to survive! It is only after this that you have something to enjoy.
One of the most amazing laws of wealth creation is to pay yourself first. So how can you do this?
· Create a separate bank account and call it “millionaire” account.
· Every pay, pay yourself 10% of your wages.
· Do it unapologetically. Do it before you pay everyone else.
· Have a glass of wine when you are doing it. 10% is easy (you will not even notice the difference).
However, the amount will be significant enough to build up the Millionaire account quite fast. I promise you will thank yourself in 2 months.
2. Be proactive with your mortgage debt
A couple of weeks ago I had to re-fix one of my mortgages. I had a balance of about $420,000 and I went from 4.15% to 3.55% fixed for one year with ANZ. On top of that I have also added $30 a week to my mortgage repayments. This allowed me to shave 4 years off my mortgage. I reckon that is a pretty good use of $30.
· Start small today.
· Increase your payments by $30-50 a week and see what a difference it will make. It will save you tens of thousands of dollars and will allow you to become mortgage free many years faster.
Most people will pay twice the original balance of the mortgage when paying it back to the bank. Why make all the profit for the bank?! Once you start paying it off more aggressively, chances are you will get excited about it and may choose to contribute a bit more.
3. Build a Baby Emergency fund of $1,000
You might be shocked but very few New Zealanders have savings to rescue them in case of emergency. Most people rely on their credit cards. When they have unforeseen expense like a trip to the dentist, car repairs, fine etc many people will use their credit card to pay it off. We all know how credit cards sometimes never get paid off.
A couple of years I myself closed a $500 credit card that I had back from my Uni days. The amount of interest I paid on that damn thing was huge! When I paid it and AND closed it I was questioning myself as to why I didn’t do it earlier. Everybody has a credit card, right? Isn’t it a thing you get and just keep it for years making a lot of money for the bank?
· Build up the $1000 emergency fund over the next pay checks. Then when something happens you will have peace of mind knowing that you can handle surprises like a #boss.
Ideally, you want to have the emergency fund sitting at the amount equivalent to 3-6 months’ worth of expenses.