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Smart Investing
Neglect can lead to money regrets
 October 1, 2007
Robin Bowerman
Mortgage rate rises give politicians heartburn.
Every time the Reserve Bank decides to tighten the monetary screws to try and keep the inflation genie firmly locked in its bottle there is much gnashing of teeth in the media and a quick update of how much the average family is going to have to find each month to cover the cost of the mortgage.
So here is a simple question: if you have a mortgage do you know the interest rate you are paying?
For all the outcry and concern about mortgages rising it seems a lot of people are unaware of what their interest rate is. Research conducted recently by CPA Australia found that 44% of people who responded did not know their exact interest rate. Now presumably they might notice the increase in monthly repayment once it starts appearing on the regular loan statements but it does raise a fundamental question about financial awareness and whether or not people neglect their own personal money affairs.
Financial planners regularly shake their heads about new clients coming to see them for the first time who do not know what they earn each week. (Tip – if you are going to see a financial planner take last year’s tax statement and a recent payslip). Ask yourself this: which did you spend more time on this year – your holiday plans or your household budget?
Neglecting their personal finances is often the biggest mistake individuals make.
The financial planning and the funds management industry focuses a lot on the notion of adequate savings for retirement because that is a problem it has a product solution for. But for many people the question of retirement savings may leapfrog some very basic financial management issues.
Here are three basic traps that can derail your wealth creation plans.
1. Not having a basic household budget – more importantly not devoting the time to maintain it.
The complexity of our modern financial world is a powerful argument for having a consolidated household budget. There is good news and bad news here. There is the ubiquitous Excel spreadsheet with some good budgeting tools available or there are some good, relatively cheap software packages around – Quicken, Money to name two – that will help walk you through setting up and managing your household expenditure. One advantage they have is that they walk you through the financial organisation process and you can download your bank statements and import them easily to stay in control.
The bad news is that it used to be a matter of balancing the cheque account once a month. Now there are credit card(s), cheque accounts with ATM access, regular direct debits, mortgage accounts, fund investments, direct share holdings and of course a super fund or two or three.
So simply keeping track of things requires time and effort – but neglecting to do it can very costly.
2. Where does all the money go? Managing cashflow is a critical skill for the personal or professional money manager.
The joy of a household budget is that you will be able to answer the question about the money went. The catch is that you may not like the answer because money may be going on expenses that are creeping up and killing your chance to save more.
Remember the old financial planning adage – pay yourself first. Don’t live beyond your means and pay yourself first by putting money aside for saving and investing.
3. Not protecting assets. Australians are chronically underinsured so make sure that all the hard work that goes into creating wealth is not undone by not having adequate protection – be it life insurance, income protection, home and contents insurance – in place.
Managing your money is not that difficult – indeed some retirees talk about managing and investing their money as their new “hobby” when they retire.
The challenge is not to neglect it until it is too late to have a real impact.
More articles from this week's CompareShares newsletter:
Stocks: Fund manager stock pick for the long haul: VDM Group
CS stock lab: Guide to analysing stocks - part 2
Superannuation: Does your super fund stack up?
CFDs: MF Global buys BrokerOne
Leverage: Comparing margin loans and instalment warrants
Stock of the week: Sirtex Medical stands out
Warrants: The commodities trader's no.1 resource
Smart investing: Neglect can lead to money regrets
Analyst report: LPTs still hot property?
Commodities: Miners not taking advantage of the gold bull
Whatever your views, you can discuss this article - or any of Robin's articles - on our message board Your 2 Cents.
Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia and the former managing editor of Shares and Personal Investor magazines. To receive this column by email each week go to http://www.vanguard.com.au/ and register with smart investing.
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