How to Get Your Finances Under Control

by Peter Conna on August 28, 2014 in Finance

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Wherever we live, whatever we do, the concept of money is part of our adult lives. Whether it’s bills that arrive in the mail, expenses we put on our credit cards or discussions we have with our family and friends, we think about money on a daily basis.

You may choose to hate it, or love it, but you are still required to deal with finances thousands of times throughout your life. You would think that by repeating an action so many times, you would become an expert on it, and ideally, that is what should happen. After all, practice makes perfect, and this is what we keep teaching our children starting from pre-school.

Yet, with personal finance, you probably still get the feeling of somehow not being in control, or not being equipped with the mental tools to make important financial decisions. You are hardly alone in thinking this way. You share this challenge with millions of other people across the globe and across every imaginable profession. If you find yourself asking, as many of us often do, why you are in a reactive mode with personal finance and would like to know more, here are a few useful tips:

Recognise you need help with your finances.

When you are young, you learn about money by talking to your parents, relatives, neighbors and friends, in a very casual kind of way. If any of these “teachers” have incorrect ideas about money, we tend to inherit those mistaken ideas and carry them with us into adulthood, treating them as absolute truths.

Despite it being such a primary and fundamental life skill, the academic system does little to educate you formally on how to handle your finances. This means the beliefs most of us learn in childhood remain unchallenged. They become embedded into your subconscious mind, turning into habits you are not even aware of.

As you grow up, you gain more responsibility and interact with increasingly complex money flows. You continue to learn from your peers, friends and colleagues, sometimes reinforcing old beliefs, sometimes introducing new ones. The need for financial competence surfaces each time you encounter different financial situations in your life, such as buying property, assessing your superannuation or reviewing your share portfolio. Recognising your need for expert advice from people who have done what you want to do, rather than from family and friends, is a very important step towards understanding personal finance.

Set financial goals and identify how you will reach them.

If you were to ask yourself where you want to be financially in 1, 5 or 10 years time and are not able to provide a confident answer, you do not have clear financial goals. If you don’t know exactly what you want, how do you expect to get it?

Always start with the end in mind when you are setting financial goals. First think about what you would like to achieve in 10 years time. Then work backwards to determine what action you need to take every year in order for you to achieve you ultimate goal. In other words, break your long term goals down into smaller chunks, so it seems achievable. When you achieve each of your smaller goals, stop and reflect on how far you have come. It is very important to celebrate your achievements!

Pay Yourself First.

We all know we should spend less than we earn and put some money away in savings every pay cheque. However, knowing what you should be doing and actually doing it are 2 very different things.

One way to save without having to think about it, is set up a direct debit from your everyday bank account to a savings account. Sounds pretty simple, doesn’t it? But what usually happens when the car breaks down, you want to go on holidays or you’d like a new TV? Most likely, you dip into your savings account. I mean, that’s what it’s there for isn’t it? No it isn’t!!

To solve this problem, we recommend setting up 2 savings accounts in addition to your every day bank account. Each of these accounts has a very different purpose. Your Short Term Savings Account is used for large household purchases and holidays etc. Your Long Term Savings Account is to be used for one thing and one thing only… investment! You never, EVER use the money in this account for anything other than purchasing property, buying shares or funding a business.

Every time you get paid, put at least 10% of your pay into each of your savings accounts. If you set up direct debits from your everyday bank account into these accounts, you won’t even notice your money is missing. It’s called a “set and forget’’ savings strategy, meaning it takes very little time and effort. Sure, it will take some time to set up your new accounts, however once you have done it, you won’t have to think about it on an ongoing basis.

If you think you will be tempted to use your Long Term Savings Account for something other than investment, open this account with a different bank, so you don’t see it when you do your online banking. However, it is important to occasionally check how much is in there. Get excited about your savings, it is the first step to financial freedom!