Every fortune starts with the first dollar. Whether we have a million dollars or owe a million dollars a financial plan can improve our situation.
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There are several principles that can be followed in order to get ahead financially.
First we must have an income. Our income must be enough to cover basic living costs, plus a little extra.
This is because it is essential that we spend less than we earn. We need a surplus, even if it is small, that can be put towards wealth accumulation.
The first use of our surplus should be to pay down debt. It is normal for young people to have debt. Unless they have substantial help from parents they must borrow to buy household furniture and equipment, and a car.
Our income surplus should pay down the highest interest cost debt first. If we have credit cards or retail store debt that costs 20 per cent or more it should go as soon as possible. Not only is it expensive it isn’t tax deductible.
Home loans usually cost the least and are lower priority.
Debt reduction is a method of wealth accumulation. If we owe less our net asset position is greater. However not all debt must be paid off. Very low cost or tax deductible debt need not be repaid so quickly.
For example retail store or credit cards that have an interest free period can be used but the debt must be repaid before the interest starts. This is especially so with store debts that add backdated interest if the debt is not repaid in the interest free period.
Once high interest debts are paid off we can start a savings plan.
Arranging a small, regular amount to go automatically to an investment account is the least painful way to build wealth. A bank account can be a starting point but the interest is very low.
If we are saving for a medium to long term we can use a managed fund savings plan.
These can be started with $1000 initially plus $100 per month. They should earn much more than bank accounts by investing in shares and property.
When our savings plan builds up we can buy specific shares, property funds, or an investment property. It is also important to look for tax advantages.
Superannuation is very tax-sheltered. There are tax concessions when we contribute by salary sacrifice, on the ongoing earnings, and when we receive our benefits.
One of the most powerful strategies is to borrow to buy appreciating assets. If we borrow to invest the interest is tax deductible. If we borrow to buy an investment property, or a portfolio of shares or managed funds, the returns should be much greater than the net interest cost.