The Foundation Building Blocks of your Financial Future: Budget, Debt Management, and your Balance Sheet

Oct 22, 2018

Welcome to Finance & Fury!

Today’s we’ll be looking at how to start, once you’ve set your financial goals. This is the starting point for anyone looking to get a plan in place.

1. We have talked about goals in past episodes, but we haven’t really gone into much depth.
2. Goals and Reality – Setting goals and then making it a reality

So, where do you start? If you have your financial goals in place that’s a great start.

1. It is about having a strong foundation for the plan and covering the basics.
2. What are the basics to start a plan? We will look in depth at each one of these and what to do with them
   • Budget
   • Debt Management
   • Personal Balance sheet

The Foundation Building Blocks

1. Budget: Cashflow is King
   • Cashflow Components - Income, Taxes, Net Cashflow
     • Gross income - What you get from employment or investments
     • Taxes (what is taken out) - Based on marginal tax rates which progresses in brackets
       • Tax Free Threshold - the first $18,200 at 0%, then the next tax bracket is 19%, etc
       • Then, you need to add on the Medicare levy which is currently 2%
     • Net Income/Cash flow – which is gross income minus taxes
   • Net cash flow uses
     • Daily living expenses (essentials) – Housing, food, utilities, etc
     • Discretionary spending – Everything else on top
     • Savings/Investment (what you have left to put towards your goals)
     • Previous episode - Pay Yourself First; “Why work your whole life, just to have nothing left over?” 
2. Debt Management
   • Bad debts - Personal Debts or non-investment assets that have debt attached to them.
   • Avoid at all cost – it’s selling yourself down the river
     • Uses cash flow – To repay loan
     • Works like a negative investment – Costs you interest, up to 21%
   • Don’t get into too much bad debt – for example: Credit cards and personal loans
     • $10,000 of a personal loan
   • If you have personal debts make a priority to get rid of it
   • Good debt – Plan and manage
     • Negative gearing – Can be good for high growth investments
     • Goes against the budget metrics – Only as good as getting your marginal tax rates back
3. Balance Sheet
   • Starting point – Types of assets
     • Lifestyle – Ones used for personal use – Personal Home, Cars, etc
       • The ones that Bad Debts are attached to
     • Investment – Assets for investments: Shares, Property, managed funds, etc.
       • Good debts are attached to investment assets
       • This should be a main focus
   • Targets for investment advice
   • • Fill in the gap – The Rule of 20 allows you to determine roughly what you’d need in the future
     • This is where you can keep track of your goals
   • • Here is an excel sheet for you to use

This is the starting point

Now you need to make a plan, and then implement it

1. Get a budget in place – Increase what you’re putting towards your goals
2. Stay out of personal debt – pay off debts based on level of interest. The higher the interest costs the more important it is to pay this off quickly.
3. Use a balance sheet in order to keep track of your progress towards your goals.