How Financial Literacy Affects Your Income, Debt and Wealth Levels

Money management is a personal skill that is useful throughout a person’s life. However, it is not something that everybody easily learns. Why? Because it can be daunting with all the due dates, bills, charges, invoices, investments, etc.

According to a  survey by Household, Income and Labour Dynamics in Australia (HILDA), only 25% of people under 25 years old have a good understanding of inflation, interest, and diversified investments.

Sadly, personal money management isn’t formally taught in schools. You just pick up the lessons through the years and it requires financial literacy and personal responsibility to be able to meet your financial goals.

Karina Wolfin, the consultant for home appliance rentals at DAR, believes that financial literacy is key to a comfortable life for most people. “Financial literacy is what makes the difference between a person earning six digits to someone earning a few hundred a months. No matter how much you earn, you’ll still struggle financially if you don’t know how to handle money correctly. It’s not a promise that you will be rich, but it will help you become more comfortable.”

Let’s explore further how financial literacy affects our income, debt, and wealth levels:

Teaches you how to budget:

To fulfil all financial responsibilities, get rid of debt, and accumulate money, it’s crucial to learn to budget. It all begins with knowing how much you’re earning and how to allocate it effectively.

Once you set a budget, you can track all your expenses and re-evaluate your spending plan from time and again. There are different budget methods; choose what you’re most comfortable with.

Helps you manage debt:

A study showed that 37% of Australians are struggling to get rid of debts, and 50% of millennials state that debt is a personal problem for them.

Australian household debt has consistently increased over the past 30 years, as more of us aspire to continue to depend on loans and credit cards.

If you are financially literate, you’ll be more careful with debts. As much as possible, you’d avoid borrowing money from an institution or an individual. However, many of us will have to loan for long-term purposes, such as house and education. Financially literacy will teach you how to find the lowest charges and best deals.

Encourages you to create an emergency fund:

One of the effective ways to prevent debt accumulation is to prepare an emergency fund. This type of fund should only be touched should unexpected expenses come up. Ideally, an emergency fund should cover at least 3 to 6 months’ worth of expenses—and should be replenished as soon as possible.

Helps you see the need for a retirement plan:

While building a safety net, a retirement fund should be part of your long-term goal. A financially literate person knows how much he/she has to save to live comfortably during retirement years.

Do you need to take a loan for a house, a business, or any other personal endeavour?

Aussem Mortgage Solutions offers service-based services that can help you achieve financial freedom. Contact us now to discuss your needs.

Are you looking to buy your first home?

It isn’t easy to find an affordable home for first-home buyers.

Whether it’s an old apartment or a new one or a house in the outer suburbs, many first-home buyers tend to make a few common mistakes when they are caught up in the excitement of buying their first home.

Here is a list of some of the most common mistakes made by first-time homebuyers you should avoid when buying your first home.

Ready to learn more about getting started in property investment? Check out the beginner’s guide here.

Mistake #1 – House Hunting without pre-approval

It’s not enough to just qualify for a home loan.

It is important to visit the lenders and ask them about the maximum amount they can lend before you go out and start looking at properties.

Knowing your upper limit will help you focus only on houses you can afford and allow you to avoid the disappointment of finding that perfect home and learning that you can’t afford it.

Mistake #2 – Not Understanding Mortgage Options

It’s true that getting a home loan is easier today as compared to earlier times as most people had to save for many years in order to have enough for the down payment.

While it is easier today, you also need to keep in mind that it might be more expensive and also riskier.

When you take a no deposit home loan, you also have to pay for mortgage insurance. You need to check with different lenders and discuss in detail all the options available to you before coming to a decision.

In some cases, it might be better to make a deposit while saving on the ongoing cost of mortgage insurance.

According to Sydney PPC marketer and homeowner Michael May, it pays to do your homework. He explains “with so much information available online it’s tempting to close your eyes and pick the simplest option. But what looks good upfront can actually end up being worse for you in the long run. I recommend chatting with a professional team like Aussem who can layout your options in a simple and clear manner. You’ll be thankful you did when it’s all said and done.”

Mistake #3 – Borrowing Too Much Money

One of the most common mistakes made by first-time buyers is that they end up borrowing too much money.

If you borrow to your financial limit, it might stretch your finances and you might not be able to make any improvements to the property. In fact, you might end up not enjoying the life in your first home due to financial issues.

Also, you might have to sell your house before building any substantial equity in case you have to face any unforeseen financial problems.

Mistake #4 – Relying on Others

Many first home buyers make the mistake of relying extensively on the local real estate agencies. Instead, it’s recommended to do independent research and have a pre-proactive approach when it comes to house hunting. It’s easy to find auction results online and in the local paper.

Take a note of the auction results and narrow your search to the suburbs and streets where you would want to buy a house and in this manner, it will be easy for you to find the selling price of properties in that area.

It will allow you to make a realistic counteroffer to the vendor’s agent (always working on behalf of their clients) when they quote a price. In case you decide to buy your first home at auction, you will save quite a bit of money.

Mistake #5 – Buying a Property without Pre-purchase Inspection

When it comes to the best real estate deals, you’ll find that these happen to be older homes that need minor renovations and cosmetic repairs.

On the other hand, the worst real estate deals also tend to be older homes that require expensive major repairs. These expensive repair jobs are typically not visible on the surface.

According to plumbing experts, “avoiding a pre-purchase inspection report will save you some money but don’t forget that getting an inspection report from one of the many independent building inspectors also has the potential to save a lot of money once you move into the home. It is also recommended to get a pest inspection done to be on the safe side.”

Mistake #6 – Not Accounting for Other Costs

Don’t forget that you will have to pay for other things in addition to the cost of the house.

This is a commonly overlooked aspect of first home ownership according to the roofing team at CM Roofing Services. They explain “some of these additional costs include the cost of moving, stamp duty, transfer fees, council rates, inspection reports as well as home insurance and – what we see often – home upgrades. It might turn out to be a fatal mistake when you simply don’t take into account or underestimate these costs.”

It’s important to be sure about the costs of moving into a new home in order to prepare a budget. You will sleep well when you don’t have any unexpected financial issues on moving into your first home.

Mistake #7 – Making an Emotional Decision

For most first-home buyers, it’s an emotional experience and sometimes, people let emotions get the better of them.

You should think like a professional home renovators who only take into account their ROI when it comes to buying a house. When a professional renovator doesn’t find an offer attractive due to low ROI, they simply walk away and this is what you should do.

Feeling ready to avoid these common mistakes? Check out the 6 BIGGEST mortgage mistakes to avoid and stay on top of your finances.

Final Thoughts

If you avoid the above-mentioned common mistakes, it might take some time to find your first-home but the effort will be worth it.

It will allow you to build your future on a foundation that is as firm as the foundation of a well-built home.

While finding your first home can be a challenge, by avoiding these 7 common mistakes, you’ll streamline the process and wake up in your dream home before you know it.

Looking for help on your journey to home ownership?

Speak to the friendly team at Aussem today and get the help you need.

Author Bio

Fiona White is an Australian freelance writer and Sydney-based university student. As an Accounting student, she has a passion for learning about global changes in business culture and specialises in entrepreneurship and innovation-related topics. When Fiona isn’t at her desk, you’ll find her exploring National Parks.

Are you fully educated on your tax rights and responsibilities?

Not being up to date could mean missing out on benefits, and putting yourself in trouble too.

At times navigating tax obligations for being self-employed can be confusing.

It doesn’t have to be.

Knowing your responsibilities is the first step to making your obligations feel less of a burden, and will allow you to focus on your business more instead of a spreadsheet.

Tax was never meant to be fun, but it can be easier to understand with the right guidance and the right approach.

So if you’re a self-employed entrepreneur looking to take control of your own tax at the end of the financial year, here’s what you need to know.

Your Tax Responsibilities Will Depend on Your Business Structure

How you pay tax as a business will depend on how your business is structured.

●    SOLE TRADER

As a sole trader, there’s no difference between your business assets and your personal ones. Your tax liabilities are therefore the same. Any income earned is subject to the same tax brackets as if you were a regular employee, including the tax-free threshold.

For this reason, it’s a good idea to make a habit of putting some funds away for your tax payments which will increase due to income gained through your business activities.

Remember to keep your business and personal expenses separate though as this causes less confusion.

●    COMPANY

The other main business structure the Australian Taxation Office (ATO) recognises is that of a company. This is important to recognise as a company is taxed separately to that of a sole trader.

Deductions are allowable for companies, but this form of business structure has many levels.

As a result, taxation for companies is more complex, with many happily relying on approved tax agents to help them navigate the obstacles that come with corporate tax rules.

Ultimately, it pays to know where you fit in. Choosing a business structure is like choosing a property, there are many pros and cons so it pays to think ahead. In terms of your taxation responsibilities, it is important to understand your obligations to ensure you don’t find yourself in trouble come tax time.

Understanding Deductions

Understanding your full deduction rights can help you save money come the end of the financial year.

According to the team at Northern Rivers Demolition, sole traders may be missing out on potential deductions, saying “just like an employee, as a sole trader can claim a range of deductions for expenses incurred whilst running your business. As long as these deductions are a true reflection of expenses incurred for the running of your enterprise, the amount of tax you pay can be reduced.”

One point to keep in mind is that any money drawn from the company cannot be seen as a deduction.

The ATO explains this, saying “amounts taken from the business are not wages for tax purposes, even if you think of them as wages”.

Personal Service Income (PIS) and the “gig economy” is here to stay. PSI is defined as the income from a contract where you’ve earned as a result of skills, knowledge, or expertise.

Freelance writers, copywriters, consultants or specialist trainers can be considered PSI income earners for taxation purposes.

The ATO ruling is now quite specific, stating, “If you’re paid mostly for your personal efforts, skills or expertise, you might be receiving personal services income (PSI) and you may have to treat deductions in relation to this income differently”.

Understanding the GST

Both sole traders and companies are required to pay GST on earnings over $75,000 per year.

Generally, GST is paid quarterly, so it makes sense to plan for the inevitable. Making regular payments into a bank account is the simplest way to ensure you do not fall behind.

It is worthy of mentioning the obligation for those with alternative employment. One example of a new industry in question is the increasing presence of Uber or other ride-sharing drivers.

The GST laws for a regular business earning over $75,000 do not apply to these types of business. So if this is you, it would be beneficial to get some advice from a professional tax advisor.

Reporting

Get into a habit of tracking your expenses and income. Keeping records and receipts is as important as the understanding of what you can and cannot claim.

Don’t forget to split your personal and business expenses. How you do this is up to you, but the days of shoeboxes filled with random pieces of fading paper are over.

According to the finance experts at Empowered Finance, electronic record keeping is central to staying out of trouble at tax time, explaining “storing your financial data electronically protects your business by centralising tax records and necessary figures. Even better, these solutions are more cost-effective than traditional paperwork storage so you end up saving money too.”

If you are old school, a decent ledger book will suffice, however, it is recommended that you make a move to a program designed specifically to help you. If you’re not software savvy, there is plenty of help online available a few clicks away.

Staying Informed

According to personal finance experts Maxiron Capital, “while staying informed may be the last thing on your list of tax do’s and don’ts, keeping aware of the latest tax changes and rules in your industry it just as important as any other tool. New and proposed changes to legislature and policy can affect the independent contractor and any self-employed person’s financial future.”

As we move through changing economies, this type of important taxation information allows you to make plans for your business.

While very few business owners set out to land on the wrong side of the taxation laws, ignorance is no excuse so it’s worth your while to stay on top of the changes in your industry.

Where Can I Find Help?

There are many avenues for help for the self-employed business owners of Australia

While initial tax obligations may seem daunting, with the right education and experience you can make sure you stay on the right side of the law and maximise your returns come tax time.

If you require help in regards to your finance as a self employed business owner, reach out and speak to the professionals today.

Author Bio:

Fiona White is an Australian freelance writer and Sydney-based university student. As an Accounting student, she has a passion for learning about global changes in business culture and specialises in entrepreneurship and innovation-related topics. When Fiona isn’t at his desk, you’ll find her exploring National Parks.

Hi, is this Aussem mortgage solutions? I am Matthew

Hi Mattew, yes it is, I am Suresh, how are you doing today?

Good thanks Suresh, how are you?

I am doing great! What can I do to help you today Matthew?

So, I just had a few questions about offset accounts, is that alright?

That’s perfectly fine, what would you like to know Matthew?

Well, first of all Suresh, I wanted to know what an Offset account really is.

That’s fine Matthew, so an Offset account is a bank account that is linked to your home loan which reduces the interest accumulation on your mortgage.
What this does is, instead of interest accumulating on your total home loan, money in the offset account is offset against your mortgage to reduce the payable interest.

So, for instance, if you have a mortgage of $500,000 and an offset account with $30,000, then you will only have interest on $470,000 and not the full $500,000. This way, in the long term you can reduce the total amount of interest you pay and the amount of time it would take to pay off the mortgage!

Oh I see how it works, so would I have to pay tax on the interest saved from the offset account?

Actually no, since there is no compound interest being earned from the offset account money, it does not get taxed. The saved interest instead adds to the equity in your property.

Wow that sounds great, can you still withdraw funds from the offset account?

Yes Matthew, you have the flexibility of depositing and withdrawing funds without any access fees as it is the same as a transaction account. As a result, you can also store a sum of money in the offset account to rely on during emergencies which is continually reducing interest paid on your mortgage.

That makes sense, just one more thing Suresh, what are the benefits of an offset account and who would it be suitable for?

Well, Off-set accounts work best when you can keep a large amount of money in the account over long periods of time. So, if you are a good saver, by saving money and depositing to the offset account, you can avoid paying taxes on interest while still making valuable gains in equity-like I mentioned before.

Also, instead of making extra repayments into your mortgage, you could deposit into an offset account as it provides a flexible alternative that lets you reduce your interest while still being able to access the money in case of an emergency situation.

Any additional money into the offset account will help reduce the long-term interest repaid, however only keeping a small amount in the offset account will not give you very significant savings. Just keep in mind that you should always be aware of any possible fees and conditions which come with the offset account as they may not be worth the savings in the long term.

Thanks a bunch, Suresh! That makes things a lot clearer.

Always happy to help, Matthew, if you have any other queries regarding home loans or refinancing, don’t hesitate to contact us again.