Financial security – the 5 things you absolutely have to get in place

By Mark Frary

Are you stressed about money? It’s hardly surprising that money troubles are one of the biggest causes of friction in the home. Arguing about who is to blame for going overdrawn on the bank account? Not having enough to pay the utility bills?

If this all sounds very familiar, don’t worry, you’re not alone. Each year, the Household, Income and Labour Dynamics in Australia (HILDA) survey looks at the habits of more than 7,500 households and almost 20,000 individuals, asking questions about everything from how much you spend on groceries to who looks after your kids after school. Year in, year out, a sizeable proportion of those surveyed revealed that they had suffered from financial stress.

Single mothers were the most under pressure, with around one in four saying they had money problems. One in six couples under 65 without kids also had worries about their ability to pay the bills.

Getting more relaxed about your household finances is a matter of taking a few simple steps. Here are five things that you should start to look at this year if you want to improve your financial security.

Getting into debt has become far easier in recent years, thanks to a willingness of the banks to lend and cut-throat competition on interest rates. Nowhere is this more obvious than in the credit card market where balance transfer rates of zero per cent and discounted annual fees are now commonplace.

As a result, credit card debt has risen to its highest ever. In July, the Reserve Bank revealed that the average balance on credit card accounts had risen to more than $3,000 for the first time and that the average credit card limit had soared to more than $8,000.

Although the introductory rates of interest are often attractive, they soon revert to double digits after a few months. When you compare those long-term rates with the 4% to 6% you get on a typical savings account, you can see why it doesn’t make sense to keep a balance on your credit card for a long time if you also have savings in another account.

Make sure you never pay late or go over your limit, even by a few dollars. This is how those zero per cent card firms make their money.

Store credit cards are another area of debt to tackle. With interest rates often more than 20%, it makes sense to transfer the balances to a lower rate credit card or, better still, pay them off altogether.

If you have built up a big balance you are struggling to pay off, think about consolidating all your debt and replacing it with a personal loan. That makes it easier to manage and may save you money on high credit card rates. Debt consolidation firms can be good if you drastically need to reduce your monthly outgoings but the service comes at the price of you having to pay back your debt over a longer period. You’ll undoubtedly end up paying more than you would otherwise have done.

If things are really out of hand, give your local Citizens Advice Bureau a call. For more tips on tackling debt, check out the Learning Room’s podcast on managing debt

The most recent snapshot of Australian spending, from the Australian Bureau of Statistics’ Household Expenditure Survey, shows that the average household spends just less than $900 a week. The three big ticket items are food, housing costs and transport, which together account for half of that figure.

The average household spends around one dollar out of every six on recreation and, perhaps surprisingly, just under $16 on sporting goods and equipment.

Do you know how much you spend each month? If you kept a note of every time you dipped into your wallet or purse, used your EFTPOS card or wrote a check, you’d probably be surprised.

A surprising number of Australians never see all their expenditure in one place. Writing out a list, completing an online budget calculator or using a spreadsheet like Microsoft Excel is an ideal way to see whether your income and expenditure match.

If you suddenly had to raise $3,000 – to pay for roof repairs after a violent hailstorm, to replace the trusty Holden after it finally falls apart or to cover some emergency dental treatment – how would you do it?

Ill health and unemployment can also mean a sudden gap between your income and your outgoings. Most money gurus say the answer is an emergency fund, a pot of cash that sits in a savings account, ticking over with a good bit of interest, that can be withdrawn if the worst happens.

A good level for an emergency fund is about three months’ pay. That probably sounds like a lot if you are stressed about your finances, but you don’t have to amass your fund overnight.

Access to your money is important. Balance the desire for a good rate of return on your emergency cash with the ease of getting access to it in case you really need it.

What are the chances of getting injured and not being able to work? Most of us say it won’t happen to us but figures from the Institute of Actuaries tell a different story. In fact, they reckon, after looking at the accident and insurance claim statistics, that all of us have a one in three chance of becoming disabled through illness or injury for a period greater than three months before we reach 65 - a sobering thought.

The answer could be an income protection policy. The big insurers all offer policies to cover you if you are forced out of the labour market. The premium you pay will depend on a number of things. If you can wait three months before you need a payout, your premium will be far lower than if you need money within a couple of weeks.

In the same way, if you want a policy that pays out until retirement age, you’ll pay far more than one which only pays out for a fixed period. Most policies also restrict the payout to 75% of your current salary.

If you die before you have had a chance to write a will or you didn’t think it was necessary, there is a good chance that your property, money and other possessions will not be split up in the way that you would wish.

The rules on how your estate is split up vary from state to state. If you divorce your partner and then live with someone else for a few years, who should get the money? The current partner, the ex or both? If you don’t decide, the government will.

Writing a will can be straightforward. You can do it yourself if your finances are not too complicated. You can buy the necessary forms from a newsagent and these packs include everything you need to consider.

You’ll need to decide who gets what on your death, who will oversee the sharing out of the finances (the executor) and, if you have dependents, who you want to look after them and how they will be provided for. You will also need to sign and date the will in front of two witnesses, who are preferably not beneficiaries. Especially if your affairs are complex, it makes sense to see a lawyer when you are drawing up a will.

Doing these five things won’t guarantee freedom from money worries, but along with a disciplined approach to spending and saving they will set you up for a much smoother run.