Spending

NYE Reflections: The best way to achieve your goals in money (or anything else)

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Happy New Year!  This time of year is perfect for reflection on the year that has passed and to make goals for the coming year.

When making financial goals (or any goals in fact), they need to be S.M.A.R.T:

Specific

Measurable

Attainable

Relevant

Timely

E.g.

Specific: A clear goal in mind

Measurable: If you cant measure it, you can't improve it. Whether it be in dollars, percentages, kilos, you must be able to measure it

Attainable: Not unrealistic (e.g. I want to be the world's richest person tomorrow)

Relevant: This one is pretty obvious, but is has to be relevant to what you desire to achieve

Timely: You have to put a time frame on the goal. When you intend to start and when you intend to reach your goal

One final tip: You should also write these goals down and tell others about your goals. This will help to hold yourself accountable and increase the likelihood of reaching your goals.

What are your SMART goals for the coming year? Feel free to let me know in the comments below

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Mawer Money is a Social Enterprise assisting the world with Financial Empowerment.

www.mawermoney.com

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Credit cards – drugs for the weak!

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Nearly all personal finance strategies involve strength, persistence, dedication and time.

Why are credit cards like drugs? They are easy to get your hands on, provide a temporary high, but are bad in the long term and will destroy your life.

Credit cards at their best are fantastic tools for managing cash-flow, minimising interest (not a misprint) and acquiring frequent flyer points. At their worst, credit cards lead the weak in a downward spiral to financial oblivion.

You should only use credit cards if you know you can pay off the balance in full when due.

Let’s look at a situation where a household spends $6,000 on their credit cards each month. If the balance is paid in full from a mortgage account (or preferably offset – will back link in future article), the cost (more opportunity cost in this instance) at current mortgage rates of 4% is $240. If the balance is carried (e.g. one month behind where the balance and the where the interest is charged) at 20% is $1,200 a year. This is a difference of $960.

EVERY SINGLE YEAR OF YOUR ADULT LIFE!

Taking into account compounding and inflation (a couple of my favourite topics) over 60 years is $569,909. OVER HALF A MILLION DOLLARS!

Banks love that you carry a balance on your credit card because the above is the income they receive from a large number of the Australian population over their lifetimes. People love criticising banks over their massive profits.

If you can’t beat them – join them. Perhaps buy some bank shares (unless you think Australian property is overvalued on a range of metrics and Australian banks are holding a ticking time bomb of bad debts if interest rates increase, unemployment increases, wage growth continues to stagnate etc).

Take away points:

1.     With discipline, credit cards are an effective interest free tool;

2.     You should only have a credit card if you have the cash (or a 100% certain future cash-flow) to pay off the card in full;

3.     You should never pay a single cent of credit card interest in your life;

4.     You should never pay a single dollar of annual fees (one caveat – if you can acquire masses of frequent flyer points at efficient cents per point rates – I will back link once I write the article); and

5.     Zero interest introductory rates can be used with caution (but please compare the effective after tax hourly rates of the effort).

What are your opinions on credit cards?

You’re welcome.

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Mawer Money is a Social Enterprise assisting the world with Financial Empowerment.

www.mawermoney.com

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Lotto and Investment Returns: A unique case study

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Everyone who knows me knows I love spreadsheets. I have a hundreds of spreadsheets for a range of different purposes (investment, taxation etc.) which come in useful for both my clients and my personal interests. I have recently revisited one of these models which analyses a person’s ‘investment’ (I use the term loosely) in lotto.

I speak to a variety of people every day about making prudent financial decisions. I frequently state that your net worth is the culmination of every small and large financial decision you have ever made.

One of the topics I speak about often is compounding (Albert Einstein was once asked “What do you, Mr. Einstein, consider to be man’s greatest invention?” He didn’t reply the wheel or the lever. He is reported to have said, “Compound interest.”). Investing small amounts on a periodic basis and leaving the income in the investment to ‘earn interest on the interest’ can lead to great outcomes.

This concept can be applied to lotto and the decision whether to buy a lotto ticket or save / invest the same amount each week.

Let’s picture the scenario where at the age of 18, a person purchases a lotto ticket every week until they retire at age 65. All we need is two assumptions (and a spreadsheet) to illustrate this example:

  1. The lotto ticket costs $17.70 (current price of a Saturday Lotto Ticket (Slick pick 25))
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2. An after tax rate of return of 5% (relatively conservative)

Below shows the growth in the value of the funds built up over time (send me a message if you want the full spreadsheet):

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At retirement, the person will have over $175,000! Given the latest second division prize for Saturday lotto, this is equivalent to winning second division more than 15 times (once every three years!):

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Therefore if you never buy a lotto ticket, you are guaranteed to win second division many times over. Even if you put the money in the bank and achieved an after tax rate of return of a measly 1%, you would still end up with over $50,000.

Knowing this, what is your opinion on lotto tickets now? Are you still willing to risk over $175,000 for the very slim chance (don’t get me started on these odds!) to win a million or two in first division? Feel free to comment below.

You’re welcome.

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Mawer Money is a Social Enterprise assisting the world with Financial Empowerment.

www.mawermoney.com

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Expensive Motor Vehicles – why don’t you just burn your money instead?

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Motor vehicles (in excess) are one of the biggest wastes of money. Our household has a Toyota Corolla and a Hyundai i30. Some people may think that such vehicles ‘do not befit a business advisor and an engineer’. My first car I had while at university was a 1L Suzuki Swift. It did not have air conditioning, it did not have power windows, it did not have power steering and it did not go all of the time (one time in fact it broke down because the cable to the battery came loose). I therefore feel exceptionally fortunate that I now have a car that is reliable and takes me from A to B in relative comfort.

Let’s condense this down to two scenarios:

The average person spends $38,000 on a brand new car, say a Toyota Rav4, and keeps it for 4 years. It will be sold for $18,000. This is an annualised cost of $5,000 (being the $20,000 difference between the purchase and sale price divided by 4 years).

The smart person spends $15,000 on a second hand car, say a 2 year old Toyota Corolla, and keeps it for 8 years. It will be sold for $5,000. This is an annualised cost of $1,250 (being the $10,000 difference between the purchase and sale price divided by 8 years)

This difference is $3,750 of after tax money per car per year. Or $7,500 of after tax money per two car household per year.

Taking into account inflation and a rate of return of 5%, if you change your car habit from the average person to the smart person, you will have a million dollars in 35 years. Would you rather have a million dollars or try to impress others?

You’re welcome.

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Mawer Money is a Social Enterprise assisting the world with Financial Empowerment.

www.mawermoney.com

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This is where it all begins...

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Nigel Marsh said, “There are thousands and thousands of people out there living lives of quiet screaming desperation who work long hours, at jobs they hate, to enable them to buy things they don’t need to impress people they don’t like”.

I have a dream that all inhabitants of Australia (and the world) have at least a basic level of financial literacy.

This should be learned in primary school, high school, and prior to being able to purchase a property and take out a mortgage. Increased financial literacy will have a positive impact on not only the individuals with the knowledge but the community as a whole and the government as well. It will lead to greater mental well-being, less stress, reduced cases of depression, happier families, reduced incidents of domestic violence, less reliance on welfare, the aged pension and reduced suicide. This is too important for the world to ignore and has a range of simple (at least in my mind) fixes. I personally learned a long time ago that your knowledge is very powerful and no matter how simple the knowledge is to you, it can be life-changing for someone who does not know the knowledge yet (“You don’t know what you don’t know”).

I feel this is one of the most important challenges facing our country and I can see a path. I am making it my mission to improve the state of financial literacy in Australia (and the world). I call upon the government and forward-thinking organisations to support me in my quest to make our country and the world a better place.

“Sometimes it is the people no one can imagine anything of who do the things no one can imagine.”

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Click here to sign up to our Newsletter to receive the latest in Financial Empowerment and Personal Finance.

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Mawer Money is a Social Enterprise assiting the world with Financial Empowerment.

www.mawermoney.com

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