Good Financial Habits
The key to developing your personal asset base and financial stability is to develop some very good financial habits - things that you do regularly to review, monitor, amend and manage your assets. As in life, the markets are constantly changing. Once you have prepared that budget , determined your risk profile and made your investments, you need to develop a regular pattern of reviewing where you are at and adjustments to make (or not). There are also some key financial things that you should be doing regularly to manage your assets to ensure they are working for you.
Some of the things that I do on a regular basis to help you with this process are:
If you have prepared a budget then you should compare the budget to your actual results. This should be done monthly.
You should also review and update the assumptions used in your budget - but not too often and only when there is a material change (~20% up or down).
Make sure you only have a small amount of money in your cheque account. This is ‘dead’ money and you can better use this for repayment of debt or increasing your investments. If there is money in your account the temptation is to spend it. If it is out of your account then you can’t spend it. There are two ways to save money: spend less or earn more. If you remove the temptation of having money in your account then you will spend less.
If you need or want a ‘safety’ sum of money for emergencies then you are better to have it in another account - with limited access - or an overdraft facility (which can be expensive).
Check the transactions and balances in your bank accounts regularly. It is amazing how you can change your habits when you regularly see what, and on who, your money is being spent. You may also pick up errors and items that you want to review and check on.
It is important that you review your investment assets (equities, Kiwisaver, etc) but not too often. As all the experts say it is ‘time in the market not timing the market’ so you must look at these investments over a medium to long term horizon. As a guide I would say you should look at them monthly (if you are really keen) but quarterly is sufficient. It is also important that you review them on a consistent basis - say June, September, December and March which ties in with other reporting periods for investment. This way you can then compare your returns with others in the market.
READ, READ and READ articles about the investment markets. There is so much information out there that it can become overbearing. Look for articles in similar areas you invest in (for comparison) and new investments (for opportunities). Keep an eye on interest rates and exchange rates as these can move the market. Also look at what is happening in the world markets.
Talk to family, friends and colleagues. You don’t need to talk about the dollars involved in your investments. It is more about developing your knowledge, learning more and keeping up-to-date.
Pay off your credit card EVERY month. Credit cards can be good and bad. If you use them correctly and repay them every month, before the due date, then you can get up to about 45 days free money. If you don’t then they are very expensive. If you are unable to pay them off EVERY month then you are better not to have a credit card.
Make sure you have a basic understanding of the tax implications of your investments. There are many things to consider such as PIE rates, withholding tax rates, tax deductible expenses and funding costs. Your accountant can help you with most of this but it is important that you have some understanding.
Make sure you really do understand the difference between a need and a want. I think this has become a little murky over the past few years - learn to say No.
Good luck and start working on those habits.
James
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