2. Know where you're spending your money

Taking small manageable steps can help you to develop a new behaviour or habit. Try tracking everything you spend for a short period of time, like over the next month. Why? It can give you insights into how you spend money now and may highlight how spending even small amounts adds up over time.

For example, if you bought a $4 coffee five days a week for a year that would cost over $1,000. Tracking it may also reveal those areas of spending that otherwise go unchecked, such as paying for subscriptions to multiple digital streaming services, that you may not use. Try jotting down every transaction in your preferred money diary – it could be on paper, a journal, a document or your computer or an app, for example Pocketboo[ii]. The choice of money diary is yours. To help get you started on tracking your spending, consider using this downloadable Money Diary from the Davidson Institute.

3. Set savings goals and budget to achieve them

Goal setting starts with seeing something in the future that doesn’t yet exist. To get an idea of what this future looks like, visualise it in as much detail as possible. By visualising what your goals are and the timeline within which you would like to achieve them, it is easier to create realistic steps to chip away at them over time.

When planning your goals, it is important to consider:

• What’s important to you about your money?
• Where do you want to live?
• What would be your ideal lifestyle?
• What is the right balance for you between work and lifestyle?
• What equipment you might need to help you with your work and entertainment – for example, a laptop?
• Where you might like to go on holiday?
• Whether you would like to experience living and working abroad?

An effective way to help you to achieve your goals is to set Specific, Measurable, Achievable, Realistic and Time-bound (SMART) goals.

For example, Linda might set herself the following goal:

• Specific: I want to visit Western Australia for 10 days in December 2021 with my partner.
• Measurable: I want to spend 10 days and nine nights. I want to pay less than $2,000 for airline tickets, no more than $2,000 for lodging and my total budget can be no more than $7,000.
• Achievable: I need to save $7,000 in the next 18 months (~$389/month) to make this trip around Western Australia. I’ll set up a monthly savings allotment, save all my tax refunds gifts, and find other ways to save as much as possible.
• Realistic: This is tied very closely to achievable and allows Linda to visualise the results of her efforts. Realistic means that while Linda may dream of staying at a five star hotel, there’s no point in doing so if it will consume all or most of her budget, and not allow her to do anything else at our destination.
• Time-bound: We will need to have $4,000 of my $8,000 by January 2021 to purchase our airfare and reserve accommodation (because I don’t want to leave these until the last minute).

A simple budget can help you reach your financial and lifestyle goals, allowing you to make considered choices about how you spend your money. It can help you allocate your spending to live within your means and work towards achieving goals like buying a new car Give this new money habit a go by completing the following sentence: “If I create and stick to a budget, I will be able to_____________________.”

Thinking about specific goals aligned to different stages or events in your life, can be a source of motivation.

4. Consider adopting the three-category approach to budgeting

One of the keys to a successful budget is to keep it simple. First, you’ll need to know how much is coming in – which may be through your after-tax income from work or investments such as interest income from your savings. Then you need to see where your money is going out – your expenses. When you look at your expenses, there are three important categories:

1. Commitments: This includes payments you have very little control over as they represent a legal obligation to pay, such as your rent, loan repayments, phone plan, plus utilities like your electricity bill.
2. Everyday expenses: Include things like your groceries spent on food.
3. Occasional expenses: Everything besides your commitments and everyday expenses falls into this third category. It represents expenses that we can control with our behaviours. It includes money you spend on fashion, gifts, and entertainment.

The three-category expense budget is simple to use and with the right action may have a positive impact on your financial wellbeing. To find out more about budgeting check out the Managing money guide (PDF 2MB) available from the Davidson Institute.

Once you've set goals, identified your income and expenses, and considered areas of your budget, you would like to manage, like savings, now it’s time to put your plan into action.

To minimise your occasional expenses, try ask yourself, “Do I really need this?” If the answer to this question is “No, but I want it”. Then ask yourself, “Do I want it enough, to go without something else?” You can then make the choice, whether you buy the thing you want and go without something else, or decide that even though you want this thing, it will have to wait until another time.

5. Apply the pay yourself first strategy

Saving on a regular basis is one of the most powerful savings tips to help you become more financially resilient and achieve your lifestyle and financial goals. One of best ways to do this is to pay yourself first. This means automatically putting aside a specified savings amount from each paycheck at the time you receive it into a separate savings account. In other words, you are paying yourself before you begin paying your monthly everyday expenses.

By using an effective budget, you may be able to begin a savings plan with your leftover monthly cash, after your expenses. Most savings accounts generally offer a higher interest rate than transaction accounts and can help you save by giving you less access to your money. And, if you leave the interest earned in your savings account it can grow through compounding interest. Compounding can create a snowball effect, as the original investments plus the income earned from those investments grow together.

Saving plans can be established so that a set amount is automatically withdrawn from your transaction account or pay and deposited directly into your savings account.

6. Plan for the unexpected

Some call it ‘saving for a rainy day’, but it’s essentially planning for the unexpected by having an emergency fund set aside. This is the money to give you peace of mind that if something unexpected crops up – the car break-down or you chip your front tooth - then you’re able to deal with it. Choose an amount that will cover your lifestyle and an allowance for mishaps and once you have that amount set aside continue to save for your other goals.

7. Work towards reducing debt

Debts may not always be a bad thing, especially when you are leveraging it to invest in yourself or your financial future. However, over the course of your life, you might be amazed by how easy it is to get into debt, and how difficult, it can be to reduce it. According to the Australian Bureau of Statistics[iii], in 2018 74% of Australians held some form of debt, the most common forms were credit card debt and home loans.

Some tips on what to consider when paying off your debt:

• Start by listing out how much you owe and the form of debt.
• Then prioritise your debts from highest to lowest by interest rate. Consider paying off debts with higher interest and fees first.
• Make a repayment plan.
• Work out if you can afford based on your budget and cash flow to pay more than the minimum repayments.

Also a credit card balance transfer may help. This involves moving balances that you owe from a high-rate credit card to one with a no-interest or low-interest rate to reduce the amount of interest you’re paying. The main advantages to consider with a balance transfer credit card are that it can help you to:

• Reduce the amount you pay in interest.
• Repay your debt sooner.
• Consolidate your debt.
• Get a credit card that helps manage your finances better.

It is important to remember that the 0% rate is usually valid for 12 or 18 months, sometimes more. Can you pay off the transferred balance during that period? If not, you’ll need to note that a higher interest rate will apply after the promotional rate has ended on any unpaid balance.

8. Maximise superannuation contributions

What’s your retirement plan? Let’s face it, retirement may be a long way off and feels even longer for someone who has recently started their working years. With life expectancy increasing and the desire to maintain current lifestyles into retirement the amount needed to support your retirement is growing. That’s why the need to plan, and to do so sooner rather than later, is important.

Superannuation can be a tax effective way to save for your retirement, for those on the higher income tax bracket. The superannuation guarantee is the amount an employer is required to pay into a super fund on behalf of an employee.

There are ways you may be able to boost your retirement savings:

• Salary sacrifice: Is an agreement between you and your employer where you contribute a part of your pre-tax salary to your super instead of taking it as cash.
• You are also able to make after tax payments to your super, up to certain amounts, as specified by the ATO.
• Combining your superannuation: Consolidating your super funds means moving all your super funds into one account. It makes your super easier to manage and saves on fees Check your insurance cover and how it will be affected if you consolidate.
• Spouse contributions: If you make a voluntary contribution to a complying super fund on behalf of your spouse who is earning a low income or not working, you may be able to claim a tax offset of up to $540 per year, subject to meeting conditions outlined by the ATO.
• If you are a low or middle income earner, you can take advantage of the super co-contribution payment by making eligible personal super contributions to your super fund or retirement savings account (RSA). The government will then match up to $500 of your personal super contributions.
• It is important to remember that caps apply to super contributions and any super contributed over a cap amount is subject to extra tax (see the ATO website for more information).

9. Consider investing as part of a broader financial plan

When it comes to financial investments, if you contribute to your superannuation and already have a regular savings plan, and you still have some spare money, then you might want to consider putting it into other investments to maximise your long term returns.

When you start looking at investing options, it’s easy to become overwhelmed by all the information. Therefore, it helps to get expert advice. The more informed you are the more confidently you can make decisions. A great source of information and expertise is a professional financial planner.

With the right help you can invest to either grow your assets and create long term capital gains or create more cash flow or both. Regardless when it comes to money, time is your most valuable asset. The most successful investors know that, to achieve a good quality result, investing takes time. So, one of the best investment decisions you can make is to start investing sooner rather than later so you have a better chance of reaching your goals. When considering your investment plan, it is important to consider two things:

• Your attitude towards risk. This should be one of the main drivers of your investment decisions as you need investments that let you sleep soundly at night but work hard towards your financial goals.
• The risk-return trade-off. There is always a trade-off. This is the trade-off between the risk you run that the investment might not perform and you may lose money, against the return that you are likely to get. Generally, the higher the return, the higher the risk.

Alfredo Gaxiola has worked on numerous IRS problem cases and has successfully settled with the IRS to release liens on houses, bank accounts and wages and, if needed, setting a payment installment plan that is not burdensome for the client. He has conducted appeals before the U.S. Tax Court and obtained favorable resolutions in reducing the tax debt of his clients. Mr. Gaxiola served as Treasurer of Camara de Empresarios Latinos, one of the largest and strongest Hispanic organizations in the city of Houston. He has conducted financial and accounting seminars for the Houston Small Business Development Corporation, as well.