How Sound is Your Financial Lifestyle?

Before you can start to build up a passive income, you need to check that your financial life is in order. If you haven’t got your finances in order- you will be fighting yourself to try and save and invest. It’s not the easiest thing to do!

I often hear friends come telling me about different investment options and ideas that seem too good to be true. They have great intentions to invest in their futures. But the way they are going about it is all wrong.

You don’t want to be chasing the very high-risk investment options. What you want to do is to get your financial life in order and invest in investments with good solid returns- not overexposing yourself to risk.

Get your finances in order. I tell everyone to work on that before they thinking about investing.

You can not have your cake and eat it too when it comes to your personal finances.

If you don’t have your finances in order, you need to start there before building an investment portfolio. Now, how do you know if your finances are in order? I’ve listed a few things that will indicate whether or not you have your personal finance in order.

1. Do You Pay Your Credit Card Off in Full Every Month?

Paying your credit card off in full every month is a must. Heck, I do it weekly. Credit card debt is one of the biggest categories of bad debts! The combined credit spend in NZ on credit cards is 36 billion. Even if only 1% of that is overdue, Kiwis will loss $6 million a month in interest.

The interest rates on credit cards are around the 20% mark. If you only pay off the smallest monthly payments, you will pay more than what you initially spent.

Suppose you do have credit card debt and want to get your finances in order. Pay it off if you can; otherwise, you can refinance it to a lower interest debt- but pay as much off it as you can. Just because it is on a lower interest rate now doesn’t mean you can relax on the payment amounts.

2. Have You Paid Off All Your Bad Debt?

Pay off bad debt before you start to invest in your future financial independence.  Bad debt is working against you. The size of the debt will grow if you leave it. This is the miracle of compound interest working against you.

Credit debt is a type of bad debt, but there are others- payday loans, higher purchase loans, car loans, personal loans. Everything today can be bought through finance. Pay all your bad debt before you start to invest.

There are generally two methods in which you can do this. If you have many loans, you can focus on paying the highest interest rate loan off as fast as possible. Once you have paid that one, you can then move on to the next highest interest loan. But keep paying the minimum amount on the other loans, or you will get stung with payment penalties and fees.

Or you can pay all of them at the same time but refinancing them all into one loan and paying as much as you can. It would be best if you got rid of the bad debt so pay as much as you can afford. No more going out for lunch, or expensive coffees until you have paid the loan off in full.

3. Do You Have All the Insurance That You Need

It would be best if you had insurance- that is a given. But you don’t need all types of insurance. There are four insurances that you will need.

•  Home or renters insurance
•  Contents Insurance
•  Car insurances
•  Life Insurance

Ok, so there’s really only two that you absolutely need, Home/renters and Contents. You will need car insurance if you have a car, and life insurance if you have dependents.

All the other types of insurance are being sold to you.

You don’t need the extra warranty on new electronics- they already come with a manufacturer warranty.  You don’t need screen protection insurance for your phone- be more careful with your things.

Insurance if for big unexpected life events- not small ones like breaking your phone. You need to be covered if a tree falls on your house. Or you accidentally crash into some CEO’s Mercedes.

You don’t need health insurance in New Zealand as the public system will look after you. But if you want to get health insurance, by all means, go ahead- do some research first.

Also, when it comes to insurance- make sure you shop around. You will be surprised how much you could save!

4. Do You Pay Yourself First?

The technique of paying yourself first has been proven to work for millions of people around the world- and it can work for you!

It works on the basis that you don’t miss what you don’t see.

Paying yourself first is where you set up an automatic payment on the day that you get paid. These automatic payments move money for you. Into debt repayments, mortgage payments, or into investment accounts.

Automatic payments make it easier for you to reach your debt payment or savings goals. There is no way that you will miss any of your targets as you have already paid yourself first at every paycheck.

5. Do You Avoid Unnecessary Fees?

Do you avoid being charged any fees? These can be late payment fees on debt, or they can be bank fees associated with having insufficient funds. Paying yourself first can help in avoiding any fees.

But if you are still being charged insufficient fund fees or overdraft fee from the bank tries these tips. First, ring the bank and ask to have them reversed. If you plead your case, the bank may be willing to reverse that $20 fee for the unarranged overdraft. It’s worked for me in the past

Secondly, ring your bank and tell them not to allow your account to get into an unarranged overdraft state. This will mean that your transaction will be declined when you don’t have money in your account- but you won’t be charged the unarranged overdraft fee.

Finally, keep your checking account above $1000 to avoid it happening in the future. This is a buffer, and it is not for spending. It is an insurance against the banks charging you fees in the future.

6. Do You Have a Cash Buffer?

Life happens. And there are always unforeseen events where you need cash quickly. Build up a stockpile of cash so that you can cover these events.

The rule of thumb is to save 6 months worth of expenses so that you can survive for 6 months if you lose your job.  This may seem like a lot of money, but you can build it up over time.

Not all of it needs to be accessible instantly, but if the time comes, you need to access it in a few business days. So some of it can be put into a liquid investment. Your $1000 checkings account buffer can add to this fund. Figure out what is right for you.

Is your Financial lifestyle in order?

• Do you pay your credit card off in full?
• Have you paid off all your bad debt?
• Do you only have the insurance that you need?
• Do you pay yourself first?
• Do you avoid fees?
• Do you have a cash buffer?

If you answered yes to all questions, congratulations, your financial life is in order.

You can now look into investing for the future. Building up your investment portfolio, generate passive income and become financially independent.

If you answered no- make a plan to turn it around to a yes before investing. Follow the 10 steps to reach financial independence in New Zealand.