Financial
First Steps
RENT PAY
MENT
THE
DAIL
Y NE
WS
The content of this Financial First Steps manual is general in nature and is not intended to constitute financial
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Information is current as at June 2012. The information is subject to change without notice and Westpac is under
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Contents
What do I want?............................................ 5
Planning..........................................................................6
Budgeting......................................................................14
How to build a budget................................................... 21
How do I get it?. .........................................24
Spending.......................................................................25
Saving...........................................................................38
Borrowing......................................................................40
How do I protect it?...................................49
Appendix.....................................................54
What do
I want?
6 I What do I want?
Planning
Whether you want to take a holiday, buy a house or eat at
a restaurant, one thing’s for certain: it will involve money!
In fact, most decisions you make in life do. In order to be
confident in making the right decisions, you must first
know what you want to achieve and how to manage your
money so you can achieve it. Planning is the first step
towards great money management skills.
Key life moments
Making a financial plan for your future will help you achieve
your goals regardless of what stage you are at in life,
whether you want to further your education, get married,
have a family or be financially comfortable when you retire.
A good way to start planning is by thinking about your
significant life events, like getting married or starting a
family. You should think about how these key life moments
would affect you and your finances and this will help you to
start setting your goals.
Financial First Steps
work
school
family
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ENT
retirement
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MENT
I7
8 I What do I want?
Activity:
1. What are the key life moments coming up in
your life? Draw them on the timeline.
2. How much do you think each of these life
moments will cost?
Birth (0 years)
Financial First Steps
95 years +
I9
10 I What do I want?
Setting your goals
Goals are important because they give you a clear
understanding of where you want to go and map out a
clear path to get there. There are three different types of
goals that you should consider – short, medium and long
term.
Being clear about whether your goal is for the short,
medium or long term will affect how you save to achieve
your dream.
Financial First Steps
Short term goals Medium term
goals
Summary Focused on the
immediate future.
They are usually
related to meeting
expenses for
unplanned events.
You will want to
have easy access
to your savings.
Goals that focus
on the next 3 to 7
years.
Long term goals
These goals focus
on plans 7 years +
in the future.
They are usually
for planned events
such as starting a
While you will want business.
easy access to your You will want to
money, you will
be earning a good
also want to get
return on your
savings investment,
a good return on
your investment.
which is more
difficult to gain
access to.
They are usually
planned events,
such as a holiday.
Examples • Home or car
maintenance
• Medical bills
• General
household
emergencies
• Children’s
school fees
• Holiday
• House deposit
• Wedding
• Starting a
business
• Retirement
• Financial
independence
Savings
strategy
Aim for assets
that provide a
good financial
return, such as
term deposits.
These give you
some access
to your funds
while growing
your savings.
Aim for assets
that will provide
you with lifelong
security which are
more difficult to
access, such as
property.
Aim for assets
that are easily
accessible such as
a savings account.
I 11
12 I What do I want?
SMART goals
When setting goals, it’s important to be clear about what you
want to achieve. The more defined your goals are, the easier it
will be for you to achieve them.
Consider the following goal statement: “I’m saving for a
holiday”. This may be your goal but it isn’t clear when the
holiday is, where it is or how long it will be. Without this
information it will make it difficult to determine exactly how
much money you will need or when you should start saving.
A better goal would be “I’m saving for a three week holiday
in Australia in June.” It’s clear about when you are going and
helps you determine how much money you’ll need to save
between now and June.
One way of clearly stating your financial goals is by using the
SMART goals method:S
Specific
Be clear about what you want to achieve.
M
Measurable
Understand how you will know when you’ve
achieved it.
A
Achievable
Make sure you set a goal that is realistic and
achievable.
R
Relevant
Determine whether it helps to support you achieve
other bigger goals.
T
Timely
Have a specific timeframe when you want to achieve
it by.
Financial First Steps
Activity:
Identify some of your own short, medium and long term
goals and write them down using the SMART method.
Short Term
Exactly what do you want to achieve?
Medium term
How will you know when you have achieved it?
Long term
Is it something that you can do?
I 13
14 I What do I want?
Budgeting
Budgeting is key to successfully achieving your financial
goals. A good budget will give you a clear picture of whether
you have enough cash to meet your needs or whether you
have a shortfall. By keeping a record of what money is
coming in and what money is going out, you can ensure you
have enough to save, meet financial commitments and pay
your living expenses.
Spending Diary
Many people struggle to complete a budget because they
have no idea what they are spending their money on or how
much they are spending. If this is familiar, consider keeping a
spending diary.
For one month, keep a small notebook with you and write
EXPEyour money
down everything you spend
N
JOU SES
RNAit may
on, no matter how insignificant
L
EXPE
seem. Remember, every dollar adds
N
JOUR SES
NAL
up, and you may be surprised at how
much you really spend! At the end of
each month, calculate how much you’ve
spent and on what items.
Financial First Steps
I 15
clothing
transport
shoes
music
food
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bills
shelter
sweets
16 I What do I want?
You may find that some of your expenses need to be paid
weekly, while others will be paid fortnightly or monthly so
you will need to decide which of these timeframes works
best for your budget.
This table helps you quickly convert your expenses or
income to the time period for your budget.
Financial First Steps
If you receive
income or
expenses
daily…
I 17
…and want to
…and want
convert amounts to convert
to weekly:
amounts to
monthly:
…and want
to convert
amounts to
yearly:
Multiply (x) by 7
Multiply (x) by 365
Example:
2 x 7 = 14
per week
Multiply (x) by 365,
then divide (÷) by
12
Example:
2 x 365 = 730
per year
Example:
2 x 365 = 730
per year
730 ÷ 12 = 60.83
per month
If you receive
income or
expenses
fortnightly…
Divide (÷) by 2
Multiply (x) by 2
Multiply (x) by 26
Example:
200 ÷ 2 = 100
per week
Example:
200 x 2 = 400
per month
Example:
200 x 26 = 5,200
per year
If you receive
income or
expenses
monthly…
Divide (÷) by 4
Multiply (x) by 1
Multiply (x) by 12
Example:
200 ÷ 4 = 50
per week
Example:
200 x 1 = 200
per month
Example:
200 x 12 = 2,400
per year
If you receive
income or
expenses
yearly…
Divide (÷) by 52
Divide (÷) by 12
Multiply (x) by 1
Example:
200 ÷ 52 = 3.85 per
week (approx)
Example:
200 x 12 = 16.66
per month (approx)
Example:
200 x 1 = 200
per year
18 I What do I want?
Cash flow
A budget can also be described as a plan for cash flow.
It measures cash coming in against cash going out. For
example:
Cash coming in:
calculate all the types of income and benefits you receive,
including remittances and money gifts from your family.
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Cash
coming in
–
Cash
going out
Financial First Steps
Cash going out:
this is what you spend your money on. This can be
a little more difficult to identify because we usually
spend money in lots of different ways. Consider the
following spending categories:
• Savings – the money I pay myself
• Repayments – the money I need to repay others
• Living Expenses – the money I need to live, such
as rent, electricity, groceries
• Other Expenses – the money I want to spend on
other things such as movies, sport, clothes
=
Cash
that’s left
I 19
20 I What do I want?
Cash that’s left:
By taking away the amount of cash going out from the
amount of cash coming in, you are left with your ‘cashflow
position’. There are three possible outcomes, a:
1. Surplus: more cash coming in than going out.
2.Deficit: less cash coming in than going out.
3.Neutral: the cash coming in equals the cash
going out.
For many people there’s a deficit, which means they’re
spending more than they’re earning.
Your goal should be to create a surplus. You can achieve
this by increasing the cash coming in, which can be
difficult, or by improving your spending habits.
Financial First Steps
How to Build
a Budget
Step 1: Record Cash In
Cash can come from a number of sources but the most
regular source is usually your salary or wage, which will
typically be paid weekly, fortnightly or monthly. Other
sources of regular income may come from remittances,
weekend markets or the government.
Record your regular income under Step One of and
calculate this as a weekly amount.
Step 2: Record Cash Out - Savings
It’s important to set aside some savings and ‘pay yourself’.
Record your intended savings allocation for each week in
Step 2.
I 21
22 I What do I want?
Step 3 – Record Cash Out – Repayments
The next allocation of cash should be for commitments
to repay borrowed money. List the amounts that you’ve
borrowed and are committed to repaying. This could be cash
you borrowed from family or friends, a lender, an amount
owing on a credit card or your loan repayments. Record
these repayments under Step 3.
Step 4 – Record Cash Out – Living Expenses
Our living expenses are expenses we need to provide
basic food, shelter and clothing. They also include things
like transport and health to ensure we’re able to continue
earning our living.Record these expenses in Step 4.
Step 5 – Record Cash Out – Other Expenses
Other expenses are usually wants and include optional and
lifestyle items such as sports equipment and clothes, a TV,
travel and buying takeaway food. Record these in Step 5.
Step 6 – Total Cash Out
Add all amounts for Steps 2 to 5 and record in Step 6.
Step 7 – Calculate End Cash Position
Subtract the amount at Step 6 (Total Cash Out) from the
Cash In amount in Step 1 to see if you have money left over
or not.
Financial First Steps
How to Build
a Budget
Step 1: Record Cash In
of sources but the most
Cash can come from a number
will
your salary or wage, which
regular source is usually
fortnightly or monthly. Other
typically be paid weekly,
s,
may come from remittance
sources of regular income
government.
the
or
markets
weekend
under Step One of and
income
regular
your
Record
amount.
calculate this as a weekly
- Savings
Step 2: Record Cash Out
some savings and ‘pay
It’s important to set aside
savings allocation for
yourself’. Record your intended
each week in Step 2.
– Repayments
Step 3 – Record Cash Out
nts
should be for commitme
The next allocation of cash
List the amounts that you’ve
to repay borrowed money.
to repaying. This could be
borrowed and are committed
an
family or friends, a lender,
cash you borrowed from
ts.
card or your loan repaymen
amount owing on a credit
3.
under Step
Record these repayments
– Living Expenses
Step 4 – Record Cash Out
we need to provide
Our living expenses are expenses
include
also
They
basic food, shelter and clothing. ensure we’re able to
health to
things like transport and
rd these expenses in
continue earning our living.Reco
Step 4.
– Other Expenses
Step 5 – Record Cash Out
wants and include optional
Other expenses are usually
sports equipment and
and lifestyle items such as
buying takeaway food. Record
clothes, a TV, travel and
5.
these in Step
Step 6 – Total Cash Out
6.
2 to 5 and record in Step
Add all amounts for Steps
Cash Position
Step 7 – Calculate End
6 (Total Cash Out) from the
Subtract the amount at Step
left
to see if you have money
Cash In amount in Step 1
over or not.
Notes:
STEP 1: Cash in
Money I get weekly
$
STEP 6
4
Add up all items in Step
TELEPHONE
$
Mobile recharge
$
$
TRANSPORT
$
$
STEP 2: Cash Out - Savings
Money I save weekly
$
nts
STEP 3: Cash Out - Repayme
Repayments I make weekly
STEP 7
Fares
$
Subtract Step 3 from Step
STEP 1
Petrol
$
Servicing/Repairs
$
Registration
$
Car Insurance
$
Equals
Health Insurance
$
Doctor
$
Medicines
$
Dentist
$
Car
$
$
Family/friends
$
School fees
$
Other
$
expenses
STEP 5: Cash Out - Other
Other expenses I pay weekly
Expenses
STEP 4: Cash Out - Living
Living expenses I pay weekly
$
Money I spend weekly
$
GROCERIES
Mortgage/Rent
CLOTHING
$
ENTERTAINMENT
$
SPORT
$
GIFTS
$
DONATIONS
$
$
+
- $
MONEY LEFT OVER
+ $
MONEY NEEDED
- $
your spending you
If you plan ahead and control
the
than you earn and save
will be able to spend less
you will always have reserve/
surplus. The result will be
if needed.
emergency funds to use
Stop and Think!
■
■
Pay yourself first
Make it a habit to save
Insure or protect your
income
■ Take control of spending
■
■
■
■
PERSONAL SPENDING
HOUSING
$
STEP 4
OTHER REPAYMENTS
Credit Cards
$
Minus
HEALTH & MEDICAL
$
1
Plan your budget
Day
■
Watch out for the leak
factor
Use your credit card
wisely
Shop around for value
■
Need or Want?
■
Review your insurance
policies
Week
1 Year
5 Years
Other Stuff
$
$
14
730
3650
$
2
Lunch/coffee
4
28
1,460
7,300
10
70
3,650
18,250
$
15
105
5,475
27,375
20
140
7,300
36,500
Maintenance/Repairs
$
Water Rates
$
Snacks/chocolates
Home Insurance
$
Holidays
Electricity
$
Gas
$
$
I 23
How do I
get it?
Financial First Steps
I 25
Once your goals have been identified and a budget prepared
it is easier to achieve if we employ good spending habits,
and make informed decisions about whether to save or
borrow to achieve our goals.
Spending
By developing good spending habits you will be able to
achieve your plan and stick to your budget. To do this we
need to separate what we need from what we want, make
sure we get the best value for our money, be aware of any
‘leaks’ in the budget and use the best method to pay our
expenses.
The difference between ‘needs’ and ‘wants’
An important money management skill is to understand
the difference between your needs and wants. Your needs
should take significant priority over your wants because it’s
more important to cover the basics of food, clothing and
shelter, before considering spending money on other things
such as entertainment.
26 I How do I get it?
Needs:
A necessary product or service such as
food, basic clothing items, or utilities like
water and electricity.
Wants:
A product or service that you desire but
don’t actually need. Anything that isn’t
strictly a need falls into this category. For
example, you don’t need to buy takeaway
for lunch everyday, or choose expensive branded clothes, or
the latest mobile phone.
While it is not wrong to spend money on your wants, you
should really budget to save for these items. Purchasing your
wants as a reward for good money management is a good
way to keep on track and celebrate achieving key goals.
Financial First Steps
A good habit to consider getting into is calculating
the number of hours
would
27you
I How
dohave
I gettoit?work to
purchase your want. Consider the effect of your
purchase and ask yourself:
• If I buy this now, will I have enough money to buy
food and pay for water or electricity?
• Will others be impacted by your purchase?
• Is there a better use for the money?
I 27
28 I How do I get it?
Understanding the value of money
Everything we buy has a price and a value. Sometimes the
price and value are the same, but often they are different. We
notice this when the same item is being sold in two different
shops and at different prices. A good habit to get into before
making a purchase is to shop around. By understanding what
is available you can choose the price that gives you the best
value for money. Getting better value for your money doesn’t
always mean buying the cheapest available or making
unnecessary bulk purchases - it’s about identifying the value
of what you want to buy and how to take advantage of it.
Delaying purchases
Ever had the urge to splurge? Impulse buying is an unplanned
purchase made in the spur of the moment. This is another
common contributor to money troubles so here are some
suggestions on how to overcome the ‘urge to splurge’:
• Wait for a few days before making your purchase – often
the desire to buy fades
• Replace old for new - this forces you to think about if a
new purchase is worthwhile
• Stick to a budgeted spending limit
Financial First Steps
I 29
• Limit your access to funds (eg: set aside your money into
savings account)
• Before buying, ask friends or family for their opinion
• For more costly purchases, ensure items have a cooling
off period should you need to return them
• Ask yourself “do I really need it?”
Remember, having a plan before spending money is a great
way to keep focus on your financial goals.
Plugging money leaks
It’s important to identify whether you have money leaks,
which are regular purchases of low cost ‘wants’, such as
coffees, magazines and lunches. These items are wants
because although they are nice to have they are not a real
need.
If you were to spend a small amount of money each day, it
will add up over time! These are known as leaks.
Day
2
4
10
15
Week
14
28
70
105
Year
730
1,460
3,650
5,475
5 years
3,650
7,300
18,250
27,375
30 I How do I get it?
Case Study
Luke was very proud of himself for having put together his
budget to help him save for an overseas trip, but was finding
it very difficult to stick to his general spending allowance and
asked for some help to identify what might be going wrong.
He described a usual day like this:
• On his way to work each morning he would buy a cup of
coffee ($4)
and a pack of cigarettes ($15).
• He’d also buy a coffee at morning tea time ($4)
• At lunch he generally bought himself a burger and
chips ($10) with a bottle of water ($3).
• He’d also take a walk down to the local newsagent
to buy a paper, but usually ended up buying a
magazine as well ($7)
• On his way home he’d have
a couple of beers at his
“local” ($12) and catch up
with his best mate
• Luke’s general spending also included his
mobile phone, which cost about $35 a week.
Financial First Steps
THE
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I 31
32 I How do I get it?
Activity:
To help him out, list below some of the ways he
could reduce his daily general spending.
Financial First Steps
I 33
If Luke works 5 days a week, for 48 weeks a year, here’s what
Luke’s daily general spending adds up to:
Luke’s Spending:
Day
Week
Year
Coffee
8
40
1,920
Cigarettes
15
75
3,600
Lunch
10
50
2,400
Bottled Water
3
15
720
Magazines
7
35
1,680
Drinks
12
60
2,880
35
1,680
310
14,880
Mobile Phone
TOTAL
55
Luke has taken some of our advice and managed to plug
some of the leaks in his budget.
34 I How do I get it?
Here’s what it looks like now.
Day
Week
Year
Coffee
Cut back to 1 bought
coffee per day
4
20
960
Cigarettes
Cut back on cigarettes
7
35
1,680
Lunch
Only buy lunch on Friday
-
10
480
Bottled Water
Drink tap water
-
-
-
Magazines
Read online
-
-
-
Drinks
Cut back
6
30
1,440
Mobile Phone
Pre-paid phone
-
20
960
17
115
5,520
TOTAL
By being more disciplined and plugging his leaks, Luke will
save himself almost 10,000 over the year. That’s another
10,000 he can spend on his holiday!
Financial First Steps
I 35
Different ways to pay – and the impact that
they have
Whenever you spend your money, you should think about
how you plan to pay for your purchase. This is important
because the methods of payment that you use could have
an impact on the amount of money available, and what other
costs might be incurred. Each payment method that you use
has advantages, and disadvantages, including different costs.
The main payment methods that you can use are:
• Cash
• Cheque
• Credit card
• Direct debit
• EFTPOS
• Mobile Banking
• Instore Banking
• Internet Banking.
36 I How do I get it?
Activity:
36 I How do I get it?
Pick a card, any card
Payment Method
Cash
Description
EFTPOS
Cheque
Direct Debit
Credit Card
Mobile Banking
Instore Banking
Internet Banking
Cheque
Financial First Steps
Advantages
Disadvantages
I 37
38 I How do I get it?
Saving
Paying yourself first
Paying yourself first means setting aside some of your
income as savings before spending it on anything else. This
can be any amount that you are comfortable with and a good
starting point is to aim for about 5% of your regular income.
Once you have paid yourself you can consider the rest of
your budget. Over time, you will become used to adopting
more controlled spending and regular savings.
Paying yourself first helps to build a nest egg for the future.
It’s also good to use in case of emergencies like illness,
hospital stays, funerals or repairing natural disaster damage
to homes.
Starting small and building big!
You might feel that the small amount you are able to pay
yourself won’t make a big difference but just as the leaks
in our budget add up, so too do the small amounts we can
save!
Financial First Steps
I 39
For example, if you were to start with as little as 5 cash
per week and doubled that each year, in 5 years you would
have saved in excess of 8,000 cash. Add to that the any
interest you may have earned and you are well on your way to
achieving any mid-term goal you’ve set.
Compound interest
When you save money into a savings account or term deposit
you will earn interest on the amount that you have deposited.
If you keep the interest earnt in the account, over time it will
also earn interest. This process is called compounding, and it
can help to grow your savings.
For example, if you were to deposit 100 cash into a bank
account that pays 5% per annum in interest, and left the
interest there to accumulate more interest, the table below
shows the amount of interest earned with compound interest.
Interest Earned
New Balance
Year 1
5.00
105.00
Year 2
5.25
110.25
Year 3
5.51
115.76
Year 4
5.79
121.55
Year 5
6.08
127.63
Compounding interest works the opposite way when you borrow.
40 I How do I get it?
Borrowing
Saving for a purchase is often the safest and most cost
effective way to achieve your goals, but can often take time.
To achieve your goal sooner you may decide to borrow money.
Borrowing money comes with risks and costs such as interest.
For example, saving to pay for school fees can be difficult but
by taking a personal loan you can pay for it upfront and work
towards repaying the loan.
While there are a number of places or people you could
borrow from, a bank is the most common. But all lenders will
want to be repaid and in most instances they will have strict
criteria and conditions around who they will lend to and why.
The 3 P’s of Lending
Most financial institutions will have a process that requires
applicants to provide certain information which will allow the
institution to assess the 3 P’s of Lending.
Financial First Steps
I 41
Person
The first aspect is identifying who is applying for the loan. As
an example, a home loan application will request information
such as where you live, how long you have been there, and
whether you own or rent the property. It will ask where you
work or where your income comes from, how long you’ve
been employed and what your current financial position
is, i.e. what you currently own or owe. Having a stable job,
living at your residence long-term, having a good amount of
assets and little debt will all help to reflect positively on your
application.
Purpose
The lender will want to know the purpose of your loan. What
you want to use the loan for will determine the type, amount,
applicable interest rate, and the appropriate repayment term.
For example, if the loan is to pay for a year of school fees
then it would not make sense to have a 25 year loan.
42 I How do I get it?
Payback
The lender will want to know how the loan will be repaid.
A lender will prefer to receive regular repayments from an
applicant’s regular income. They will want to ensure that
you are able to meet the agreed repayments without putting
you in a difficult financial position. This is why details of your
employment, income and other commitments are requested.
When borrowing money it’s important to know that you will
need to provide security to support the loan. If you are unable
to repay the loan as you’ve agreed, the lender may need to
rely on the sale of your security, such as a car or residential
property, to repay the loan (see Loan Security section).
Repaying your loan
The first thing to consider before taking out a loan is to
determine how much you can afford. This will ensure that
you’re able to afford your repayments and you don’t place
yourself in financial hardship.
Budgeting will play a key part in your ability to repay your loan
and you should determine what is a reasonable as part of your
budget (use the Budget Planner in the Budgeting section).
Also, it’s a good idea to factor in higher interest rates than
what you currently pay, in case interest rates increase.
Financial First Steps
I 43
Despite all your well-intentioned planning, your financial
situation may change. This could be as a result of deciding to
get married, start a family, or a job loss. This may mean that
your budget may no longer apply.
If this happens, it’s important that you let your lender
know of the change in your situation. There are significant
consequences if you don’t make your loan repayments and
the asset that you’ve used as security may be sold with the
proceeds put towards repaying your outstanding loan. If
there is a short fall, you or your guarantor (explain?) will still
be liable.
Loan Security
When you take out a loan it can be either on a secured or
unsecured basis. Secured loans are usually used for longerterm purchases, such as property. As there is security
pledged to the bank for the amount of the loan they are
considered lower risk, attract lower interest rates and have
more flexible repayment options.
This security is held in the event that you are unable to repay
your loan and is used as a means for the lender to recoup
their funds. An example is a property mortgage, where
the security offered is typically the house or land being
44 I How do I get it?
financed. And, a car loan is often secured by the vehicle being
purchased. As there is usually less risk for the bank, with this
type of loan, a lower interest rate is charged.
Unsecured loans have no asset (security) for the bank to hold
in case a borrower defaults on a payment. This type of loan
presents a higher risk for the lender and so a higher interest
rate is charged. An example of this form of lending is a credit
card.
Guarantees
Some borrowers find themselves in a position where they
have insufficient funds for the required deposit on a loan. In
this instance a guarantee might be needed.
The most common type of guarantee is when additional
security or equity is provided to assure the loan. This is known
as a supported guarantee. An unsupported guarantee is when
security is not taken.
A guarantor should keep in mind that providing their
guarantee means they are responsible for repayment of the
loan. A guarantee is often given to help a family member
purchase a home if the borrower has insufficient equity.
Typically guarantors are limited to immediate family, such as
parents or spouse.
Financial First Steps
I 45
Sometimes, there can be multiple people as guarantors for
a loan. For example, a husband and wife can be guarantors
for their son or daughter’s loan. In these cases, the loan
documentation will likely list the guarantors as ‘jointly and
severally liable’.
This means that if the borrower defaults, all parties of the
guarantee are liable and responsible for the full repayment
of the loan. If your guarantor is called to repay a debt, they
may need to use their own assets to fulfil your financial
responsibility.
Another important aspect to consider is that the guarantor’s
ability to get finance may be limited as a result of being your
guarantor. This is because their financial responsibilities as
a guarantee will be taken into consideration when the bank
assesses their ability to service a loan.
It’s important to remember that a guarantee is a legally
enforceable document. Seek legal advice before you agree or
sign any paperwork.
46 I How do I get it?
Compound Interest
The Savings section of this manual looked at the concept of
compounding interest. Compound interest also applies to your
borrowings, in the reverse. Effectively you can pay interest on
top of interest. This is another important reason to repay your
loan regularly, because missing just one payment will mean
you pay more interest.
Typically, the interest on a loan accrues daily but is charged
monthly. However, the amount you repay can depend on how
frequently you choose to pay your loan.
As an example if you took out a home loan of 300,000 over 30
years at 7.86% per annum today and simply paid the minimum
required repayment of 2,175 per month, you will end up paying
481,800 in interest over 30 years.
However, if you made weekly repayments of 544 (this is 2,175
÷4 weeks), the loan could be cleared in 22 years 6 months
and the interest paid would be 337,807, a saving of almost
150,000.
Financial First Steps
Loan amount:
Loan term:
Minimum repayment:
Total interest paid:
Interest rate:
Scenario 1
Scenario 2
300,000
300,000
29 years 11 months
22 years 6 months
2,175 Monthly
544 Weekly
481,810
337,807
7.86%
7.86%
Outstanding Balance
300,000
240,000
180,000
120,000
60,000
Term of Loan (in years)
I 47
48 I How do I get it?
Loan amount:
Loan term:
Minimum repayment:
Total interest paid:
Interest rate:
Scenario 1
Scenario 2
300,000
300,000
29 years 11 months
21 years 10 months
2,175 Monthly
550 Weekly
481,810
326,807
7.86%
7.86%
Outstanding Balance
300,000
240,000
180,000
120,000
60,000
Term of Loan (in years)
Financial First Steps
I 49
How do I
protect it?
50 I How do I protect it?
When developing your personal financial plan, it is important
to recognise that, sometimes, unplanned things happen and
to consider these in your plan. Not having adequate protection
could set your finances back significantly.
Your financial plan should also address the protection of your
income, assets and yours and your family’s health.
Protecting your income
If something happened that prevented you from working, then
you may no longer have access to a regular income stream.
While your savings may cover your ongoing expenses in the
short term, they may not be sufficient to last in the long term.
You may also have to forgo whatever you were specifically
saving for.
Income protection insurance, also known as income
replacement insurance, is one way of protecting yourself
against the loss of your income.
Financial First Steps
I 51
Protecting your assets
Insuring your assets is a way to protecting them. Assets
are things like your car, house, or your furniture at home.
Sometimes it’s possible to use your savings to cover the
cost of replacing these assets should something happening
to them. However, with larger assets such as property it is
important to have insurance.
There are many different types of asset insurance and
careful consideration should be given to the terms of
the policy purchased to ensure that it provides the best
protection and easiest claims process for the price you are
paying.
Protecting your health
Some insurance providers offer health insurance cover. As
part of your personal financial plan, you should consider
setting aside money for future health emergencies for you
and your family.
52 I How do I protect it?
Life Insurance
Having insurance to protect the primary income earner as
well as the primary caregiver can significantly reduce the
financial impact in the case of death or disability.
A note on insurance policies
When purchasing any insurance policy, you should consider
your personal goals and needs and also obtain professional
advice to ensure you fully understand the costs and
implications of the coverage you have purchased.
Financial First Steps
Activity:
Identify what current insurances you have in place and
assess whether they are still appropriate or what other
insurances may now be applicable to your situation.
I 53
54 I Appendix
Budget Planner
Step 1: Cash In
Weekly
$
How to Build Budget
$
TOTAL $
Step 1: Cash In
Record the amount of all regular income
(wages, salaries, pension etc) and whether
received weekly, fortnightly or monthly.
NB all Cash Out amounts will need to be for the same
period ie weekly, fortnightly or monthly
Step 2: Cash Out - Savings
Money I Save $
Step 3: Cash Out - Repayments
Step 2: Cash Out – Savings
Record the amount you will save each period
Home Loan $
Personal Loan $
Step 3: Cash Out – Repayments
Car $
Record all the repayment commitments you
have.
Step 4: Cash Out – Living Expenses
Record all essential expenses for Food,
Housing, Transport, Clothing, Telephone, and
Health.
Step 5: Cash Out – Lifestyle Expenses
Record the amounts you will budget for optional
spending on leisure and lifestyle.
Credit Cards $
Store Account $
Other __________ $
Step 4: Cash Out – Living Expenses
Food
$
Housing
Rent $
Step 6: Cash Out – Total
Rates $
Add up all the amounts recorded in Steps 2 to 5
Step 7: Ending cash
Subtract the amount of Cash Out (Step 6) from
Cash In (Step 1).
.
If you get more money than you spend,
you will have enough to do what you
want.
If you spend more money than you get,
you will need to cut down on your
spending.
If you cannot cut down on your
spending you will have to use some of
the money you have saved
Fortnightly
Insurance $
Electricity/Gas $
Other $
Transport
Fuel $
Fares $
Registration $
Insurance $
Servicing/repairs $
Monthly
Financial First Steps
Clothing
$
Telephone
$
Hot Tips
Insurance $
Good advice
Health
Allocation for doctor, $
chemist etc
Other $
Step 5: Cash Out – Lifestyle Expenses
Sport $
Entertainment (eg movies) $
Personal Spending (eg $
haircuts)
Gifts $
Spending Money $
Other $
Step 6: Total Cash Out
Add Steps 2 to 5
$
Step 7: Ending Cash Position
Cash In (Step 1)
$
minus
Cash Out (Step 6)
$
equals
Ending Cash
My financial goals:
$
I 55
By planning ahead and controlling
your spending you will be able to
spend less than you earn and save the
surplus. The result will be that you will
always have money to pay your bills
and will be building up a reserve of
emergency funds.
Stop and Think!!
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Don’t spend more than you earn
Take control
Pay yourself first
Make it a habit to save
Protect your income and assets
Develop healthy spending habits
Plan your budget
Use credit wisely
Shop around for value
Need or want?
Watch out for the “leaks”
The Leak Factor
Day
$
2
4
10
15
20
Week 1 Year 5 Years
14
28
70
105
140
730
1460
3650
5475
7300
3650
7300
18250
27375
36500