Episode Details

Episode 68 – Financial Fundamentals – the 6 essential foundation stones for financial success

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Today's episode flows from a meeting I had last week with one of you guys, a member of the Financial Autonomy community. For reasons of privacy, of course I won't use her real name, so let's call her Jenny. It was a first time meeting, and in it Jenny observed that she felt she just didn't have the financial fundamentals right. As an example, Jenny pointed to having her employer continue to take out extra tax for a HECS debt, even though this debt had actually been repaid. Jenny did this so that she would get a large tax return, which she could then put to something meaningful. Essentially this was a savings strategy, but she realised it wasn't the most efficient or profitable way to go – lending your money to the government for no interest is not ideal.

So it got me thinking about what are the key financial fundamentals that really set you up for success? I came up with 6, but I'd love to hear your thoughts – let me know on either our Facebook page or via email from the financialautonomy.com.au website.

1. Cash for emergencies

The number one source of financial pain I see is credit card debt. Now credit card debt can build up for a number of reasons – the search for happiness through a little retail therapy is common. But often it tips from manageable to a problem when a big unexpected expense comes in – the car breaking down, the fridge dying, or a big bill.

Without having some cash up the sleeve, the credit card becomes the only solution, and the downward spiral begins.

So the starting point in our financial fundamentals has to be having some cash saved to act as a cushion when life throws you the inevitable curve ball. Now if you have a mortgage, those savings could be in redraw or your offset account - it doesn't need necessarily to be hived off in its own little bank account. But just having some cash available is essential.

How much? Well, of course, it depends on your circumstances. A family with 4 kids would need a larger stash of emergency cash than a single person. But as a starting point, think of getting $5,000 put aside. This will cover most things, like a new fridge, excess on insurance, car repairs, or a flight at short notice to see a sick relative.

2. Know what you spend

I'm well aware that budgeting is not a topic of fun and joy. But when you talk about financial fundamentals, having a handle on what you spend just has to be included.

Most people in the Financial Autonomy community are in their 30's and 40's, but at times I get people in who are about to retire, usually referred by other clients. In developing a retirement plan, one of the first question I have is, how much income do you need each year to fund the retirement you want?

I get a lot of blank stares.

So then I ask, okay, how much are you spending now?

More shrugs of the shoulder, looking at the partner, them looking blankly back – they simply don't know.

Having had these sorts of discussions for about 19 years now, I can tell you that only about 5% of people actually have a detailed budget. Far more though have a less detailed plan that might look something like:

We pay $2,000 a month to the mortgage ($500 more than the minimum)

We put $1,000 a month into an account we use to pay bills

We put $500 each month into a savings account that we use for things like holidays

And we spend the rest on normal living

They haven't broken it down into how much they spend on coffee or electricity but through tr