Smart saving means watching debts and investments
Do you have a solid financial plan in place to create, protect and grow your wealth? What if something unexpected occurred? The ninth and last step of Rival Wealth’s third series on achieving financial health deals with savings and investment.
Renee
Renee has minded her money so well that she’s almost achieved her goal of saving a deposit for her first home. Thanks to her job she has an excellent understanding of the current housing market in her area, so Renee’s in a great position to make sure she finds her ideal home at the right price.
Although Renee’s worked out she can comfortably meet her potential loan repayments and associated costs with owning a home, she is concerned about managing all the costs involved with raising her children.
Should she be saving some of her money for the children’s education as well? At this stage, no. The kids’ school expenses are quite low, so saving for a home for them to live in is currently more important.
Looking ahead, Renee has calculated her future loan repayments to be monthly. When she sets up her actual loan, she’s going to pay fortnightly. This means she’ll make extra payments during the year, paying her loan off quicker and saving interest over the term of her loan.
Top tip: If the interest rate drops on your home loan when it’s up for review, keep your repayments the same. Or better still, if you have surplus funds increase your repayments – an extra $10 a week can take years off your loan.
Warren and Judith
Warren and Judith have substantial funds in their respective retirement schemes. For the past nine years, they’ve opted to invest in balanced and growth funds and it’s served them extremely well.
But with retirement fast approaching, it’s time for a review. By completing an investment risk profile, Warren and Judith can work out an ideal investment management strategy for their retirement needs. The profile should consider not only their individual attitude to risk but any goals they might have as well as their personal circumstances.
When Warren and Judith stop working, taxes will start chipping away at their nest egg and if interest rates stay lower for longer as predicted, they could lose 2.5 per cent of their investment to inflation each year.
To protect their nest egg from losing value, they will still need to invest in some growth assets that will appreciate over time more than bank deposits, although they do come with a higher risk of volatility. It’s possible Warren and Judith will be retired for 20 years, maybe more. They need to work out what they want out of their retirement and invest accordingly.
Top tip: Make sure you are comfortable and fully understand the risk involved in your investments.
Darryl and Christine
Darryl and Christine have made excellent progress sorting out their finances. Although their key focus is still reducing debt, Darryl has recently dabbled in the sharemarket. He’s purchased several $500 parcels which have been making some pretty good returns.
However, the minimum fee for each $500 sale or purchase is $50. This means every time Darryl trades in shares, it’s costing him 10 per cent. When the time comes to sell his shares, it will cost a further 10 per cent.
Looking at it like this, it’s not a sensible investment. He would be far better off using this additional money to repay his personal debt on his home, rather than having the urge to play.
Once the home loan and credit cards are knocked on the head, and they have a regular surplus of funds available, then Darryl and Christine can start casting round for investments. But they should be looking to diversify, rather than pick one-off investments. Diversification is the best way to spread risk.
Top tip: Be smart with your money. Short-term investments can be rewarding, but if you have any debt the actual cost of the risk can be high.
An extra $10 a week can take years off your loan.