The primary goal for anyone serious about improving their personal finances, whether you’re seeing a planner or doing it solo, should be to create a budget. And to do that, you need to first create a snapshot of your finances.
Snapshot advice from a professional
Melinda Houghton is a financial adviser based in Point Cook, Victoria. With her slogan “financial planning for real people”, Melinda is on the frontline of financial stress. And she says people commonly don’t have a clue where their money goes.
Getting a clear picture of your assets, liabilities, income - and the even more crucial area of expenses, is essential she says. And while many people know the details of their large expenses, especially those easy-to-track things like utility costs and the mortgage, that’s generally aren’t what gets them intro trouble.
“It’s generally the smaller things,” Melinda says. “With lending and credit cards you can have what we call ‘expense creep’, where effectively you only put in an extra $50 to $100 on your credit card every month but then you turn around and you’ve got a $5000 debt. The small things can make a big difference.”
So, to create an accurate snapshot, you need to hunt down some paperwork.
Those all-important documents
Clients of Melinda’s firm Houghton Strategic Solutions are given a document checklist which requests everything from personal loan statements, mortgage statements, credit card statements, superannuation fund statements, share certificates (even if you’ve only got a few) as well as pay slips, tax returns and insurance policy documents.
Again, it’s about the little things. With bank statements for instance, you need to include all your accounts, even small savings accounts.
“You’ll also need documentation of any Centrelink income you have,” she says.
Another area that’s often forgotten is estate planning – things like wills and powers of attorney are all part of the picture.
Why is information gathering so important?
If you don’t know where you are financially, then you can’t fix it, Melinda says. And it’s not enough to look at your current state – you need to see what’s caused you to be where you are.
“A client might seem like they’re in a great position – they’ve got money in the bank, and you think they’ve done a good job,” she says. “But they might have received that money from someone else and don’t know how to manage it.”
“Or, they might be in a bad position but it’s not through any fault of their own. It’s a client’s financial history that will tell the full story.”
Knowledge is power – and money
If you think your work is done once you’ve handed your documents over to a planner or you’ve compiled them in one place, no such luck. You also need to understand the fees, interest costs and terms that attach to your loans and other types of credit, either with the help of a professional, or on your own using resources such as MoneySmart and other reputable local websites.
“If people don’t understand it they tend to ignore it,” Melinda says. “It’s really important that people act like grown-ups and remember that they’re in charge of their finances.”
“Continuing to stick your head in the sand financially can lead to financial stress,” Melinda says, “as well as loss of opportunities, lack of lifestyle and future retirement planning, working for longer than you need to; even health issues and family breakdowns can result.”
“When it comes to financial literacy, people don’t know what they don’t know,” she says. “Either they need to find that out through some learning or getting someone to do that for them.”
If you’re looking for help to get on top of your finances, Bees with Honey is a great place to start. You can also speak to your employer about ways they can help.