A staggering one in two working Australians live payday to payday, suggesting we could all do with a little help when it comes to managing our personal finances.
For young professionals entering the workforce, whose circumstances change from living on a student budget to earning a full-time professional salary, it’s particularly important to get into the habit early of responsible money management.
La Trobe MBA graduate and financial advisor Ash McAuliffe has over 15 years’ experience in finance. He shares his sage money tips to help you get ahead.
1. Understand your current position
After years of toiling away on a tight student budget, it’s easy to want to live like a king with the sudden extra cash. ‘By all means blow your first paycheck,’ says McAuliffe, ‘maybe even your second too. But after that, if you’re going to have grown-up money, you’ve got to start acting like a grown-up.’
The first step is assessing your current financial situation. ‘What do I earn? What do I owe? What are my expenses? Identify your income, expenses, assets and liabilities,’ explains McAuliffe. After all, getting ahead financially is not so much about how much you earn, but how well you manage your cash flow.
2. Know where your money is going
It’s one thing to know where your money is going – rent, entertainment, shopping, holidays. When you don’t know where it’s going, that’s when there’s a problem.
McAuliffe recommends downloading a free, reputable app you can link to your bank account to track your spending. You can train the app to recognise your transactions, such as purchases at the local supermarket as ‘groceries’ and so forth. Your transactions can then be categorised so you can see your overall spend on categories like ‘transport’, ‘home bills’, and ‘eating out’. You can set a budget for each category, and track your progress – rather than getting a nasty surprise at the end of the month.
3. Write down your goals
‘Anyone who earns money needs to spend time understanding what it is they want in their life and how they can use money to get it,’ says McAuliffe.
No matter if your goal is to travel the world, put a deposit on a house or start a family – even if these goals are 5-10 years away – write them down and start working towards them.
‘I have an influx of clients who have just started a family. So, they’ve been a couple where both earn $80,000-$100,000 a year. They have a magnificent lifestyle. If they want to do something or buy something, chances are the answer is always “yes”.
‘Then, all of a sudden, one of them isn’t working because they’ve had a child. All of a sudden it’s not just a matter of swiping a card and she’ll be fine till next payday. It’s “I’m out of money” or “I can’t do this”, “why can’t I get a bank loan”, “why don’t I have a deposit for a house?”’
On one hand, McAuliffe says, if you’re in your 20s, don’t miss out on experiences. ‘But, at the same time, Future You wants you to be a little more sensible.’ So, step 3: write down your goals.
4. Write a spending plan
Once you’ve determined your current situation and future goals, ‘it’s pretty easy to draw a straight line from A to B’. Well, reasons McAuliffe, ‘it’s easy to draw the line, but then you’ve got to stick to it.’
Rather than devising a ‘budget’ (‘budgeting is a dirty word, isn’t it,’ jests McAuliffe), you need a spending plan. By writing a spending plan, which details how much of your income will go to rent, bills, savings, going out etc, you can keep your spending in perspective and prioritise how you will spend your hard-earned cash.
If you’ve spent all your ‘going out’ money and need an extra $50 for Friday night with your mates, a spending plan will help you see where you take this $50 from: next week’s ‘going out’ money, your holiday fund… etc. This way, you are in control of your money and you’re making informed decisions.
5. If you’re in a relationship, you need to have the money talk
70 per cent of couples argue most about money. McAuliffe says divorce rates peak during the first two years after having a baby because all of a sudden your finances have changed.
‘My research shows that what happens is there’s no communication about money. So in couples, instead of talking about it regularly and discussing goals, one or both members get frustrated and take it out on each other.’
In this regard, McAuliffe’s biggest piece of advice is: ‘It’s not how much you earn or how much you spend, but how much you talk about money.
‘Be open and honest about it. That’s good advice for all aspects of your relationship, but I only deal with the financial side.’