financially savvy

Financially savvy: Tips on how to get there

Being financially savvy takes effort, and it's so much more than just looking the part. Here's how to get there.

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Some women appear to be quite wealthy, financially savvy and all that. But often the reality is that their wealth is quite fragile, with their “idyllic” lifestyle being propped up by borrowings. Others might be asset rich but cash poor. 

What studies show is that women tend to be more financially cautious than men when it comes to investing, but may be more impulsive with their day-to-day spending. For this reason it’s often assumed that many women aren’t as money or investment savvy as men. This perception is changing.

Here’s some tips that will help you brush up on your financial smarts and create good quality, sustainable wealth.

1. Build it

It may come as a surprise to learn that our ability to save is more important to building wealth than how much we earn.

Remember:

– Avoid building up debt to fund lifestyle as this can destroy wealth.

– Not being able to repay credit card debt each month is often the first sign that personal cashflow is in trouble.

– Commit to a regular savings plan that is automatic and aligned with pay cycles.

– Making extra repayments on a mortgage is a good way to build net wealth.

– Consider salary sacrificing extra amounts to super when cashflow allows.

“The aim is to spend less than is earnt, and to do something meaningful with those savings.”

2. Invest it

Any investment strategy needs to suit a person’s stage of life and circumstances. Those investing for a long period of time, say five years or more, should consider investing in a portfolio with a higher allocation to Australian and international equities. These asset classes provide the opportunity for capital growth and higher yields but also come with more short-term volatility.

However, those investing for a period of five years or less won’t have the benefit of time to ride out that short-term market volatility, so a portfolio predominantly invested in cash and fixed interest assets may be more appropriate.

3. Diversify it

Wealth should be spread across different asset classes to lower the risk of investing. Focusing on one investment category makes the strategy too reliant on the returns of that asset class and more susceptible to market fluctuations.

4. Tax it

When investing, make sure investments are in the most tax effective structure, such as investing savings in the name of the lower income earning spouse, or putting more in superannuation.

Growth in asset value is more tax effective than investment income, as growth is subject to capital gains tax (CGT) only upon eventual sale and CGT is at a lower tax rate than tax on income. So investing in growth style assets (shares, property) can be more tax effective than more capital secure assets.

5. How liquid is it?

People can be “asset rich” but “cash poor” when too much of their wealth is tied up in illiquid assets, such as direct property or unlisted shares. This can leave them exposed if their income circumstances suddenly change and they can’t easily extract cash from these lumpy assets to cover living costs.

6. Can you access it?

Wealth should be invested so that it’s accessible when you need it. For example you may want to use savings to buy a house so investing large amounts into superannuation won’t work as access to these funds is restricted until at least age 60 for most. If you’re getting close to retirement age then investing additional amounts in superannuation is the way to go.

7. Protect it

Finally, having adequate insurance and estate planning arrangements in place will ensure wealth is protected and a legacy passed down to future generations.

A person’s income earning ability is likely to be their biggest asset so ensure it’s protected through income protection insurance. Also consider life insurance and other personal insurances to leave the estate in good order.

Transferring wealth efficiently, tax effectively and to whom you want can be achieved with thorough estate planning arrangements.

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