Time to read : 8 Minutes
Every house is only as strong as the foundations on which it is built. Strong foundations allow us to build big things that stand the test of time and allow us to live comfortably – rain, hail or shine.
The same is true of our financial health and wellbeing. There’s no point in buying property – or any type of investment – without first having robust financial foundations in place. Wobbly foundations are like a teetering house of cards, ready to give way at any moment.
In the very worst-case scenarios, I have seen people lose their homes, not because there was anything wrong with the property itself, but because their weak financial foundations gave way underneath them. They quite literally couldn’t afford to keep a roof over their head. The effects – financially, mentally, physically and socially – can be devastating.
This isn’t meant to scare you. I want to point out just how crucial it is to get your financial foundations strong – and keep them strong as life’s journey runs its course.
What are the financial foundations?
There are five foundations we need to live and thrive. Each is important and interconnected in many ways.
Let’s explore each foundation in detail to understand the role they play in delivering financial stability and independence.
1. Emergency fund
While we hope they never strike, it is a sad fact of life that emergencies can and do happen. Often with little to no warning, such as:
natural disasters
scams
relationship breakdowns
illnesses
accidents and injuries
redundancy
pandemics
the untimely death of a loved one.
Emergencies are stressful enough without the added uncertainty of how to pay for your (and your kids’) next meal or where you will sleep that night, which is why an emergency fund is so important.
This is money that is specifically set aside for a rainy day so that you don’t need to raid your savings or run around trying to sell assets in a fire sale at a time when you are distracted and distraught.
It should be easily accessible in a hurry. And crucially, it should be exclusively your own – a ‘get out’ fund should you ever need to leave, for example, an abusive situation.
How much is in your emergency fund is as unique as you are. Some people feel comfortable with $10,000 in the kitty. Others need more. And others still can get by on less.
As a general guide, I recommend having enough money set aside to cover your essential bills for six months. This safety net can significantly reduce the pressure of staying safe, fed and sheltered during an emergency, allowing you to focus on your longer-term recovery.
2. Spending and investment plan
If you’re anything like me, the word ‘budget’ sends a shiver down your spine (there it goes). It’s like a ‘diet’ – sapping all the tasty goodness out of life, reliant on willpower alone to see it through.
A budget only tells half of the story – what is (and is not) going in – not what is happening in the bigger picture.
That is why when talking about money, I prefer the term ‘spending and investment plan’. It provides a holistic view of our finances and how we are tracking towards our financial goals. And if we’re being realistic, we have to spend money to live. So, it’s better to track that spending and understand where it goes.
Your spending and investment plan should cover all your incomings:
wages
investment returns
trust income
any inheritances and windfalls received.
It should also cover your outgoings:
essentials eg food, utilities, housing
important things eg car, clothing, lifestyle
luxuries – at some point, you’ll want to treat yourself, so it’s better to have that cash already set aside than rack up credit card debt or use Buy Now, Pay Later schemes.
In my own spending and investment plan, I actually break things down even further into small pots, including:
mortgage repayments (or rent if you don’t currently own a property)
bills (fixed commitments like groceries, utilities, insurances, car, gym membership and other regular bills)
credit card repayments (paid off in full each month so that there is no interest accruing)
pocket money (an allocated amount for fun things like eating out and entertainment)
savings and investments
holidays (essential to our wellbeing)
giving to others (even a little bit goes a long way).
Having this level of visibility over your money is really empowering. You can see exactly how much money is coming in and when.
You can also track just how much you’re spending at any given point in time and where that money is going. Think about those unused subscriptions you completely forgot about, which have slowly but steadily eaten away at your savings!
Armed with all this information, you can quickly and easily make changes if needed to stay on track towards reaching your longer-term goals.
Important: this isn’t a set-and-forget document. Your plan needs to live and breathe with you.
So, every time something changes, be sure to update your plan as soon as possible so that you can see its impacts on your bottom line in real time. It may be a pay rise at work or an unexpected windfall, or it could be a new expense (such as the arrival of another child or fur baby, the purchase of an investment property or the addition of another car).
3. Insurances
Most people tend to think of insurances as a financial drain. But consider them this way: insurances are back-up plans.
You can enjoy the peace of mind of knowing you’re covered should things change in the future. In 2022 alone, insurers in Australia paid out a staggering $36.5 billion in claims.
Having insurances can help you recover substantially faster from an unexpected loss, keep a roof over your head, and offset much of the out-of-pocket costs.
There are two key aspects to insurance: having enough coverage in the first place and ensuring that they remain fit for purpose.
It isn’t enough to just pay your premiums every month, quarter or year if they don’t offer enough protection should you need to make a claim or don’t cover your like-for-like replacement costs.
It’s also not useful to pay for insurances that you don’t actually need. A good example of this is maintaining pregnancy and maternity cover under your private health insurance once you have reached the stage of life where more kids simply aren’t possible.
Review your insurances regularly to make sure they are still fit for purpose and that they offer you value for money. For instance, you will likely get a better deal on your car registration and CTP if you shop around instead of simply paying the renewal notice from your existing provider.
For things like home and contents insurance, consider how the high inflation of recent years has ballooned replacement costs, so you may now be woefully underinsured if you don’t adjust the replacement values.
On the flip side, it often pays to get in early with insurances because you will be covered earlier in life when you have fewer assets and lower income to fall back on.
Not only that, some policies, such as health and life insurance, have age restrictions and financial penalties if you join later than recommended.
For example, private health insurance may apply additional loadings or exclusions depending on the risk you present. As you age, options for cover decrease, and inclusions may shrink – even as premiums rise.
Certain super funds may insure you for $250,000, but that amount reduces annually to maintain a consistent unit cost. Additionally, some insurers won’t cover individuals over a certain age, such as 60. Others may decline coverage due to health issues or being deemed too high a risk by actuaries. This highlights the importance of securing policies earlier, when terms and conditions are typically more favourable.
When it comes to property specifically, there are a few types of insurance you’ll want to explore, depending on your particular circumstances, such as:
house and contents (for your home and everything in it)
contents only (also known as renters insurance, which just covers furniture, etc.)
landlord insurance (for investment properties, to cover damage to or theft from the property as well as loss of rent – effectively doubling as income protection insurance for your rental income).
Make sure that whatever policies you have cover the full replacement costs as they stand today, and review them regularly to see if you could be getting the same – or even better – cover for less money from the same or a different insurer.
4. Superannuation
Given that it is typically locked up until you retire, superannuation often attracts a lower tax rate than the rest of your income and has many other tax benefits attached to it, making it a powerful tool for funding your retirement.
Sadly, though, many Aussies don’t give super much thought during their middle years. They set it up with their first job, then don’t really think about it again until they hit 50 or so and begin thinking about retirement.
But stop here to consider this point: it is your money. So, by leaving it to its own devices and not making it work its hardest for you, the only person you’re short-changing is your future self. Treat your superannuation like any other asset and regularly check in with it to keep it in tip-top shape.
Don’t forget that some types of insurance – such as life, total permanent disability and income protection – can be taken out within your super. While this means one less bill from your everyday finances, it does reduce your super balance. Some policies may offer more generous terms and conditions when taken out through superannuation than directly, and for others, vice versa. It’s worth noting that trauma/critical illness insurance, which is often the most commonly claimed, must be funded from your cash flow.
Generally, when it comes to the details of the policy, no two policies are exactly the same, and if one is significantly cheaper, that is a red flag. Always seek professional advice to avoid a mistake.
Looking after your super is even more important for women. Statistically, Aussie women live 4.1 years longer than men. Yet various factors, including the gender pay gap (currently 21.7%), mean we have less money in super. In short, we have to pay for more and do it with less.
Many women rationalise by saying, ‘It’s ok, my partner has enough in super for us both’ – only to be caught out when the relationship breaks down. Their partner has done something wild with the funds, or done nothing, or their partner’s health deteriorates, draining those funds more rapidly than planned.
5. Estate planning
First things first – yes, estate planning includes your will, but it’s far more than that.
Estate planning covers what happens after you’re gone as well as how decisions are made over your healthcare, living arrangements and assets if you become seriously ill or incapacitated (think palliative care, stroke, dementia, brain injury from an accident and so on).
Who do you really want to call the shots for you? Would they do so in your best interests or their own? Would they even know what your wishes are if you haven’t written them down? Even if you have verbally told your loved ones, they can easily forget amidst the stress of you being in the hospital and the pressure of doctors demanding answers on the spot.
Your financial wellbeing – now and in retirement – rests on what you do today. As does the financial wellbeing of everyone who will benefit from your estate once you are gone. It pays to give this proper attention here and now while you have the capacity and clarity of mind to do so.
Factors to consider include:
Your will, which should be updated after major life changes, such as marriage, separation, births, deaths, inheritances, major asset purchases, moving home, etc.
Executor selection, which covers who your executor will be and whether you should have a secondary executor.
Power of attorney/enduring power of attorney to delegate someone who can make legal, financial and medical decisions on your behalf.
Advanced Health Directive (AHD), which is an outline of what (if any) medical treatments you want to receive in particular situations, such as if you are in a coma. This involves more than just ‘switch me off’ – think pain relief, hydration, resuscitation, medications, transfusions, transplants, etc.
Letter of wishes, which is an outline of your views and hopes about non-financial matters, such as how you would like your children to be raised, if you are leaving funds with the intention of private schooling/university fees, or who will look after your pets, as well as instructions for your funeral arrangements.
Testamentary trusts, which are tax-effective structures for managing inheritances that can provide asset security and protection against bankruptcy, that can also be used to release inheritances gradually. For instance, you may want to release some money for a child at age 17 to buy a car, 18 for tertiary education, 25 for a property deposit.
Custodianship of underage children and provision for them.
Tax effective structures for your beneficiaries to maximise how much they receive from their inheritance and minimise how much the Australian Tax Office (ATO) gets.
Structures to keep the assets in the bloodline.
Bottom line
Money is a complex business. Really complex. This is why financial advisers, accountants and lawyers go through so much study to become – and stay – qualified. There is so much to know, and the laws around tax, superannuation and financial affairs change all the time.
With that in mind, I cannot recommend strongly enough that you seek professional advice to get your financial foundations as strong as they can be. The costs of getting things wrong can far outweigh the fees of getting the right advice from the outset. Plus, you get to enjoy the peace of mind of knowing that your money is ticking along nicely, allowing you to focus your efforts on the next big thing – such as buying that property!
Edited extract from Money For Life: How to build financial security from firm foundations (Major Street Publishing $32.99) by licensed financial advisor Helen Baker.
Disclaimer
The information in this article is of a general nature only and does not constitute personal financial or product advice. Any opinions or views expressed are those of the authors and do not represent those of people, institutions or organisations the owner may be associated with in a professional or personal capacity unless explicitly stated. Helen Baker is an authorised representative of BPW Partners Pty Ltd AFSL 548754.
