Some people have serious financial problems, but that's not you, right?. You've got a regular savings account, have cleaned up your high-interest debts, have all your super funds consolidated, and all-around are in pretty good financial shape. So where do you go from here? What's the next step for those of us who know the basics but want to make our money work harder?
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Mastering the fundamentals is the most important aspect of keeping your finances healthy, and it's important to focus on that. However, you can boost your personal portfolio in a number of ways after you've exhausted the basics of money management. That's what this post is all about.
Don't Jump The Gun: Make Sure Your Money Isn't Better Spent Elsewhere
Before you jump head-first into riskier financial waters, we need to make absolutely sure that you're really at the point financially where you have money to invest. J.D. Roth, editor of Get Rich Slowly, explained that before you start looking for new ways to invest your money, make sure you have the basics covered — and we don't just mean a single superannuation fund, a positive balance in your bank account, and nothing on your credit cards.
Before you venture beyond the basics, make sure you've hit all of the areas on this checklist first:
- You have a budget. This may sound obvious, but it's important. Make sure that you have a budget and you're sticking to it, so you know at all times where your money is going, including this cash you want to save or invest.
- You're saving for retirement. Your compulsory superannuation contributions are a good start, but you may well want to top them up. Before you start thinking about other things to do with your money, consider how much you'll need in retirement, and commit to contribute as much as possible to achieve those long-term goals.
- You've paid off your debt. We're not just talking about credit cards here. Your money isn't really yours until you've paid off your other debt. Student HELP debt, car loans, mortgages: even if it's "good debt", your extra cash is better spent towards getting your net worth in the black before anything else.
- You have an emergency fund. Usually 3-6 months of expenses saved up and stashed away, just in case.
- You know how to save for life events and desired purchases. This means you know how to budget well enough to save for that new laptop you want, for your wedding, or for that dream holiday you've always wanted, without wrecking your budget or plunging into credit card debt to make it happen.
J.D explained that if you've hit all of the points above, you're ready to start thinking about intermediate savings, or taking that extra cash and putting it aside for other things. If you're not out of debt, or don't have a fully-financed emergency fund, you're better off putting your money there instead.
That can be daunting for a lot of people, because it implies you're better off paying off your mortgage or your student loans before you start playing the investment game or saving for luxury purchases. But there's no point trying other strategies if paying off existing debt is more effective.
Option 1: Use "Targeted Savings" To Save For Specific Goals
If you have the basics covered, it's time to do some brainstorming. What exactly do you want to do with this excess money in your budget? Do you want to stash it away so it makes you more money? Perhaps there's something you've always wanted — a specific model of car, or a holiday home? Maybe you want to start your own business, or start a charity? Whatever it is, J.D. calls these goals "targeted savings," which use dedicated saving accounts and automatic deposits to keep you saving towards specific goals. He explains that this allows you to name and prioritise what you're saving for, and you can easily monitor your progress at any time. Photo by Jeff Turner.
Whatever your dream is, J.D. suggests you find a higher-interest savings account for it, and start diverting that extra money to it on a regular basis. Your best bet is likely to be an online-only savings account; these often have a higher interest rate, and it's easy to set up automatic transfers. It's not as sexy as playing the stock market, but it uses skills you already have, puts your money to work for you, and most importantly, gets you where you want to go.
Option 2: Consider An Investment Property
Investing in property is a popular choice for many Australians. Negative gearing (claiming the interest on your mortgage as an expense against your income for tax purposes) means it can be a relatively inexpensive investment, especially if you get suitable long-term tenants). It's definitely a long-term strategy, however: variations in property prices and interest rates mean that it can take time to realise a gain. You'll also need to save up a reasonable deposit before getting started.
You need to budget and plan carefully for this strategy, and you shouldn't assume that it will automatically be a path to riches. Nonetheless, it remains a common choice, and it can seem less daunting than investing on other areas. On that note . . .
Option 3: Hire a Financial Planner and Sail for Risky Waters
Sometimes you have to spend money to make money, but a good financial planner can help you make smart decisions about other, more advanced options. Sure, a financial planner can help you make the smart saving decisions we've discussed up to this point, but that kind of advice is free — what you really want a financial planner or accountant's advice with are the tricky investment options, such as buying into shares or investment funds.
Option 4: Stop Worrying and Manage Your Current Investments Instead
There are plenty of options available if you're wondering if there's a way to make your money work harder for you, as you can see. Even so, the majority of us will have a hard enough time paying down our debt and putting together an emergency fund. We mentioned it earlier, but you shouldn't go running into the wilds of investment properties and the stock market until you're in sound financial shape. There's an old adage about gambling that applies here: "Don't play with money you can't afford to lose."
Lifehacker's weekly Loaded column looks at better ways to manage (and stop worrying about) your money.
J.D. Roth is the editor of Get Rich Slowly. He offered his expertise for this story, and we thank him.