Tools and strategies for effective financial management Flashcards
What are the tools and strategies for effective financial
management
- Importance of monitoring and record keeping
- Budgets
- Saving Plans
- Superannuation
About the importance of monitoring and record keeping
Taxes and charges, bank fees, rent, mortgage payments and bills quickly take a large proportion
of the money we earn. These expenses are fixed expenses; that is, they are the same amount every time. For example, on your mobile phone plan you may have to pay a minimum charge of $40 per month. Other types
of expenses are variable and change over time. For example, you may buy a jumper this month and go to
the movies next month. The secret to managing money is to keep accurate records of the money coming
into and out of your account, monitor your balance and minimise your expenses wherever possible.
About Budgets:
If you are still not satisfied, you will have to modify some fixed
expenses; for example, walk to work or school, and make your own
lunch. If you are not able to reduce your spending, you either have
to earn more income, borrow money or go without. Remember,
though, you should borrow only if you are certain you can make the
repayments.
If you are a compulsive shopper, you will need to monitor your
spending very carefully, especially if you use some form of credit.
Set up a budget, try to save on a regular basis no matter how small
the amount, keep accurate and up-to-date records, monitor your
spending and avoid overcommitments. Following these practices
will help you manage your finances responsibly and provide greater
financial security.
A budget should follow a number of steps, these are:
STEP 1 Calculate your total income
STEP 2 Record your expenses
STEP 3 Total your expenses
STEP 4 Compare your total income with your total
expenditure
STEP 5 Assess your financial position
What do you do for STEP 1 Calculate your total income, about budgets?
Calculate and record all the income you are likely to receive.
What do you do for STEP 2 Record your expenses, about budgets?
Make a list of all your expenses. These should be divided into two types: fixed and variable.
What do you do for STEP 3 Total your expenses, about budgets?
Calculate and record the total of all your spending.
What do you do for STEP 4 Compare your total income with your total expenditure, about budgets?
Calculate whether you have sufficient income to meet your total
expenses.
What do you do for STEP 5 Assess your financial position, about budgets?
If necessary, modify your budget. This may mean taking steps to reduce your expenses or to increase your income.
What do budgets help with?
Budgets help you to not spend more than you earn, by keeping record of your money so you know how much goes where.
What is a valuable commerce lesson, relating to Savings plans:
a valuable Commerce lesson: you can do two things with money — spend it or save it. Russell can, however, do both by spending some of his earnings responsibly and working out a
regular savings plan.
Why do people save?
People save for many reasons, and these reasons change at different stages of life. For example:
* Teenagers might save for a laptop, a car or a big holiday at the end of Year 12.
* On leaving school, young people may wish to experience the excitement of living in an inner-city
location. The cost of living in such areas can be high, especially accommodation costs, and may make
it difficult to save. People living in remote rural communities also experience high living costs,
especially for food and household items, due to the added expense of transporting supplies to
isolated areas.
* Houses are so expensive that not many people can afford to pay cash for them. First-home buyers must
save for a deposit and arrange the rest through a loan.
* For wage or salary earners with children, the saying ‘saving for a rainy day’ means that it is important
to have some money saved in case illnesses, accidents or other emergencies affect them or their
dependants.
* Older people save for their retirement by putting funds aside in a superannuation plan. They want to
have a good lifestyle and to feel secure in their old age.
* Whatever a person’s age, saving money gives some people a sense of satisfaction and pleasure. When
they look at their savings balance, they feel a sense of achievement. Also, having access to savings and
not living from pay to pay reduces stress. Knowing that they can get by if an emergency arises
provides many people with a sense of security.
About Superannuation:
In Australia, superannuation is a compulsory savings scheme for retirement. Over your working life, you
pay into a fund and then when you retire, you receive either a large lump sum or a pension.
What are the two types of superannuation funds, and explain each one:
You can choose between two types of superannuation funds: a retail fund or an industry fund. These
differ as follows:
* Retail funds are usually run by banks or investment companies. They will offer many investment
choices but the company that owns them will also keep some of the returns as a profit.
* Industry funds usually offer less choice, but any profits are returned to the members. Originally, many
industry funds were trade union based. (Trade unions are organisations that represent employees and
try to improve their wages and working conditions.)
