Personal Finance – Are You Operating In The Red?

With one of the fastest growing economies in the world right now, are you poised to excel, or are you one of the millions struggling to keep afloat?

According to Economy Watch, the IMF has predicted Australia will grow faster than almost all advanced economies in the world in 2011.  This rapid growth can be accredited greatly to the demand for Australian commodities by China.  The success of Australia’s economy means that there is also great potential for personal financial growth of Australia’s citizens.  Unfortunately, this economic stimulation is dramatically helping some people, but not all.

While the economy overall is growing at an uncustomary rate, not everyone is enjoying the benefits.  Australia’s unemployment rate in 2010 was 5.192%, which is .22% higher than the average world percentage.  While the unemployment rate is high, so is the inflation rate, which is expected to reach 3.038% by the end of 2011.

The Importance of Personal Finance in Today’s Economy

The culmination of economic stimulus created by the growth in exports, growing unemployment, and increasing cost of living means that prudent Personal Finance planning is more essential than ever.  Those who plan and discipline themselves well will not only succeed, but thrive in today’s economy.

Personal Finance is applying corporate practices to an individual’s monetary decisions in regards to their individual finances or finances as a family unit.  How people obtain, spend, and save their money is their Personal Finance.  Personal Finance includes accounting for future events, risks, and changes: known and unknown.

Several sources, including Financial Services Review, Financial Online, and several other online sources all agree that there are five key steps in personal financial planning:

Assessment: This means that you will need to assemble lists.  You will need a list of your sources of income, assets, and liabilities.  While a list of assets is not essential to your budget, it does give you a way to measure net worth.

Set Goals: Goals are how you will determine progress and measure success.  You will want to determine a good mix of long term and short term goals.  A good example of a long term goal is to retire at age 67 with a net worth of $1,000,000, $600,000 of which is cash.  A good example of a short term goal is to have paid off the $5,000 balance on your Visa by the end of the year.

Create The Plan: The Plan is how you will accomplish the goals you set.  There are six key areas to the plan that you need to consider: your financial position, adequate protection, tax planning, investment and accumulating your goals, retirement planning, and estate planning.  Creating your plan involves assessing your income, evaluating your spending, and making adjustments to ensure a stable, lucrative financial future.  Whether you use books, computer software, or a simple pen and paper, assess your spending, cut unnecessary spending, and create a budget that is reasonable and achievable.

Execution of The Plan: The next key is to actually put the plan into action.  Having a plan means nothing until you actually execute it.  It will take great discipline and perseverance to initiate and maintain your plan, but it can also be greatly rewarding as you see your net worth grow, your debts paid, and your goals reached.

Monitoring and Adjusting The Plan: Now that you have initiated your plan, you need to keep track of your spending, saving, and investing.  You need to see where every penny goes so that you know if you are being successful in your plan.  As time goes on, you will see the areas of your plan that are unrealistic, or flawed.  This is when you need to make adjustments and rewrite your plan, then execute the new plan, and monitor and adjust again.  This entire process is dynamic; changing every time you make a change in your life.

Why is having a solid personal finance plan essential?

According to a financial blog, there are four great reasons to take personal finance very seriously right now.  People who have not had a personal financial plan, and have implicated them seem to agree with these four key points.

Self-confidence is the first reason mentioned, and one point that is agreed upon by experts as well.  People who have a financial plan that they have created, implemented, and are following are much more confident in themselves.

Saving for emergencies is the next reason a solid personal finance plan is essential.  What if your air conditioner broke while it is 95 degrees or your furnace while it is 20 degrees?  Think of the additional self-confidence you will have knowing you are ready for any emergency that may occur.  Being prepared can help you avoid high-interest emergency loans, saving you hundred of dollars.

Saving for retirement is another reason to have a personal financial plan in place.  According to The Super Guide, life expectancies are on a steady rise, meaning your retirement will be even longer than your parents’.  In the past 5 years, life expectancy for men has increased 1.48 years, and 0.8 years for women.  Not only will you have to live longer on your retirement than the previous generations, but with the steady increase in inflation, every year of retirement sill cost more than the previous.

Saving for university is the final reason mentioned in this blog for having a personal financial plan.  Right now university tuition for a bachelor’s degree can run $35,000 a year, and continues to rise every year, and tuition is just 30% of the cost of attending university.  Expenses such as books, room and board, and lab fees are not included in tuition, but must be considered.  According to about.com, a college graduate will earn an average of almost $20,000 a year more than a high-school graduate with no degree.  Over a 40 year career, that is an $800,000 difference.  How will that affect your retirement?

Australia’s Household Debt Crisis

The Daily Reckoning states that Australia has the highest “Household Debt to Disposable Income Ratio in the World” in 2010, and unfortunately, the February 2011 Leenane Templeton article states that this trend is continuing, as credit card debt continues to climb in Australia.  This trend is accredited highly to the outrageous housing costs.

The Australian Bureau of Statistics states that the household debt of Australia’s citizens has increased more than six fold in the past 20 years.   In 2008 the level of household debt was $1.1 trillion dollars, compared to $190 billion in 1998, and it is continually increasing.  In 1990 the average household debt was about 50% of household income.  Today the average Australian owes 156% of their annual income.  This trend will eventually put the entire country into an economic crisis.  Personal Finance can help prevent this impending disaster.

The Economist states that the Australian housing market has risen even faster than America or England, although Ireland is still topping the list on a global scale.  The writer of this article questions whether the increase in demand for coal and iron are not the real reason the housing values rose 18.8% in the year leading up to the first quarter of 2010, continue to rise, and look to continue this trend.   If owning a home is in your list of goals, personal finance planning is unquestionably crucial.

Financial Planning is Vital to Young Adults

To begin with a personal financial plan and the discipline you will develop early can avoid excessive debt, and avoid paying excess interest.  If you plan and keep your credit in good standing, you will be able to enjoy lower interest rates when you do need to use credit, also saving you money, and making it easier to achieve your financial goals.>

Amy Fontinelle of Investopedia has eight tips for young adults beginning on their own regarding their financial future:  learn self-control, take control of your own financial future, know where your money goes, start an emergency fund, start saving for retirement now, get a grip on taxes, guard your health, guard your wealth.

Common Sales Pitches Designed to “Trap” You

There are sales pitches and advertisements designed specifically to get you into a financial “trap” in which you spend more money than you had intended with small print and stipulations that most people will not catch until it is too late.  An article in E-How Money points out some of these common traps and exposes the reality:

Low interest Credit Card:  This is a common selling point used by banks to get you to transfer your debt to them.  The reason this is a good plan for the banks is because the lower interest usually is set for a limited time, and then increases to an exorbitant rate.  They will also write into the contract that one late payment will default the loan, causing your interest rate to skyrocket immediately.

Sales Shopping with a Credit Card:  Avoid making the common mistake of shopping with a credit card unless you are planning to pay it off before the grace period expires.  If you make minimum payments to pay off your credit card, you will end up paying much more for the item than the sticker price.  By the time you pay it off, you will not only have voided the sale, but you will likely pay much more than retail.  You are financially much better to save the money and shop with cash.

Upside Down Car Loan:  Car dealers often advertise about “top trade in value” for your car towards a new car on their lot.  Be cautious, and review your contract carefully.  Often times, they will include a large portion of what you owe on your new loan, putting you into a situation referred to as being “upside down” on your new car.  This means you will actually owe more on your new car than the car is worth.  They will show your trade in as a down payment, but you pay in the end.  The larger your down payment, the less you will pay in interest.  Plan carefully before you make your next vehicle purchase.

Payday Loans:  You may find yourself in an emergency in which you need money between checks, but beware of these loans.  Almost every company that offers these loans charge anywhere from 200-400% interest.  They will offer to renew your loan as long as you pay the interest at your due date but beware because once you cross this line, you may find yourself only paying the interest each due date, and have a hard time getting out from under these “traps”.

These are definitely not all the “traps” that are out there that you need to watch for.  You need to look at any offer that seems great on the surface, and see what the long term implications are.  Remember that all companies are in business to make a profit.  When an offer seems great on the surface, it is usually because the company is trying to keep your focus on the short term without consideration of the long term.

Why Finance Plans Fail

Finance plans can fail for large variety of reasons, but most of the time they can fit into one of five categories.  Fox Business points out several of the common mental money traps that cause people to fail.  To ensure success of your financial plan, you will want to avoid the common pitfalls.

“All-or-Nothing” Mentality

This is the mental attitude that “Either I do everything perfectly, or I’m just going to give up.”, says Dr. Mary Gresham.  Gresham is a psychologist based in Atlanta whose specialty is financial issues.  This is a very common problem in people developing a personal financial plan.  They will commonly give up if they are unable to follow through 100%.

Gresham teaches that you are better to try and miss than to not try at all.  If you miss your budget, for example, by spending $300 on groceries one month instead of your budgeted $200, tell yourself that you will do better next month.  Don’t get discouraged and give up on your entire plan.

Unnecessary Spending

Part of designing your plan is to look at your spending, and eliminate any unnecessary spending, but how closely did you look at your spending?  You have to look at everything you spend and ask yourself, “What value does this add to my life?”  Stopping for that $6 coffee every morning may be something you enjoy, but don’t just decide to get the $4 as a part of your decreased spending.  What if you made the coffee at home, what could you do with that $41,600 over a 40 year career that would add true value to your life?

Thinking Too Far Ahead

It is great to have a dream, but often times, people do not set goals and stick with them because they seem too difficult to achieve, or will take too long.  When you focus on the end result, it is easy to become discouraged because it may seem too big.  This is where you set “markers” and reward yourself for achieving them.

Avoiding Money Issues

A common mistake that people make is called “money avoidance”.  Behavior such as never asking for a raise, discarding an unopened bill into a drawer, or not even reviewing your bank statements are common to someone avoiding money issues.  The problem is that this behavior only makes your issues worse.  Money Avoidance is avoidable through conscious efforts.  The simple awareness of the issue and an effort to avoid behaviors associated with it is usually sufficient in avoiding further disruption to a secure financial future.

Personal Suffering

Probably the most common issue that will cause people to abandon their personal finance plan is the feeling that they are causing themselves personal suffering.  If you have created a plan that eliminates eating out, every morning coffee, and doesn’t allow for any “fun”, it will be easy to become discouraged.  Rather than feeling a sense of accomplishment as time goes on, it is easy to feel punished.  This is easy to avoid by simply budgeting and planning for rewards incrementally throughout your budget plan.  By allowing yourself rewards for achieving steps in your plan, you will avoid the feeling of being punished for budgeting, and sticking to your budget.

Personal Finance planning is essential for everyone.  Today the housing market is out of control, tuition costs are on the rise, inflation is growing dramatically, and retirement is more expensive than ever while life expectancies are increasing.  With a personal finance plan life can be less stressful, retirement will be possible sooner, and you may have opportunities that are not available to those financially unprepared.

Peter Anderson from Bible Money Matters, Personal Finance For Dummies,  The Retirement Solution Store, and many others all agree on one resounding piece of advice for your financial future:  Spend less than you earn, then save and invest the rest.