Making Your Money Work

Your own plan will help you control your money. If you set some goals, make a plan and stick to it, you can make progress even with ups and downs along the way.

What do you want to achieve?

Would you like to:

• Pay off your credit cards?
• Buy a new car and pay it off quickly?
• Buy a home and pay it off quickly?
• Save for your children's education?
• Put some money aside for your retirement?

These are some typical financial goals. Others include paying off personal loans or saving up for a holiday. Write down your own goals as the first step in your plan.

How long will it take to reach your goals?

Some goals may be urgent, for example getting credit card debts under control and paid off. Remember how Nat and Sam's credit card debt had gone up? Paying almost $500 each year for just $3,000 (16.5% interest) is very expensive, so they would probably need to fix this soon.

Longer term goals, for example buying a home or saving for retirement, can be just as important. Because they cost a lot of money, the sooner you start working towards them, the sooner you can achieve them, even if you can only spare a small amount of money. It can cost a lot more to do these things later.

In the table on the next page, based on Nat and Sam's situation, we have:

• drawn up some financial goals
• estimated how long they may take,
• and noted some things to do to get started.

Using your own goals, you could draw up a similar table for yourself. If you're not sure about some of the things you need to do, come back to them after reading the ideas in this website.

Nat and Sam's financial goals, time needed and how to start

Goals	Time needed	Their strategy
Pay off credit card	In two years	Stop using the cards. Instead, use a card that debits their savings account, so they spend their own money, not pay to use someone else's. Check how much they need to pay monthly to get rid of the debt within 2 years, and stick to that amount each month.
Pay off new car	In three years	Work out how much they can afford to pay per month, including the cost of insurance. Choose a model within their price range and shop around for the best price Make the biggest deposit they can Shop around fro the best loan, as well as the car. Maybe extend their mortgage, so long as they pay off quickly the extra they borrowed.
Buy a home and pay it off	Long term	Work out how much they can afford each month, and look around in their price range. Shop around for interest rate. Make payments fortnightly and pay a bit more than required each time. If it won't cost more in interest, a redraw or offset savings account can let you put any extra money you may have, including your pay cheque, on your mortgage.
Save for children's education	Medium to long term	Set up a long term investment account that they won't touch. Check personal finance magazines about suitable long term investments.
Put some money aside for retirement	Long term	Put more money into superannuation (more on super later). If their funds offer investment choice, consider which option best meets their needs.

How much will each goal cost?

The next step in planning your finances is to estimate how much your goals may cost, and compare that cost with what you are saving. Then you can see if there's a gap to close.

Estimating costs is fairly straightforward for the goals you have already started, such as loans you are paying off. Useful internet loan calculators can show how much a loan will cost, and how your repayments are affected by shorter or longer term loans. To estimate long term savings and investments, we will show you some calculations for Nat and Sam, which you could use or adjust. Later we'll offer some extra figures on super and saving for retirement.

What Nat and Sam's financial goals will cost

Nat and Sam's goals	On track?	Cost / month	How they worked this out
Repay a $15,000 car loan in three years	Yes	$463	Borrowed more against their home loan at 7% interest, and increased their payments by $463 to pay the car off in 3 years.
Pay off $3,000 credit card debt in two years	Yes	$148	Interest is 16.5%. Stopped using the cards immediately.
Buy a $320,000 home, pay it off in 25 years	Yes	$1,843	Borrowed $250,000 at 7.47% interest. (Their families helped with their deposit of $70,000 plus $15,000 for costs.)
Save $21,000 towards children's tertiary education in 10 years.	Not started	$120	Invest an initial $2000, and contribute for 10 years, earning 5% after tax each year.
Make extra super contributions	Not started	$363	'Salary Sacrifice' an extra 10% of salary.
Total cost per month		$2,937

A gap between your goals and your savings?

Is there a gap between what you can save each month and the cost of your goals?

1. What's the total cost of Nat and Sam's goals each month?	$2,937
2. Subtract the total amount they are already paying for what's on track	-$2,306
3. Here's the cost of what they have still got to pay for	$631
4. Subtract what they are saving now	-$230
5. Here's the gap between their savings and the cost of all their goals	$401

The gap between Nat and Sam's savings and their goals are shown in the table here. Nat and Sam's goals cost more than they can spare from the $161 they save each month. They can't afford to start everything today, but they can afford to do some things that will close the gap within a fairly short time.

Suppose they grit their teeth, stop using their credit cards and use what they save to pay off their cards in two years. Around the same time, they will also have paid off the car. Their costs then drop and so their savings increase to $665 per month.

So in two years, there's extra money to pay off their home loan faster and put some money aside for the children's education. They can achieve their goals if they make a start, even if it takes two years longer than they would have liked.

Closing the gap means finding ways to free up cash that you can devote to your financial goals. Usually the top priority is paying off high-interest loans. When you achieve that goal, you can channel the extra money you save into your next goal, and so on.

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