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Owning a home

Buying your first home

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Hi, I’m Bron Lawson from Westpac’s Davidson Institute here to talk to you about “Buying your first home’. If you are watching this video, I’m assuming that you are thinking about, or are already in the process of, buying your first home. If so, congratulations! This is an exciting time but can also be a daunting one for many people. There is so much information to take in and so many decisions to make about what is potentially one of the biggest purchases you will make in your lifetime.

Our video aims to take some of the mystery out of the process and highlight some of the important things to be aware of.

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Buying your first home is a big step and for many people the first question is simply “Where do I start?” This is often quickly followed by “How much deposit do I need?” Then comes the challenge of Applying for a home loan. So, where do I start? Buying a home is a long-term proposition so it’s a good idea to take your time to think through very clearly what it is that you want, and to get to know what’s available in the market.

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So, start with your own personal goals. Are you a career-oriented person who is likely to spend a good chunk of your own time either studying or working, rather than cleaning a large house? Or are you a homemaker who loves to create a warm living space where the family can grow? Or are you an adventurer who would rather spend their time and money on travel rather than bricks and mortar?

Your goals, of course, are very closely related to the lifestyle you want to enjoy. So, make sure you’re very clear in your own mind what you want out of the property.

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For some the location will be dictated by where they work, family commitments, or even financial capacity. Others may have more freedom to choose. When selecting the location though think about not only the current situation but how things will change in the future. This includes thinking about what facilities the location offers, how that may change over time, and whether that is going to suit the future you have planned.

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The type of property you want comes into these considerations too. From studio apartments to double storey mansions … there are so many choices. But what is going to suit you, your personal goals, the lifestyle you want to have, and your financial capacity? The next step then is to do your research. There are lots of ways to do this.

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Property reports are a great tool. From general information about the state’s property outlook to detailed information on particular properties they are available from a number of sources, including your Home Finance Manager. Online is a great place to do your research too. Real estate websites such as realestate.com.au or domain.com.au not only provide you with information on properties on the market but you can also compare recent sales in the area and price trends over recent years.

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The process of purchasing a house can be quite complex. Therefore, it makes sense to engage professionals who can help you with the purchasing process. There are 3 key professionals who can help you on your home ownership journey. Real estate agents or buyers’ advocates can be a useful source of information, as they know the local market and property values. A word of caution for you as the buyer, however.

Unless you are using a buyer’s agent, remember that the real estate agent works for the vendor and will try to get the best deal for them – not necessarily for you as the buyer.

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While you can get a “do-it-yourself” conveyancing kit, it is safer to engage a solicitor or conveyancer for the legal side of the purchase. The conveyancing process can be very technical and requires diligent attention to detail. Those less familiar with the process may overlook things which could be costly in the long run.

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Getting your finances right is another important part of the process. You can talk to your bank to get help with financing the purchase, or you may decide to use a mortgage broker. Your financier and legal representative will also prepare the documentation to finance the purchase, complete the settlement of the property, and have the property transferred into your name.

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There are a couple of different ways you can purchase a property. Traditionally it’s been by private sale or private treaty as it’s also known, however auctions are becoming more commonplace now too. Whether the sale is via auction or private sale will depend on which method the vendor believes will achieve the best price for them.

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The first step in a property purchase is to obtain a finance pre-approval. That way you’ll have peace of mind that when you identify a property you should be able to make a confident offer within the parameters of that approval. A private sale generally involves the vendor listing the property with an agent, who will advertise the property to attract buyers.

Depending on current market conditions, the price expectations of the vendor and the effectiveness of the marketing, a private sale can sometimes take months to complete.

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The buying process, once you have identified a property to purchase, involves you making an offer via the agent who will negotiate the contract between the vendor and you, the purchaser. Aside from negotiating on price, other contract conditions that can be negotiated include things such as the required deposit, the property being subject to building and pest inspections, finance approval dates, and settlement dates.

It’s recommended that as a minimum you negotiate the contract to be conditional upon building and pest inspections, and also finance approval.

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Once you have signed the contract and paid your deposit it’s important to arrange home insurance as soon as you can. As soon as that contract is signed, and you have paid your deposit, you have a financial risk should something happen to the property. Then organise your building and pest inspections and finalise your finance approval. Once these conditions have been met the contract is referred to as being unconditional.

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Engage a solicitor or conveyancer to complete all the property searches and prepare the documentation for the transfer of the property into your name. Your bank and legal representative will then arrange ‘settlement’ with the vendors representatives. It’s important to ensure in the lead up to settlement that you have money available to pay your upfront costs as well as any balance of deposit.

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The benefit of a private sale to you as the buyer, is that you have more time to consider the deal that is on the table and have none of the immediate pressures involved in an auction. Another benefit is that there is often a cooling off period so if you change your mind you can withdraw from the contract without penalty within that period. The auction process on the other hand, while similar, has a couple of notable differences.

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An auction can be viewed as a bidding competition where people interested in the property bid for the right to buy it. Properties being auctioned typically have a ‘reserve price’ set, which is the minimum amount that the vendor will sell the property for. Once this price is reached, the auctioneer then pronounces the property ‘on the market’ and bidding begins in earnest because at this point the vendor now must sell to the highest bidder.

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If the reserve price is not met, then the property is ‘passed in’ as no bidder was successful. The vendor and agent then need to reconsider their strategy to sell the property. Often auctions are held at the property being sold and can be over very quickly – sometimes in as little as 10-15 minutes - meaning there are no long drawn out negotiations. While this is considered to be a buyer advantage, there are also disadvantages of bidding at auction.

For example, it’s easy to get caught up in the emotion of the auction and then outbid your own budget. Also, there is no cooling off period – if you are the winning bid, you must follow through with the purchase.

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That’s why it’s recommended that you obtain finance pre-approval prior to identifying the property and bidding at auction. Once you have identified a property you are keen to bid on its also good practice to undertake some research prior to the auction including obtaining a copy of the proposed contract and checking that you are comfortable with any special conditions and the required deposit; get your conveyancer to undertake property searches;

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do as much research as possible on future zoning changes or developments in the area; and be satisfied the property is sound from a building and pest perspective so you’ll be confident there’ll be no surprises if you are the successful bidder at auction. Once you’ve signed the contract and paid your deposit the process then continues much the same as private sale. The biggest difference lies in the actual auction itself.

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No matter whether you purchase by private sale or at auction there are a number of other costs to consider above and beyond the purchase price – and all of which will impact your affordability. Stamp duty is potentially the biggest additional cost. Stamp duty is collected by the state government and is calculated based on the purchase price of the property. The rate differs from state to state, and states have different discounts for first home buyers.

Your legal representative will advise you of the amounts or you can find the information online from your state government website.

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Other government fees include registration fees for changes to the Land Titles register. Again, these differ from state to state but your legal rep or financier will be able to provide you with specific information. Your solicitor/conveyancer will charge for their time and recover any costs they incur, such as property searches.

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It’s advisable to have at least a building inspection, if not a pest inspection as well, and of course the relevant inspectors will charge for their services. There are likely to be finance costs such as a loan application fee, and you may require Lender’s Mortgage Insurance or LMI. As I said previously, it’s very important that when you sign a contract on the property you insure the property.

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There will also be your relocation costs, utilities connections, furnishings and so on. It’s also useful to take into account the ongoing maintenance costs for your home. If there are things such as a pool that will require regular upkeep, ensure you factor this into your ongoing budget as well. I highly recommend researching each of these costs and factoring them into your planning

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Moving on, the next questions was “How much deposit do I need?” As well as covering the costs that we have just spoken about there is your contribution to the purchase price to consider as well. One of the biggest challenges for first home buyers is saving the amount of deposit required. The amount will depend largely on the value of the home you are looking to purchase.

Most banks will lend up to 80% of the value of a property in a prime location. This is known as the Lending Value Ratio or LVR. The remaining 20% is your deposit or contribution.

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This 20% can come from a number of sources as well as your savings. You may be eligible for your state’s First Home Owners Grant, or you may have parents willing to help by providing a Parental Guarantee. For example, if you wanted to purchase a home worth $500,000. The bank’s usual lending value at 80% would be $400,000; meaning you would require a deposit of $100,000 plus enough to cover your up-front costs.

But let’s see how the first home owners grant or parental guarantees can help to reduce this amount.

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The First Home Owner Grant (FHOG) is a national scheme but it is funded by the states and territories so each state has different amounts and eligibility criteria. Under the scheme, a one-off grant is payable to first home owners that satisfy all the eligibility criteria. In recent years, changes to the scheme have included that most states now require the home being purchased to be ‘new’, not an established residence.

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To see if you are eligible or to obtain more information about your state’s First Home Owners Grant, go to firsthome.gov.au and select the state or territory in which you intend to purchase your home. Another way to reduce the amount of deposit required to be saved is if the borrowers’ parents have equity available in their property and they are prepared to provide a guarantee for the borrower.

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As an example of how this might work … let’s say you want to buy a property worth $500,000 but have only saved a deposit of $25,000. This would be outside of most banks’ lending guidelines. However, if your parents have enough equity in their home, they may be willing to offer a guarantee of $75,000 which covers the shortfall in security value.

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As a guarantor your parents are then liable for your loan up to the amount of their guarantee. Guarantors are often required to get independent legal advice prior to entering into such a guarantee. Parental Guarantees offer a way for parents to help their children get into a home sooner, without actually lending or giving them cash. The guarantee can be released once the loan amount is reduced to within the usual 80% lending value, once again freeing up Mum and Dad’s equity in their home.

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Another way of reducing the amount of deposit required is to use lender’s mortgage insurance or LMI. LMI is used where less than 20% of the value of the property being purchased is available as a deposit. LMI is an insurance that covers the bank in the event of a loan default by the borrower. The cost of that insurance though is borne by the borrower.

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There are a couple of reasons why you might choose to have a smaller deposit and incur the LMI cost. The first reason is that it can help new buyers get into the market with a lower deposit or you may be able to purchase a property of a higher value than you might otherwise be able to afford.

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Using the same example of purchasing a $500,000 property instead of having to save a $100,000 deposit, using LMI you may be able to borrow up to 95% of the property value meaning that you only need a $25,000 deposit. However, this would significantly increase your upfront costs. The LMI premium in this example could cost in the vicinity of $16,500.

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So, how are you going to save for your deposit and up-front costs? We suggest starting by looking at your lifestyle and how you currently spend money. Is there any discretionary spending that you can reduce? Have you got the best deal on utilities and so on or could you reduce those costs? You could use the Spend Snapshot tool on the Davidson Institute website to help you get a clearer picture of where your money is getting spent.

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By putting together a comprehensive budget for yourself and understanding what money gets spent where you put yourself in the position of choosing how you want to spend your money and how much you can save. When setting your financial goals, make them SMART goals – Specific, Measurable, Achievable, Relevant, and Time-bound. It’s also a good idea to keep your savings separate from your regular spending money.

That way you’ll be less tempted to use it, and you may also be able to make it work harder for you by keeping it in an account that pays interest.

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To me, saving is about creating the financial future that you want but it shouldn’t mean that the present is all hard work … set yourself some regular milestones that you can reward yourself for to remind you why you’re saving in the first place.

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For the final part of our video, we are going to look at what you can expect when applying for a home loan. When you apply for finance, your financier will ask you for a lot of information. This is to help with their assessment of your application. Broadly financiers will look at 3 key components when assessing a loan application.

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Firstly, the ‘Purpose’. In the case of a home loan this is fairly self-explanatory – to buy a house. However, they will also look to explore with you what your goals are for the property to help with identifying the loan features that will best suit your situation.

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They will also explore the ‘Person’, that is, you. Information on your age, address, job stability, asset accumulation, current debt position all helps to paint a picture of whether you are a person of a character that’s likely to pay back their loan. This will include accessing your credit history to see your track record of repaying loans.

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Then finally they use financial information to assess the likelihood of the loan being repaid; both from the perspective of can you afford the repayments? As well as, should something go wrong, is it likely that the money could be recouped through sale of the property?

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The first question on many first home buyers’ minds is “How much can I borrow?” How much you can borrow is dependent on 2 things. Firstly, how much the property is worth; and secondly, how much you can afford to repay.

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As we saw earlier, lenders will apply what is known as a ‘Lending Value’ or LV against a property offered or held as security. Typically, this will be 80% for a residential property in a primary location. So, if the property is worth $500,000 then the value the bank could lend to would be $400,000. However, just because the financier is able to lend to a certain value of the property, the second aspect is how much you are able to repay.

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In assessing your ability to repay the lender will consider all the household income, and what other commitments need to be met such as other loan repayments. They’ll also will review past bank account and credit card usage to observe the spending habits of the applicant, and in my experience, banks are now paying greater attention to regular household expenses when assessing applications too.

Many financiers will also look at how interest rate increases might impact your ability to repay their loan.

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One way to get an indication of how much you may be able to borrow is to use one of the many online calculators available. We’re going to look at the Westpac Mortgage Calculator. In the example on the screen, based on a single applicant, with no dependents living in Sydney … with an annual before-tax salary of $80,000 and no other income … with monthly expenses (such as food, transport etc) of $1,630, a credit card with a limit of $5,000

… and other monthly expenses of $300, you can see the calculator works out that the applicant’s ‘borrowing power’ is $553,269.

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Now don’t get too caught up with these numbers, go online and check your own situation. Even a postcode change can change the end result. And remember that this is indicative only and that the full application process may have a different result. So, based on your income and the potential to borrow $500,000, you’ll now want to know what the monthly repayments are on that amount.

It is one thing for someone else to calculate what you may be able to afford but you still need to ensure that your budget will support that level of repayments.

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Let’s say we’re going to make fortnightly payments of half the minimum monthly repayment … $2,188 divided by 2 is $1,094 And here we can see that by making fortnightly payment of $1,094 you could potentially shave almost 4 years off the term of the loan and save nearly $40,000 in interest costs.

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This will of course vary according to everyone’s individual circumstances but it’s well worth considering the savings you can make by using features such as fortnightly repayments, offset accounts and the like. For more information, watch our video ‘Managing your home loan to get ahead’.

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The next important consideration is getting the right home loan. As the loan will take a long time to pay off it makes sense to get a home loan that is going to suit your situation. The most important place to start when deciding on a home loan is with you. Unless you are clear on what you want, you may not be happy with the final product, the features that is has, or how much you will need to pay.

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So, always start by knowing what your own financial objectives are. In doing this, it pays take a long-term view; in other words, consider both what you need today, but also what you might need in the future from your home loan. So, think about what features of a loan may be useful in the long run. Consider things such as: “How fast do I want to pay the loan off?”, and “Will I want access to a redraw or offset facility?

“Is there capacity for a repayment holiday, if I decide to take a break from work?”

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The answer to these, and any other questions that you may ask, will help you to determine what type of loan, and what features of that loan, makes the most sense for you. Once you know what type of loan you want, you will need to consider how much it will cost you over the life of the loan. Factor in the interest rate and any fees that you may incur during the life of the loan. Also, be prepared to compare.

A lot of home loans look the same, but there could be subtle differences in the way that they work which could impact you throughout the life of your loan.

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Banks are required to advertise a ‘comparison rate’ that includes fees and charges as well as interest to help makes comparisons with other lenders. It’s also worthwhile to consider the ancillary products that might come with the loan as well, such as credit cards, transaction accounts and insurance products. Some lenders may package these additional products up for you, offering them to you at a reduced cost.

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Home loans tend to stick around for a long time so it’s well worth the effort to do your research to get the right loan for you.

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There are a few things that will help you build a strong story to take to a lender when applying for home finance. Starting with demonstrating that you have a stable income, employment, and home life. It’s also important to show a willingness to be sensible with your finances by having a good history of saving and repayments. I know saving can be difficult when you’re renting, but consistent payment of rent is also often taken into consideration by lenders when assessing your saving history.

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While a small credit card limit might not seem out of the ordinary, it could cost you an approval of home finance. It’s a good idea to minimise as much debt as you can to help your application. Be prepared to provide the lender with plenty of supporting documentation. They’ll look for payslips to confirm income, bank statements and super statements to confirm savings, verification of household bills, and of course identification.

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And finally, it helps to have realistic expectations. Some first home buyers want to jump straight to the big 4-bedroom, 2 garage home with a pool but for many that is outside of their financial capacity. Do your own sums before you see the lender and be confident in your own mind about the level of repayments that you can support.

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So, during our ‘Buying your first home’ video we have provided you with some hints and tips around selecting a property, who should be on your home buying team, and the difference between a private sale and an auction. We’ve also looked at the financial side of your purchase; from what other costs need to be paid, to saving up your deposit, and finally the loan application process.

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Thank you for watching our video ‘Buying your first home’. I trust that you are now feeling better prepared and more financially confident about buying your first home. I trust you found this information helpful, and I encourage you to check out the other resources on the Davidson Institute website to help build your financial confidence. Bye for now.

A milestone in many people’s lives is purchasing their first home, but the excitement’s often accompanied by the trepidation of stepping into unknown territory.

 

Buying your first home is a big decision and there’s a lot to get your head around. From working out what you can afford, selecting the property itself, to finalising the purchase, there is a lot of information to take in.
 

This video’s designed to help intending 1st home buyers to hone in on the important financial aspects of their purchase.
 

We’ll help you learn about:

  • What to look for when selecting a property
  • Financing the purchase
  • Ongoing management of your home loan.

 

Managing money

Budgeting

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Hi, I’m Bronwyn Lawson from the Davidson Institute, here to talk to you today about ‘Budgeting’. When you mention the word ‘budgeting’, the first things that many people tend to think of are restrictions, or ‘cutting back’ or having to go without the good things in life. I prefer to think of it as mindfully choosing how I want to use my money.

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By taking the time to work out your personal financial position and PLANNING for how you want to spend your money, you are much better placed to make confident financial decisions about your money. Confident decisions that, over time, will help you to effectively plan for the future and get the GOOD things you want out of life. So, in this video I’m going to explore the concept of budgeting and money management to help achieve your goals.

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I’ll talk about:  Putting together a plan for your money.  Developing good spending habits to help you stick to your budget.  And some Saving tips to help you get started. In practical terms, a budget is simply a plan for your money. It shows the money that is available to you, the amount that you plan to spend, and what’s left over. While many people aren’t excited by the numbers, what they should get excited about is all the things that a budget can help them to achieve.

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The purpose of money is to support our way of life. We want to be able to use that money, not just to live but to share in the good things that life has to offer. Things like holidays, cars, concerts, dinners out … whatever floats your boat. There are also some significant events that we want to enjoy to their fullest … like going to University, getting married, having children, buying a house, or even retiring.

It is when we let these events ‘creep up’ on us, or we partake in too many good things in life, that we can run into trouble.

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This is where planning can help. At all stages of your life, planning can help you make sure that you have enough money to live the life that you want and achieve your financial goals. So, the first part of planning is to think about your dreams and goals. What is it you want to achieve out of life? That might be a gap year overseas before going to university, the capacity to help your kids buy their first car, owning your own home, or perhaps early retirement.

Whatever it is, it’s your goal and it’s up to you to work toward achieving it.

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This brings me to my next point - Taking responsibility. It’s also up to you take responsibility, or control if you like, over your finances. Only you can be responsible for your decisions about your money and your financial future.

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One of the best things you can do to help achieve your dreams and goals and have the financial future that you want is to develop good money habits. I always think that if you can make something a habit, it becomes much easier to do because you do it without even thinking about it. We’re going to have a look at some good spending and saving habits later in the video.

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So, once you’ve thought through your dreams and goals and have an idea of what you want life to look like the next step is to look at what money you have available to you. One way to look at this is through the concept of ‘cash flow’. Cash flow is simply– Cash-In, less Cash-Out, equals a surplus or deficit – or, what’s left over.

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Cash-in is “where I get my money from”. There are a number of sources of income. For many people the most obvious one is you work for it, either you work for someone else or perhaps you run your own business. Another way to get cash in is to have your money work for you or to earn income from investments, such as interest on your savings or dividends earned on shares.

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Some people are eligible for social security payments, or others may have income from an insurance company if they’re injured or unable to work. ‘Cash-in’ often only comes from one of these sources and is a very finite amount. Working out how much money you have, and where it comes from, is generally the easy bit. The next step is to work out how much money is going out.

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From savings and loan repayment to education or entertainment with food, transport, housing, and health in between there are lots of ways that we use money to support our life. How much you spend on these things will determine whether you end up with a surplus (or money left over) or a deficit (where you may have had to borrow some money from somewhere). The goal of course is to create a surplus and have money available to use.

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One of the tools that we can use to understand what we spend our money on is a money diary. Record every single cent you spend for let’s say one month and this will then give you a very clear picture of where you are spending your money. You can then group these expenses into things like housing, transport, food, etc. and add up the amounts to see how much you spend to start putting together your budget.

Any notebook will do but there is also a Money Diary that you can download from the Davidson Institute website.

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You can then add all those amounts into a budget planner like this one, also available on the Davidson Institute website. Start with your ‘Cash-in’ from your wages or wherever it comes from, noting whether that’s weekly, fortnightly or monthly. Then record all of the ‘Cash-out’ amounts - take care to match up the timing, that is are you working on a weekly/fortnightly/monthly budget.

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Then start with the money you want to save; then record the money for your commitments to other people like loan repayments, phone plans and so on; then record all the money you need to live… food, housing, transport etc; then include the money you choose to spend to maintain a particular lifestyle. Add up all these amounts and subtract that from your money in and you’ll end up with a surplus or a deficit.

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As we said earlier, we are aiming for a surplus and if you end up with a deficit, then you should be looking to do one of two things: either increase your income (not always easy) or reduce your spending. One way to look at reducing your spending is to use our handy cost-cutting checklist. There are some great ideas in here to help reduce costs. Some of them will have a bigger impact than others; some you’ll love, and some may not suit your situation at all.

But these thought-starters may even help you think of other ways you can reduce costs to help you stick to your budget.

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Remember, the great thing about this is that it is a plan - a picture if you like - and if you don’t like the picture you’re painting, you have the opportunity to change it. By taking the time to look at your spending and develop your budget, you can make the decision as to whether this is how you want to spend your money or whether there is a better way that will help you to achieve your financial goals.

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As I said earlier, often when we think of budgeting, we think of reducing our spending or ‘cutting back’. In reality though, there is a certain amount we need to spend all the time simply to live. Then there are the things that we want, as opposed to the things that we need such as that nice piece of jewellery, a fancy dinner, or the latest tech.

When we think of budgeting, we quite often think of not being able to have the nice things that we want, but the reality is that buying a sandwich for lunch every day of the week could actually be the thing that is impacting your budget.

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One of the biggest challenges when you’re trying to stick to a budget is spending leaks. Think of your budget like a boat - we know that one big hole in the middle of the boat will sink it! That one big hole in your budget might be major car repairs, unexpected dental work, or even an unplanned trip away. Any of these things has the potential to sink our budget ‘boat’. But what if we have a few tiny holes? Over time even those tiny holes will leak enough to cause us problems.

We call these little holes - spending ‘leaks’.

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When you think of ‘leaks’ in terms of your budget, think of the little things that you buy regularly that might only cost a few dollars here or there. It could be as simple as buying your lunch. Let’s say that you buy a sandwich and a drink for lunch which probably costs around $15. For many people $15 isn’t really that much and they probably wouldn’t even miss it from their wallet. But what if you did that every workday? If you work 5 days a week, it would cost you $75 per week.

Over the course of a full year, that $15 per day adds up to $3,750. Think about what else you could do with $3,750.

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And this is just one little leak! Your money diary can help you to identify your leaks just like the example we’re going to have a look at now. Meet “Leaky” Luke. Luke lives in the suburbs and catches the train into the city every day for work. He’s always running late but doesn’t miss buying a coffee to give his day a kick start. When he gets into the city, he buys a bottle of water to drink as he walks the rest of the way into work.

He never misses coffee with the gang at morning teatime and loves a good latte. Because he is always running late in the morning, he buys his lunch every day – which is normally a sandwich and a soft drink. He and his mates are movie buffs so their weekly trip to the flicks costs him $30.

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What is this actually costing Luke? Individually, each of these things aren’t particularly expensive. A few dollars for coffee, few dollars for lunch … but weekly, those little bits and pieces add up to $200 for Luke. Then there’s the monthly subscriptions he pays for a couple of streaming services, and an online music service that he set up when he went overseas and has simply forgotten to cancel. When you add that into the mix … over a year, that adds up to over $10,000!

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Does this scenario sound a little familiar to you? Don’t worry, we all have little leaks, including me. Again, it’s not necessarily denying yourself these things. It’s about making a choice on whether you want to continue to spend your money in this way and building it into your budget, or whether you recognise that these leaks could be delaying you in achieving your goals and you decide to do something about it.

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Let’s say Luke decides it’s time to make a few changes and get better organised. By getting up a little earlier each morning he can catch an earlier train … one that doesn’t charge peak hour prices. He would also have time to make his lunch most days and have a coffee at home before he leaves. He does enjoy his coffee catch-ups and is happy to buy his lunch once a week, but now drinks tap water from his reusable bottle.

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The lure of saving enough for another overseas trip sees him cut back his movies to once a month, and he’s cancelled the subscriptions he was no longer using and decides to keep just 1 pay TV subscription. Not huge changes for Luke, but significant ones for his budget! Instead of his leaks costing him more than $10000 a year, these little regular spends are only costing him just shy of $4000 a year.

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That’s a saving of $6,750!! And what could Luke do with an extra $6,750? Better still, what could you do with an extra $6,750 each year? Luke’s example is a simple but common one. Your daily expenses may look slightly different, but consider – do you really know how much it is costing you? And more importantly, would you continue with that cost knowing that it could mean the difference between achieving your goals or not?

13.35

So, fixing our spending leaks is one way of getting our finances into better shape. Here are a few more good spending habits for you. Firstly, don’t spend more than you earn! Sounds obvious, doesn’t it? However, it’s a very easy trap to fall into using things like credit cards. How do we avoid it? By planning well, being aware of cash flow, and developing good spending habits.

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It’s also important to recognise Wants vs Needs: Much of our spending isn’t necessary. So next time you are tempted to splurge ask yourself “Do I really need it?” Now, I’m not saying don’t buy the things you want, but do make an informed choice. Ask yourself “If I buy this thing that I want now, what else might I be missing out on in the future?”

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Another good habit is to defer spending. We often buy on impulse but if we can defer the purchase for few days or even a few hours the urge often goes away. Some people do things like leave their credit card at home so they can only spend the cash they have on them or they might decide to wait until next time they shop to see if the urge is still there.

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A lot of impulse buying is emotional spending and best avoided. This is simply where you let an emotional reaction override your careful plans. If you are tempted to make an emotional purchase, ask yourself “Is it really going to make me feel better in the long run? How will it affect the goals I’m looking to achieve? “

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It’s also important to use your credit card wisely. Credit cards are a great tool but only if they are used well. Remember each purchase you make will potentially cost you more. Aim to ensure you use any interest-free period you have and clear the card in full each month. If you are going to use your card for larger purchases that you won’t pay off within the month, look for a card with a lower interest rate and be disciplined to pay it off as soon as possible.

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And finally, Value your Money: This is when it pays to understand the value of what it is that you are buying. Some of those “great deals” you see advertised - if you break them down - sometimes don’t stack up at all. Do your research, shop around, and make sure you are getting value for your money. Some people even think of things in terms of …” If I buy this now, how many hours work will I need to do to pay for it? Is it worth that?”

16.30

So, there you have it, a few simple habits to form to help you make more mindful decisions about how you spend your money. Ultimately, the purpose of developing good spending habits is to put yourself in a position where you can save for the future. Remember back to the start of this session – we talked about planning. Planning for a holiday, a wedding, a baby or even retirement. Saving is about our future spending rather than our ‘now’ spending.

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Like spending, there are some good habits we can develop that will help us to save more effectively. A good habit to get into is to allocate savings as part of your budget before you allocate spending money! Think about it as paying yourself first or putting your future first.

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So, how much should you pay yourself? A good guide is about 10% of your income. I know that this isn’t always possible but even if you start small, start now! Even small amounts add up for you over time. If you get into the habit of doing it, then it becomes less noticeable to the point where you don’t even miss it.

17.50

I would say though, don’t make your savings goals too difficult. If you say you want to save $100 a week, but then find that you are continually dipping into your savings for everyday spending, you will only become disheartened. Start with a challenging but manageable goal and if you find you have money left over, then add that to your savings as well. Build up to higher savings targets over time.

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Finally – keep your savings separate to your spending money. If it’s tucked away, out of reach, potentially earning more money, you’ll see your savings grow over time … giving you a sense of accomplishment and opening up options and choices in the future. Like your good spending habits, good saving habits will help you to achieve financial security and your future financial goals.

18.40

And like your goals, when it comes to savings, there are 3 levels – or tiers – to consider. Firstly – there are short term savings, that help with things like medical expenses or car repairs. This might include an emergency fund to help out when the unexpected happens. You will want to be able to get to your savings quickly so keep this type of money in an accessible savings account.

19.10

Secondly - there are medium term savings. These savings are for 3-5-year goals such as saving for an overseas holiday, a car, or even a house deposit. You generally won’t need quick access to this, so you can afford to lock the money away, say in a term deposit, potentially earning you more interest on that money.

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Finally - there are long term savings, such as saving for retirement. These savings will often be in the form of investments - things such as superannuation, shares, or purchasing investment properties. Accessing this money is generally more difficult but that’s okay because you generally don’t need to access it quickly. By allocating your savings to short, medium, or long-term goals you’ll effectively be covering all bases for your future.

20.05

So, throughout this video we have looked at budgeting as a tool we can use to help achieve our dreams and goals. By planning our financial future, we put ourselves in a much better position to have the things we want in life. Developing a budget is about understanding what money comes in and making choices about what goes out and where to. Developing good spending and saving habits supports the budget we have set helping make our goals all the more achievable.

20.38

Thank you for viewing our ‘Budgeting’ video. I trust you found this information useful and relevant and I encourage you to check out the other videos and resources on the Davidson Institute website to help build your financial confidence.

It’s easier than you think to take control of your money. A great starting place is to develop a budget. This video covers a step-by-step process to develop your own budget, and provide some tips on spending and saving to help you achieve your goals.

 

You might also like to download or use the following tools and guides: Budget Planner, Money Diary, Cost-cutting Checklist, Managing Money guide, Spend Snapshot tool.
 

We’ll help you learn:

  • How to develop a budget
  • Good spending habits
  • Saving tips and techniques.
     

Investing

Investing

0.00

Hi, I’m Bron Lawson from Westpac’s Davidson Institute here to talk to you about Investing. We all have financial goals that we want to achieve. Whether that’s to purchase a car or a house, to go on a long holiday, or simply to retire in the comfort, whatever those goals are, investing is a way to help achieve them.

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In essence, it is simply making our money or assets work for us to earn more money. But, the sheer variety of different things that you can invest in, each offering different rates of return and levels of risk, means getting started may be a daunting prospect for those new to investing.

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In this video, I am simply going to introduce some of the different investing concepts to get you underway on your investing journey. We’re going to cover: • where to start, • what options are available to you • where you can go for help.

1.00

So, let’s get started with ‘where to start’. And we’re going to start by looking at a simple model of personal cash flow. Your personal cash flow starts with your primary cash inflow, which is generally your salary or wage and is often all the money you have available to achieve your future financial goals.

1.25

This income is then used in a number of ways to support our chosen lifestyle. We call these outflows, and we have broken them down into 4 buckets. They are: Spend It Now: which is all your regular household expenses that you need to pay to live. Things such as rent, mortgage, food, transport and so on. Then you have …

1.45

Spend It Later: which is the money you save to spend later on larger expenses, such as holidays, school fees, new furnishings and so on. After that, you may choose to … Gift It: this may be donating to charities or saving and buying gifts for others. Finally, there’s …

2.10

Grow It: where you actively choose to use a portion of your primary income to grow your wealth through investing. The purpose of the Grow It bucket is to create a secondary inflow of money from your investments to supplement your cash flow and grow your wealth.

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The foundation of this model is your budget which is all about how you choose to allocate your income to each of these buckets. This video specifically looks at the ‘grow it’ portion of your money and how you can create that secondary flow of income. There are plenty of different investment options available. However, it’s important that you spend some time working out exactly what you want to achieve.

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What are your financial goals, and when do you want to achieve them by? This way, you can choose the most suitable investment options for you. Options that will help you achieve your financial goals.

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A common question is ‘when should I start investing?’ But the answer to this question will be different for everyone as they have different incomes, different expenses, different lifestyle choices, and different motivations. And, of course, your financial goals and the resources you have to achieve them will change over time.

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Depending on where you are throughout your financial journey you will be looking to achieve different things from your investing. You may want to invest to create more cash flow, like that secondary inflow we saw earlier. Or you may want to invest in assets whose value will grow over time creating long-term capital gains. Many people use a combination of the two.

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By clearly identifying your investment goals, you can then develop your investment strategy to achieve those goals. Another couple of elements that will determine your strategy are the time you have available to you, and your risk appetite.

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Firstly, time. There is a saying – “It's time in the market, not timing the market that counts”. When investing, time is a critical element. One of the best investment decisions that you can make is to start investing sooner, rather than later. The longer that your money is invested, the more opportunity you have to ride out the risks and reap the rewards.

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There are three benefits that time provides to investors. Firstly, compounding of interest, then time to make additions, and thirdly time to ride out volatility. Compounding is where you reinvest your earnings in the investment and earn additional income on those returns.

5.15

The most common example is the interest that you earn on savings. For example, if you have a deposit of $10,000 and it earns 5% interest per annum, then at the end of the first year, you will have $10,500. The original $10,000 that you deposited, and the $500 that you earned in interest.

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In the next year, if you leave the earnings in the deposit you would be earning interest on $10,500. The longer you leave your savings and earnings untouched, the more benefit that you get from compounding. In this scenario, if the investment was left untouched for 20 years it will earn $16,533 in interest and you’ll have a total of $26,533.

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Let’s build on that because time also allows you to continue to add to your investment. Continuing with our previous scenario of a $10,000 deposit, let’s add $1,000 per year over the 20 years so you will have saved $30,000 in total. Again, if you receive 5% interest each year and reinvest it, you’ll earn $29,599 in interest. Meaning you will have $59,599.

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Even if you only start with a small amount and continue to make small regular additions, this will add up over time. And the longer you continue to do this, the greater the amount you’ll have invested either creating additional cash flow or increasing in capital value.

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In the example we just looked at we have assumed a 5% return every year for 20 years. However, in reality, investment returns fluctuate and sometimes even be negative. These fluctuations are known as volatility. Volatility is one of the risks of investing. However, by spending time in the market and continuing to make additions to your investments, volatility can be managed.

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The other consideration we mentioned was that of ‘risk appetite’. It is important to understand that, regardless of how you invest your money, there is always an element of risk involved. Generally speaking, the greater the risk, the more financially rewarding the return.

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Your appetite for risk will be determined by the amount of time you have available, and how willing you are to accept any potential losses that your investments might incur. As an example, let’s say that you are 60 years old and are looking to have enough money to support you in retirement. You are much less likely to take a risky investment in this situation because you only have a limited amount of time to recoup any losses.

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However, if you are 25, looking to achieve the same outcome, then you may be much more willing to take risks, as you do have time to recoup any losses. So, once you’re clear on what you’re looking to achieve out of investing, you can then start to consider what investment options are more likely to help you achieve those goals.

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There are four main investment types. The first investment type to consider is cash. Cash investments are generally the money held in a savings account. The benefit of investing in cash is that it is flexible, allowing you to move it around to take advantage of better offers, or being available for use in the case of an emergency. Cash is considered a low-risk investment but generally doesn’t earn as high a return as some other investments.

9.20

The second investment type here is fixed interest. Fixed interest investments are generally term deposits or bonds. Term deposits are investment accounts offered by financial institutions that offer a fixed rate of interest on your money for investing it for a fixed time. This may be for as little as 1 month or as long as 3-5 years.

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Bonds, on the other hand, are generally issued by governments, semi-government bodies or corporate bodies as a way to raise capital, so bonds usually have a longer investment term than cash investments, often ranging from 1 to 10 years. In return for your money being locked away for a fixed time, fixed interest investments will generally pay a higher return than cash investments.

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Depending on the type of deposit or bond it may also provide a regular income stream if the interest is paid regularly throughout the investment period, as opposed to being paid in full at the end. The fixed interest market is considered low to medium risk.

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The third investment type is property. When investing in property, you can benefit two ways. Firstly, there is the potential for capital growth, with the value of property generally appreciating over time. Secondly, there is the rental income that can be earned from the property.

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Investing in property is a longer-term investment proposition. It is considered a medium-high risk investment because it may be harder to sell the property should you need to convert the investment back into cash; and also, because the rent yield is not guaranteed.

11.15

The fourth investment type is shares. Investing in shares is essentially investing in a business. Your money is used to operate the business and if the business is profitable it should increase in value over time and will potentially pay its shareholders a share of the profits, known as dividends. This means that, like property, there is potential to get both capital growth, and income.

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Shares also have medium to high level of risk and the share market is subject to the most volatility of all of the main 4 investment types. Historically though, returns on share portfolios generally outperform the other investment types over the long run, although property is not usually far behind.

12.05

Another common question asked by new investors is ‘what is the best thing for me to invest in?’ And again that will depend on your personal situation, goals and so on, however, what I would say is ‘don’t put all your eggs in one basket’. For many people, their investment portfolio consists of just an investment property.

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Now if something happens to that property, then they’ve potentially lost some or all of the capital they invested. One way of reducing this risk is to diversify … that is to split your investments across the different types of investments. By diversifying, you are spreading the risk and, generally speaking, improving the likelihood of better returns.

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When investing, it is important to start with your own goals and risk appetite before you look at investment options. When you start looking at investment options, you begin to realise what a large field of expertise it is. A lot of people can find the sheer amount of information overwhelming. That’s where it pays to get expert help and advice.

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Information is your best friend when it comes to investing. The more informed you are about the market and your options the more confidently you can make decisions based on that knowledge. Seeking out that information yourself, from the internet or other reliable sources, enables you to ask more qualified questions of finance professionals.

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A great source of information and expertise are professional financial planners or advisors. One benefit of using a financial advisor is that you have access to a wealth of knowledge about investing, relevant legislation, current market conditions, and anticipated changes to the markets.

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They are also heavily regulated as to the advice they can provide, and the products they can provide. This aims to reduce the risk associated with your investments and maximise potential returns.

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Financial advisors will also look at your finances from a holistic perspective taking into account your personal goals, lifestyle objectives, and risk profile. Their purpose is to provide long-term strategies to help you achieve those goals. As well as wealth creation, they can often also help with superannuation and retirement planning, wealth protection, and estate planning.

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While there are costs associated with using a financial planner these should be considered in light of the higher returns they’ll potentially achieve for you, as well as the considerable time saving for you in researching and establishing your investments.

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Finally, to get the best out of your experts/advisors you need to communicate regularly. By keeping in touch with what’s happening in the market and any changes to your situation, enables you and you advisors to make any changes sooner rather than later; to either reduce the impact of bad news or take advantage of good news as opportunities arise.

It’s therefore really important to choose a financial advisor that you feel comfortable working with and that you believe has your goals firmly in sight when making recommendations about your investments.

15.45

We started out by looking at why we invest and some of the things we need to consider in developing our investment strategy … things such as understanding what our goals are, how much time we have available to us, and what our risk appetite is.

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We looked at the various investment options available to us in terms of the things that we might invest in. And finally, given it can be a complex undertaking, where can we get some help and how do we make the most of our financial advisors.

16.20

Thank you for watching our video on ‘Investing’. I trust you found the information helpful and I encourage you to check out the other financial education resources on the Davidson Institute website to help build your financial confidence. Bye for now.

Want to invest, but unsure where or how to start? Everyone has financial goals that they want to achieve… buying a home, having a holiday, or even retiring early. Whatever they are, investing is one way that could help you get there.

 

This video’s a broad introduction to investing and aims to provide a greater understanding of investment strategies, the different investment options, and how a professional Financial Advisor may be helpful.
 

May be helpful for anyone:

  • New to investing or considering their investment options
  • Already investing but wanting to know more.

 


More to help

Davidson Institute

Your financial education hub giving you the tools to take charge and make more confident financial decisions.

 

Ruby connection

Ruby is an online community created by women, for women. Women who want to be educated, connected and inspired.

 

News: Westpac Wire

The latest thought-provoking stories and entertaining ideas on financial, economic and societal topics.

 

Things you should know

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This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek appropriate professional advice.