Tone up your finances in 10 easy steps

CALCULATE IT: Sitting down and looking at your finances is the first step in working out a plan of attack.
CALCULATE IT: Sitting down and looking at your finances is the first step in working out a plan of attack.

It is never too early or late to sit down and take financial stock - you may be surprised at what you discover and save yourself some money at the same time, writes Chris Wright.

Time for some spring cleaning. Not of the house - your finances. Many of us think occasionally that we ought to take a long hard look at our money, our bills, our lifestyle, our plans for retirement - but few of us really take the time to do it.

However, the effort is well worth making. Here are 10 ways to perform a financial makeover: to work out what's right and wrong about your financial position and to decide what to do about it.

1. Take stock

"If you don't know what you don't know, how can you fix it?" the chairwoman of the Financial Planning Association, Julie Berry, says.

Working out how to give yourself a financial makeover first requires you to know exactly what you've got today.

"It's very hard to plan for the future if you don't know what you're doing now," the principal and consulting actuary with Towers Watson, Nick Callil, says.

Knowing what you have doesn't just mean your bank balance or your latest super statement: it's the precise level of your mortgage, your shares and your commitments.

"We try to encourage clients, when taking stock, not only to look at dollar value but to factor in things like their earning potential for future income or the health of the family," Align Financial adviser, Darren Johns, says. "It's not difficult to draw up a family balance sheet."

2. Stress test yourself

Many people found, during the financial crisis, that they were stuck in investments from which they couldn't escape.

Let that be a wake-up call.

Think through different scenarios: if you have an investment property, what would happen if you were without a tenant for three months or the tenant stopped paying rent? Would you still be able to repay the mortgage? What if interest rates rise 3 per cent over the next few years? And, if you think you'd be able to sell an existing investment to meet a shortfall, have you checked the circumstances in which you can sell out? If you don't like any of the answers, take action.

Related to this is diversification. People who had everything in shares had a rude shock during the financial crisis.

What would happen to you if the sharemarket took a 30 per cent nosedive? And, given that bonds, property and other asset classes usually don't behave in the same way as shares, do you need to rethink your portfolio?

3. Budget

It's pretty obvious but few people do it properly. "A lot of people come in and have no idea they should have done a budget," says Berry, who is also a certified financial planner. "Budgeting is a big missing link. It's the key to everything."

It doesn't have to be complicated. "Don't make it hard. It's not about a huge Excel spreadsheet. It might be as simple as keeping a notebook: if you know the fixed costs you have to pay but, at the end of the week, are wondering where all your money went, keep a note of it as you spend."

For those who do prefer a more complicated and detailed approach, many computer programs and smartphone apps are available, including some online that are free.

Johns prefers to talk of a spending plan rather than a budget. "Budgeting tends to have restrictive or cannot-do connotations," he says. "People think of it as something they have to stick to. But it's not that people can't spend money in their retirement. It's more about understanding where it's gone - not questioning it, just understanding it - so you can live like you want to live."

4. Know your goals

This relates to Johns's point on planning. Know what you want to do, then you'll have a better chance of working out how to afford it. "Everything starts with establishing goals," Paul Moran Financial Planning's Paul Moran says.

When he sits down with clients, he speaks in terms of seven goals: short-term, which are specific things people plan to do in the next three years, such as holidays or buying a car; medium-term, over four to 10 years, such as saving for a house deposit or paying off debt; long-term, which is 10 years or longer, such as mortgage repayment, education costs or a holiday home; insurance goals, in which clients identify what level of protection they would want if they died or were injured; retirement goals, about the income people want in retirement and when they want it to start; estate planning; and cash flow, which involves looking at your income today and where it goes.

"We always have two meetings with clients: one to tell them what the goals are that they have to discover, then a second meeting to talk about it," Johns says.

"As a planner, I know what the characteristics of the goals are but I can't tell a client what those goals should be. It's the single most important part of the process."

Clearly, retirement is a key goal. "When would I like to retire?" Callil asks. "What would I like to have to spend in my retirement? How much would I need in order to be able to achieve that? Those are big questions and there's another whole series of steps to achieving what you want for them but the key to it is assessing where you are now and what retirement means to you."

5. Pay off credit card

Obviously, if you don't have any money available, this isn't an option but, if you have any free cash squirrelled away somewhere, there are few smarter things you can do than pay off the card. The interest rate on a credit card is higher than you could ever expect to gain on any investment you might make yourself. The logic speaks for itself. "But it is surprising the number of people we see who do carry forward credit card debt each month and don't make a decision to pay it off," Johns says.

6. Know difference between good and bad debt

"Consolidating debt is always a good place to start," Berry says. For one thing, it can get rid of those horrible credit card repayments. It's also much more manageable. "If you consolidate into a debt where you know what your repayment is and you've got a defined term on it, it makes life easier," Berry says.

It also brings some money back in because the repayments are probably going to be lower than they were before (particularly if you've cleared a credit card).

However, not all debt needs to be paid off urgently and some has advantages because it is tax-deductible. If you can afford to pay down some but not all debt, do the investment-related debt last.

"You can rank your debt from really bad debt to really good debt," Johns says. "Personal loans and credit card debt might be first, then car loans, home loans, investment loans - not many people know which order they should be paying it off in."

"Always work from the highest interest rate backwards. There's little point making repayments on a mortgage at 7 per cent when you're paying 19 per cent on your credit card," Moran adds.

7. Take retirement savings seriously

"People tend to underestimate what it costs them to live," Johns says. "But, inversely, they overestimate what dollar figure they might need to sustain a lifestyle for 30 years."

Although daunting, it is arguably easier than ever to work out what people need from retirement savings.

"There are tools individuals can use to project where they might be up to at the date they are thinking of retiring," Callil says.

Take a look at Sorted's retirement calculators.

If the numbers look daunting, don't lose heart.

"Don't panic, it's never too late to start," Berry says. She suggests people make the best use of what they have.

Additionally, the nature of retirement has changed for people: more and more choose to phase themselves into it, reducing the hours or the stress of their job but still earning enough to get by so that retirement savings are not depleted. This is another important option to think through.

8. Look for the easy tricks and haggle

Johns says you need to be aware that, as a consumer, you have power. "In my experience, banks are more willing than they have ever been to have a negotiation on the current rate on a home loan facility," Johns says.

"If a bank is contacted and told a client is looking to move or refinance, they are more willing than ever to offer a lower rate."

9. Plan your estate

If you have plenty of money, have you thought about where it goes when you die?

"Are there people in a family group - perhaps a second family - that might challenge where the assets go?" Berry asks.

"Have you got that sorted out?"

10. Educate the kids

Make sure your children are financially literate - that way they won't have to give themselves a financial makeover late in their own lives because they'll have got things right from the start.

"Because money comes out of the wall these days, kids have a very different view of it than we did when we were younger," Berry says.

"We try to show them you can't have champagne on a beer budget."

Ensure they understand the value of money from an early age.

Essential Baby