Learn more about good money habits.
Money – it’s probably safe to say that most of us like to spend it. But how well do you really know the ins and outs when it comes to your finances?
Being ‘money smart’ starts with understanding basic financial terms and money management principles, especially when you’re looking to make your hard-earned cash go further. Here, we decipher some of the financial jargon that you may come across on a day-to-day basis, and share some tips and tricks that could help you around how to budget and better manage your finances.
Income is any ‘incoming money’ you receive. This can include:
- Direct income: Any income you earn including your salary or wages, or financial assistance from the government such as allowances and subsidies. These are typically deposited into your bank account, and often form the foundation of your finances.
- Other types of income: These can include dividends paid on shares, interest paid on savings and rent received from an investment property.
Typically, you’ll receive statements for your various sources of income, and you may also need to pay income tax, with rates varying based on the amount and type of income you receive.
Expenses include any outgoing expenditure you may have. Expenses come in many forms, and can typically be broken down into two categories:
- Non-discretionary expenses. These are your living expenses, and are essential things that you need to spend money on, such as rent or home loan repayments, groceries, utility bills, child care, and petrol and other vehicle costs.
- Discretionary expenses. These refer to any non-essential expenses that you have. This is typically money you spend on your own lifestyle, including entertainment, sports and recreation, or eating out.
You may also have business expenses from your work which you have to pay up front or using a cash allowance, but your company will reimburse you for later.
Your personal cash flow takes into account all the money flowing in and out of your bank account, including your income and expenses.
Having positive cash flow means that your total income is more than your expenses over a set period of time, while negative cash flow occurs when your expenses are greater than your income.
To work out your cash flow, it helps to know how to make a budget. A budget is a list of the money you expect to have coming in and the money you expect to have going out. By tracking your spending against your budget, you can understand how you plan to use your money, and where your money actually goes.
If you have a positive cash flow, you might decide to save your extra money. People save for a variety of reasons: you could be saving to buy a home, for your next holiday, or you could be adding money to your ‘emergency fund’ (so you have some money to fall back on should your circumstances change or something unexpected occurs).
There are different ways to separate your savings from the rest of your money, and it depends on your personal goals and how often you want to tap into your savings. The most common is to have your savings in a separate savings account, but you could also choose to put your money into a term deposit for greater interest.
Unless you choose to keep your money in cash form, you’ll most likely have some dealings with a bank. Australia has a range of banks, each with its own range of options and fees for bank accounts, and most banks typically have ‘everyday’ or transaction accounts for daily spending, and savings accounts with higher interest rates.
When choosing your bank, it’s a good idea to look at your needs and financial goals, and check to see if the account you choose matches your needs. It may be helpful to check the bank’s fee schedule and any withdrawal or overdraft fees and charges as well, so you don’t get surprised with unnecessary fees and charges.
Most banks also offer other financial products such as loans and credit cards.
An investment is something you buy with the intention of generating an ongoing income or making a profit. The most common types of investments are property, shares, bonds and cash.
There are two types of interest you’ll typically encounter, and it can help to think of interest as a two-way street.
- You are charged interest when you borrow money, at a certain interest rate which will be a percentage of the amount you borrowed. You have to pay back interest to your lender on top of the amount you borrowed: for example, if you buy property, then your mortgage repayments typically include the cost of the property, plus the interest on the cost of property.
- You receive interest when you deposit money into a savings account or other savings product (such as a term deposit). Here, your financial institution will pay you interest at a certain rate, which is a percentage of the total amount in your savings account.
Tax refers to the money deducted from your various income sources by the government. The government will then use this tax they collect to pay for public services such as schools, hospitals and roads.
The most common types of taxes you’ll encounter could include income tax, capital gains tax (if you make a profit from selling your property), and the goods and services tax (GST) which is a tax paid on most purchases.
Debt is money you owe. Your debt includes money you’ve borrowed, and can be a personal loan, home loan or credit card from a bank, or money you’ve borrowed from family or friends.
While having debt is usually viewed as a bad thing, it’s not always the case – it depends on the type of debt.
- Bad debt (such as credit card debt) can cost you money without improving your financial position, thanks to the high interest rates charged.
- Good debt (such as a home loan) may help you to build wealth or increase your prospects to build wealth. Having good debt is also useful to help build up your credit history.
Your credit history is a history of all your current and previous debt, and your repayments. If you’ve got a credit card, personal loan, mobile phone plan or utility account, there’s probably a credit reporting agency out there that has a credit report with your name on it.
Your credit history is used as a way to keep track of your creditworthiness, and can affect your ability to get a loan, as well as the amount a financial institution will loan you. Actions such as paying bills on time, and not missing loan repayments help you build a good credit rating.
On the other hand, late payments or non-payments can add up to a poor credit rating, which may affect your ability to get a loan in the future.
Your superannuation, or super, is a fund into which your employer (and potentially you) contributes a portion of your earnings from your working life, to better support you financially once you have retired.
Your super is typically stored with a super fund, where professional fund managers invest your money with the aim of earning a return to grow over time. Super funds typically have higher return rates than interest rates of regular banks.
The amount of super you have is determined by several factors, including:
- How much has been made in contributions (deposits into the account)
- How long it’s been invested
- The type of investment option you’ve selected
- The investment returns your money has earned
- The amount you’ve paid in fees to your super fund.
5 tips and tricks for good money management
1. Try to keep track of your money
Learning how to budget starts with knowing how much you spend and earn, and this is a fundamental part of good money management. Reviewing your finances and budgeting can help you be more money smart, both in the present and for the future.
While setting up a budget and tracking spending can seem time-consuming, it’s challenging to get ahead financially if you don’t have a clear picture of what you earn and where it goes.
To turn budgeting into a routine, you could consider setting aside a regular time each week to track your money, or have a look online for various apps that can help you.
2. Aim to spend less than you earn
Having a positive cash flow each (or most) months is the first step in being able to get ahead financially. If you find you’re struggling to do this, it could help to look at your budget over the past weeks or months, and consider if there are any expenses you can reduce. If this isn’t possible, then it may be worth looking into any ways you can earn extra income.
3. Consider paying off any debt quickly
If you owe money— whether to a financial institution, or family or friends—it may help your financial situation if you prioritise paying it off. You could consider starting with the debts that are costing you the most in interest charges, whether from a bank or other financial institution, or consolidating your debt if you owe money to different providers.
In the future, it may be worth considering where you could avoid going into debt as well, whether it’s through limiting your credit card use, or trying to use your savings when possible.
4. See if you can get more out of your current funds
If you have some savings already, consider how you can make this work better for you. One quick win you could look into may be shifting your savings to a high-interest savings account or term deposit, so you can earn more interest on your money over time.
5. Plan for the future
When it comes to money, the more you think ahead, the more you can plan and budget for the future. For instance, buying a car, going on holiday and moving into a new apartment all within a six-month period could be very taxing financially. However, if you spread those things out, set yourself goals and break them down, over a longer period of time they might all be doable.
13 Sep 2019
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