There's a lot of choice in how you handle your finances, and none of it is covered in school. How do you allocate your money? How do you buy a house and save for retirement and raise your kids? What should you know?
We all need to start with some basics, so here's five things you should know about finance.
1. Official Cash Rate: The Reserve Bank (RBA) sets the benchmark for what it costs to borrow money. The central bank meets once a month and decides on the official cash rate, and lenders add on to this for their mortgages etc. The RBA uses interest rates to influence the economy and to keep inflation between 2 and 3 per cent. Right now rates are low, but when inflation starts moving up, so will interest rates. So pay attention.
2. Mortgage: A home loan is generally the cheapest debt you can access in Australia. So it should form a part of your wealth-building plans because you pay a low interest rate over many years to buy an appreciating asset. Down the track your lender might allow you to refinance the loan to put other higher-interest debts under the low-cost mortgage. Read the fine print on a mortgage: a 4.89 per cent home loan might also quote a comparison rate of 5.09, and this second rate is what you'll actually pay.
3. Credit Cards: A credit card (and a store finance card) is a short-term, unsecured loan facility that comes with a 15 to 20 per cent interest rate. So if you have a $5000 credit card balance charging 18 per cent, and you only make minimum monthly payments, it will take 33 years to pay it off, with interest of $12,181. The trick to this kind of debt? Use it short-term, and pay it off as fast as possible. If it becomes hard to pay it off, talk to your lender about folding it into your mortgage.
4. Superannuation: Super is the best way to build retirement savings because of the tax breaks and the fact that employers have to contribute the money anyway. Most retirees will need a superannuation balance of about $1 million a couple (assuming home ownership). The current superannuation guarantee contribution is 9.25 per cent of your earnings, but in order to have sufficient savings, you should be saving closer to 15 per cent. So top up with your own contributions.
5. Investing: Over a 10-year period, investing in Australian shares gives you returns of about 9 per cent a year, but you'll experience volatility. A savings account is virtually zero risk but the yield is low and you risk having your earnings subsumed by inflation. All portfolios need to be diversified, with different allocations according to your age and stage.
The basics are a starting point, but everyone should consider advice from experts, especially when it comes to important decisions such as superannuation, investing and a mortgage. Be informed and make good decisions. And good luck.
What do you think? Talk to me on Twitter @markbouris
Mark Bouris is executive chairman of wealth management company Yellow Brick Road.