Amassing capital is actually very easy, all it takes is a little discipline. And there’s no need to be a financial expert – although the more research you do, the more opportunities there are. Just follow a few basic principles and understand the power of compound interest and you’re half way there.
The hardest part about getting together a nest egg is starting. Once you’ve done that, the process is easy. Here are the very first steps you should take.
Work out your budget
This is the most boring part of building your nest egg but also the most important, because it lets you see where your money is going and how you can allocate it more efficiently. For a week or a month, write down absolutely everything that you spend, whether it’s cash or credit card. You will quickly see what you can cut down on, and how much you could have left to invest each month.
Don’t forget to work out how much regular items cost you over a month or year.
Your budget might reveal for example, that your daily $2.60 takeaway coffee adds up to almost $1000 a year. There’s nothing wrong with spending that much on coffee. But you might start thinking: ‘If I invested that $1000 each year, how much would I have after 10 years? – and would I rather have that nest egg than my daily coffee?’
There’s an excellent budget planner on the Australian Securities and Investments Commission consumer finance website,
www.fido.gov.au.
This powerful budget planner is quite an amazing tool, and even includes a converter to turn annual and quarterly payments into weekly, fortnightly and monthly amounts.
The link is:
http://www.fido.gov.au/fido/fido.nsf/byheadline/Budget+planner?openDocument
Pay off all your ‘bad’ debt
Good debt is money you’ve borrowed to buy something that will increase in value, for example a mortgage. Bad debt is money you’ve borrowed to buy something that will decrease in value, such as a car. The baddest debt of all is credit card debt. Paying off all your bad debt stops you paying interest to the big financial institutions and gives you extra money that, invested wisely, will make interest work for you.
Regular savings
We’ve seen how the price of that daily cup of coffee can add up over the years. In the same way, saving even a small amount on a regular basis can soon add up. Just $25 a week adds up to $1300 a year.
Three golden rules
Every now and again there are horror stories in the media about people who have lost their life savings in a dodgy investment scheme. The way to avoid this happening to you is to follow the three golden rules:
The higher the return, the greater the risk: You may make a higher return on your investment by investing a stock that sets the share market alight than by just sticking your money in an online savings account, but there’s also a much greater chance that the shares will plummet. Choose a level of risk that you are comfortable with.
Never ever put all your eggs in one basket: this means investing in a variety of asset classes (cash, fixed interest, shares, property) with a variety of financial institutions/investments. You may even want to invest some money in Australia and some in overseas investments. If one institution or investment goes completely belly up, you will lose only a fraction of your wealth, not all of it.
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f it sounds too good to be true, it is: if your bank is paying 6 percent interest on cash and someone else is offering 20 percent, alarm bells should be ringing!
Disclaimer: Information provided is for educational purposes and does not constitute financial product advice. You should obtain independent advice from an Australian financial services licensee before making any financial decisions.