Understanding Money

- This can be the biggest pitfall for youth and it can stay with them for many, many years, if they don't get a handle on it!

Money introduces students to responsible financial planning and management, explores the skills required to identify financial risks, and develops effective personal financial strategies.

For many young people the major attraction to entering the workforce is the independence and decision-making power an income provides. However, this can often prove a challenge for new earners, with many falling into well-known money traps. By the end of this module, students will have an increased knowledge about managing their money and will be aware of the implications of their decisions on savings, investment, credit and debt.

On completion of this module students should:

  • Understand the differences between wages and salary
  • Interpret a pay slip, identifying net and gross pay, deductions and entitlements
  • Have a basic understanding of taxation, PAYG, and the need for a tax file number
  • Have knowledge of the lodgment of tax returns, lodgment timeframe and methods of submission
  • Have a basic understanding of superannuation and where to access information on superannuation
  • Choose a financial institution appropriate to their needs
  • Understand the basic accounts, services and products offered by financial institutions
  • Understand what debt is and the differences between good and bad debt
  • Decipher and prioritise needs and wants
  • Be aware of the pitfalls of credit cards
  • Manage a budget, personal finances and strategies for saving
  • Understand the importance of maintaining a good credit rating
Students may understand the fundamentals of money, but understanding how to make it work to their advantage is a different matter. There is a lot they need to know to prepare, even before their first pay hits the bank.

There is so much to take in when starting a new job new colleagues, strange routines and unfamiliar systems. Wages or salary is just one more thing to add to the list, albeit a very important one. Workers can be paid for their work in different ways. The two most common pay systems are salary and wages.

Salary

This is an agreed yearly amount paid by an employer to an employee. A salary is paid in regular instalments of the same amount across the period of a year. Salaried employee’s workload may vary across individual pay periods. Many jobs have busy periods across a year or work cycle, but each pay instalment will be the same.

Wages

Wages are a per-hour or per-task rate of pay, which varies according to the amount of time worked across the pay period. Although wages are paid regularly, the amount received in each pay can vary. Waged workers may have the opportunity to increase their wages over a given pay period through overtime (additional hours of work) or by working on days when higher pay rates apply.

When a worker is paid, they should receive pay advice, in the form of a payslip. This is posted, emailed or made available through a secure website. The details should indicate the hours worked, the rate and the amount paid, as well as any deductions.

Payslips must contain the following information:

  • Employee name and contact details
  • Employer name and ABN
  • Pay period dates
  • Hourly rate and number of hours worked (or salary for the period)
  • Entitlements (leave and otherwise)
  • Tax deductions
  • Other deductions
  • Leave taken
  • Net pay

NOTE: It’s a good idea for employees to familiarise themselves with the layout of their payslips, and get into the habit of checking them at the time they are paid. Let’s face it, errors sometimes occur, and it is easier to sort these as soon as possible.

Everybody who earns over a certain amount each year must pay´┐Żtax. This is the price we pay the government for health care, education, defence, welfare and the upkeep and development of roads and other infrastructure.

There is a certain amount that people are able to earn before being taxed. This is known as the tax threshold. Workers are taxed at different rates depending on their taxable income. People under the age of 18 (minors), are taxed at special rates on any eligible income they earn.

* Employers pay tax for each worker directly to the government which is known as Pay As You Go (P.A.Y.G.) People who are self-employed have to make their own arrangements to pay the tax on their earnings.

Tax rates for Australian workers as at 2016/2017

Taxable Income Tax on this income
$18,201 - $37,000 19c for each $1 over $18,200
$37,001 - $80,000 $3,572 plus 32.5c for each $1 over $37,000
$80,001 - $180,000 $17,547 plus 37c for each $1 over $80,000
$180,001 and over $54,547 plus 45c for every $1 over $180,000

The pay slip might look something like this:

Tax File Numbers

As soon as they commence work, every person in Australia receives a Tax File Number (TFN). These can be obtained from the taxation office even before a person is employed. The TFN is used to help identify tax records and cross check information. Like a fingerprint, it is unique to individuals and is theirs for life, following them from job to job.

* Anyone who pays tax should have a TFN, including companies, superannuation funds, trusts and partnerships!

Commencing a job

Starting a new job, students will be asked to fill out many forms by their employer. One of these will be a form in which they are asked to provide their TFN. The employer will use the information to determine the tax to be deducted from their pay. A new employee has 28 days to supply their TFN before being taxed at the highest rate. So, it’s best to fill out and lodge that form as soon as possible!

Who requires access to TFNs?

People must provide their tax file number in particular situations throughout their lives to:

  • The taxation office
  • Employers
  • Banks/financial institutions
  • Superannuation funds
  • Educational institutions
  • Centrelink

Take care

Of course, it pays to be cautious. As with any other form of personal identification, it’s not wise to reveal tax file numbers online, or share them with friends. Students should also be aware that if asked for their TFN, they have the right to know:

  • The legal basis for the need of their TFN
  • The consequences of not providing their TFN
  • Providing your TFN is not compulsory

Not compulsory, however...

Having a TFN is not compulsory however being without one does put people at a disadvantage! Being without, or withholding a TFN means that a person will be taxed at the highest rate no matter how much they earn. Any bank interest, dividends or trust distributions will also be taxed at the highest rate. (Why pay more tax than you need to?)

There are also other disadvantages to not having a TFN. Without a TFN, Australians:

  • Cannot access government benefits or support
  • Cannot access the government’s higher education loans

Tax returns

Although we sometimes grumble about it, paying tax is a not a bad thing. We all benefit from the infrastructure and services our taxes fund; and we can rest a little more easily knowing that there is a safety net available if at any time we find ourselves unemployed or in trouble.

We pay a certain amount of tax according to our income. At the end of the financial year (June 30) we need to lodge an income tax return form to declare our income, the tax we have paid, and list any deductions or offsets we are entitled to. The tax office examines and calculates the information to see if the correct tax has been paid, whether there is an entitlement to a refund, or if there is money owed.

Tax returns should be lodged between July 1 and October 31, or penalties apply. They can either be:

  • Posted to the tax office
  • Lodged online via the myTax website
  • Submitted by a registered tax agent

Australian Taxation Office

For advice on TFNs, lodging tax returns, superannuation, FAQs and key links.

www.ato.gov.au

Youth Central Victoria - TAX

This site has great advice and online tools for applying for TFNs, lodging returns and tax assistance.
www.youthcentral.vic.gov.au/managing-money/tax

It’s sometimes difficult to pay living expenses whilst juggling work and study. Moving into tertiary or higher study, students have access to government loan programs, to ease the financial burden and allow them to defer paying tuition fees.

The Higher Education Loan Program (HELP) covers a range of student loans:
  • FEE-HELP covers tuition fees
  • VET Student Loans - vocational education and training
  • OS-HELP covers overseas study

Student loan repayments

HELP scheme loans are the cheapest form of loan available. There is no interest charged, but because they are indexed to the CPI, the money owed does grow. These loans are repaid through the tax system once someone starts earning over a certain income. The compulsory payments go up in scale. The higher the income, the higher the repayment.

Study Assist

On the Australian Government website, this provides information about student loans, income support and eligibility.

www.studyassist.gov.au/sites/StudyAssist/

When we first enter the workforce, retirement is the last thing on our minds. However a new worker should be aware of the importance of superannuation and investing in their future. In Australia, it’s compulsory for employers pay a minimum of 9.5% of workers wages towards superannuation. The aim of this is to allow Australians a comfortable retirement without having to rely heavily on social welfare.

Entering the workforce, students move away from the bank of mum and dad towards financial independence. Banks, credit unions or other financial institutions will play a major role in their lives, not the least of which will be for the deposit of the money they receive in wages or salary.

Banks

Once upon a time a bank was an actual building that held an important place on the street of every town. Although most of us now use banking services through the hole in the wall, or increasingly online; the main services banks have to offer remain much the same as they always have:

  • Savers deposit money
  • Banks earn interest on the deposits
  • Banks lend money (the deposits) to savers seeking loans (borrowers)
  • Borrowers pay interest on the loans. Banks make money (profits)

Credit Unions

Credit unions are not-for-profit institutions operated by members, for the benefit of members rather than for profits. However, their function is the same as that of banks - deposits and loans!

Choosing a financial institution

Most students already have a relationship with a financial institution. Choosing where to put your money is a personal decision, and once again, people should shop around to find one to suit their personal needs. Most people look towards a combination of:

  • Services what services does the institution offer, now and for future needs
  • Convenience locations, ATMs, easy online banking
  • Price interest rates, fees, return on investment

Accounts

There are different types of banking accounts, each with their advantages and disadvantages depending on their context and what the depositor needs from them.

Transaction accounts offer low cost services for everyday transactions such as shopping and paying bills. Fees are usually charged on the number of transactions made each month.

Savings accounts are interest-bearing accounts specifically to help save. They can also be used for everyday transactions and for emergencies.

Term deposit accounts money is deposited for a certain amount of time in return for higher interest, which is paid at the end of the term. This type of account is used specifically for longer term saving.

Deposit the money placed into an account

Loan money that is borrowed from the institution, and paid back in instalments, with interest

Deposit Interest Rate the rate of interest, expressed as a percentage that a financial institution pays on the money deposited

Loan Interest Rate the rate of interest a financial institution charges for borrowing money

* The interest charged on loans is higher than the interest paid on deposits. The difference represents the profit made by the lending institution.

For the purpose of this module, debt is an outstanding amount of money that is owed. Not many of us escape life without accumulating some level of debt, but it can be suffocating. Understanding the pitfalls of debt and the practice of good financial habits will put students on the path to a more positive financial future.

BANK LOANS

At some stage in the future, students will consider a large purchase such a car or overseas trip that requires more money than they have on hand. When extra money is required, often the most economical way to source this is through a bank loan.

A bank or credit union will consider lending the money for a big purchase to people who are earning and can demonstrate their ability to contribute regularly to a savings account. As with credit cards, banks expect the loan to be repaid at an agreed amount at regular intervals. There are severe consequences if loan repayments are not met.

* Unlike credit cards where the limit can be borrowed over and over again, bank loans cannot be borrowed again after they have been paid or partially paid.

Credit is the name given to the concept of spending money you don’t actually have. Credit allows the purchase of an item or service without paying for it in full at the time of purchase. A customer is given permission to take an item or utilise a service in good faith, to be paid at a later date. Forms of credit include:

  • Store credit
  • Service contracts - mobile phones etc.
  • Credit cards

CREDIT CARDS

One of the most commonly obtained forms of credit is a credit card. A credit card is an agreement made between the lending institution and the customer, and is used to pay for good and services. The financial institution that issues the card pays the vendor for the goods and expects payment from the customer in return. Credit cards are relatively easy to obtain and can be very useful when used carefully.

Benefits of credit cards:

  • A form of short-term finance
  • A convenient way to pay for things
  • Reduce the need to carry cash - especially when travelling
  • Easy method of making purchases over the phone or internet
  • Useful source of emergency funds
  • Offer attractive rewards programs

Credit and loans are essentially the same thing. They are debts that need to be paid. We tend to think of credit cards as separate from other types of loans because we use them differently.

Buying on credit - BEWARE !

Some students may already have credit card debt. This is not surprising considering they are so easy to acquire. Credit cards are one of the leading causes of debt amongst Australians today and are an easy trap to fall into if not handled sensibly. People should be aware of the true price of paying for the privilege of buying now and paying later.

Pitfalls of credit cards:

  • Makes impulse buying easy
  • Interest rates are much higher than other types of loan
  • Paying the minimum monthly amount is slow and expensive
  • Automatically extended credit limits give the capacity to accrue more debt
  • Debt continues to accrue interest
  • Crippling penalties apply

It’s easy with a credit card to spend more than you can afford, but students can avoid the pitfalls of credit card debt by asking themselves the following questions before purchasing anything on credit:

  • Is this something I really need, or just something I want?
  • Can I afford to pay it off sooner rather than later?

* If credit cards are to be a fact of financial life, they must be managed carefully.

The following are important tips for maintaining control over the plastic.

Beware the cash advance!

  • Even on ‘interest-free days’, interest is charged immediately for cash advances
  • Any payments made will not repay the cash advance until all previous credit advances have been repaid in full
  • The benefit of the interest free period is lost until the cash advance is cleared

Keep fees down

  • Manage the card carefully and check all statements
  • Avoid unwanted fees for exceeding the credit limit
  • Pay minimum monthly payments (more if possible) on time
  • Don’t have a rewards program that is not needed
  • Don’t allow payments to be dishonoured

Low or no fee payment methods

  • Explore the cheapest and easiest way to pay off the card
  • Phone and internet banking are almost always cheaper than paying over the counter
  • Have monthly payments automatically deducted from your account (unsuitable for paying off the balance owed each month)

Leave it at home

  • Avoid temptation and leave the credit card at home

Benefits of credit cards:

  • A form of short-term finance
  • A convenient way to pay for things
  • Reduce the need to carry cash - especially when travelling
  • Easy method of making purchases over the phone or internet
  • Useful source of emergency funds
  • Offer attractive rewards programs

Keep it safe!

  • Don’t let someone else get their hands on your credit card details.

More than one card

  • Will lead to further financial hardship
  • The more cards, the more fees and charges
  • Cash advances from one card to pay off another inevitably increases debt

Paying off the balance

  • Avoid paying interest charges on purchases. Pay the monthly balance in full, or before the end of the interest-free period
  • Try clearing debt within a couple of months
  • To avoid the habit of borrowing up to the limit each month, consider cancelling the card
  • Consider a personal loan at a lower interest rate to pay off the debt

* The easiest and most risk-free way to gain wealth is to limit the amount of money paid in interest on debt

The way in which a person conducts their credit agreements is reflected in their ‘credit rating’. A credit rating is the assessment of a person’s ‘credit-worthiness’ based on their history of borrowing and repayment. Late payments and loan defaults make for a bad credit rating. Having a bad credit rating can follow a person through life, effecting any future applications for finance.

If students are in any doubt about their credit rating, a number of websites provide free credit checks, credit reports and advice on improving personal credit scores.

Veda Advantage

Dun and Bradstreet

MONEY TERM MY EXPLANATION
Asset Items of value that you own. This can be cash or can be converted into cash (property or a vehicle)
Bank statement A statement given to account holders by a bank or credit union to keep them informed of transactions made during the statement period. Statements are sent or posted online on a regular basis.
Budget A plan of how money is going to be managed over a set period of time.
Consumables Items that are used and replaced.
Credit The term used when a customer purchases goods or a service with an agreement to pay at a later date.
Credit card A plastic card representing an agreement on a set amount of money, made between the lending institution and the customer that is used to pay for goods and services.
Credit limit The maximum lending amount offered for a loan, or the dollar amount that can’t be exceeded on a credit card.
Credit rating A ranking applied to a person based on their credit history that represents their ability to repay a debt.
Debit card Similar to a credit card, allows money to be withdrawn or payments made directly from the holder's bank account.
Debt Any amount that is owed including bills, loan repayments and tax.
Deposit Money deposited into a bank account.
Deposit Interest Rate The rate of interest, expressed as a percentage that a financial institution pays on the money deposited into an account.
Disposable income The money left over after expenses have been subtracted from income.
Exchange rate The price of one country's currency in terms of another country's currency.
Expenditure Money spent on bills, food, rent and consumables.
Fees Banks often charge fees for servicing bank accounts, including overdraft fees and charges for using a non-bank ATM.
Financial advisor A professional who provides financial advice and support.
Fixed interest rate When the interest rate of a loan remains the same for the term of the loan or an agreed time frame.
Gross income The total money earned before tax and expenses are deducted.
Guarantor A person who promises to pay a loan in the event the borrower cannot meet the repayments. The guarantor is legally responsible for the debt.
Income Money earned from wages, salary or other
Interest The cost of borrowing money on a loan or earned on an interest-bearing account.
Interest rate A percentage used to calculate the cost of borrowing money or the amount you will earn. Rates vary from product to product and generally the higher the risk of the loan, the higher the interest rate. Rates may be fixed or variable.
Investment An asset purchased for the purpose of earning money such as shares or property.
Liability A financial obligation or amount owed.
Loan A finance agreement where a person or business borrows money from a lender and repays it in instalments (with interest) within a specifed period.
Loan Interest Rate The rate of interest a financial institution charges for borrowing money.
net salary Gross pay minus deductions and taxes.
Overdrawn account A credit account that has exceeded its credit limit or a bank account that has had more than the remaining balance withdrawn.
PAYG Pay As You Go. Portions of tax put aside periodically towards a tax liability.
Repossess The process of a bank or other lender taking ownership of property or assets for the purpose of paying off a loan in default.
Salary The income paid by an employer to an employee, in regular instalments of the same amount across the period of a year.
Savings Money saved that is deposited in a bank or credit union.
Superannuation Money set aside for retirement that must be paid into a complying superannuation fund.
Tax Money taken by the government from a person’s income that is used towards healthcare, education, defence, welfare and the upkeep and development of roads and other infrastructure.
Tax File number (TFN) The unique identifying number used to help identify an individual’s tax records and cross check information between government departments and institutions.
Tax threshold The limit that people are able to earn before being taxed by the government.
Wages A per-hour or per-task rate of pay, which varies according to the amount of time worked across the pay period.

here really is a difference between WANTS and NEEDS. Distinguishing between them is vital when making positive decisions about money. A new outfit for a party may be a want, whereas, clothing for work is a need. The latest iPod is a want, but money for the rent is a need.

A NEED is something we have to have. Something we can’t do without. In truth we only need four things to survive:

  • Shelter
  • Adequate food and water
  • Health care and hygiene products
  • Appropriate clothing

A WANT is something we would like to have, but is not absolutely necessary. Even though we may believe that designer shirt is a need because it is a piece of clothing (and would be oh so good to have); really it’s just a want. We probably have enough shirts in our wardrobe. Or we might think that we need a car; but unless we live in the outback and have no means of public transport, this is also a want.

Suggest to students that the next time they are debating whether to buy something, ask themselves these questions:

  • Is this a NEED or a WANT?
  • Do I really have the money for this?
  • Why is this so important to have right now?
  • Can I wait a week to think about it?
  • If I buy this now, will it use valuable money I was saving?
  • Can I buy something similar for less money?
  • Will I regret buying this in a few weeks time?

A budget is a plan of how money is going to be managed over a set period of time. Learning to budget effectively will help students to live within their means and plan for the future. Some people feel that budgeting is a constraint, but following a budget allows us to spend sensibly in the knowledge that our financial obligations are met.

Budgeting is a crucial skill, it helps to keep track of

Income is the money earned from wages or salary, interest from bank accounts or gifts of money.

Expenditure (expenses) is the money that is spent on bills, rent, food, clothing etc.

Disposable income is what is left after expenses have been subtracted from income.

* Expenses more than income? - Reduce spending or increase income!

Why budget?

Students have probably been cruising along perfectly well so far without having to budget. But the next phase of their lives will be unlike the last. They will be responsible for paying their own bills and keeping the refrigerator stocked. Therefore there is no time like the present to get into the habit of effective management of their personal finances.

So why budget?

  • To plan towards short-term and long-term goals
  • To avoid spending money that isn’t there (don’t spend on credit!)
  • To prepare for life’s unexpected costs or emergencies (unemployment, ill-health)
  • To plan for an active and comfortable retirement
  • To scrutinise spending habits and find areas to make savings
  • To climb out of debt and stay out of debt
  • To adjust, focus, celebrate and reward (life is short)

Budgeting steps

Keeping close scrutiny on where the money is going is probably the best way to learn effective budgeting. Being brutally honest can be surprising and enlightening. A carefully planned budget will keep students accountable. It takes just a few steps to begin.

Money diary: Keep a money diary for a month. Writing down every purchase, even the smallest expense will help to highlight where the money is going, and what spending habits need to change.

Scrutinise: Take a look at how much was spent on:

  • Household bills (food, board, rent)
  • Living costs
  • Travel (car, public transport)
  • Leisure (going out, gym fees, sport)

Cut back: Categorise expenses as NEEDS (expenses that are unavoidable) and WANTS (expenses that could be cut if necessary). Make a list of potential cutbacks.

Monthly allowance: Create a monthly allowance and budget first for the costs that must be met.

Follow the budget carefully: Record everything that is spent and where it was spent.

Modify: What works, and what doesn’t? Modify and make adjustments each month.

Address shortfalls: There will be shortfalls. These can be addressed by exploring ways to earn more, or cut back more.

Wish list: Create a list of WANTS and NEEDS that are not yet affordable and work towards these tangible goals.

Handy money websites for students

ASIC Money Smart
For information, strategies and advice on all things money.

www.moneysmart.gov.au/

Youth Central Victoria Managing money

Advice and strategies specifically designed for young people, for making informed financial decisions.

www.youthcentral.vic.gov.au/managing-money

Not all debt is bad. Very few people earn enough money to pay cash for life's most important purchases such as a home, a car or higher education. Good debt is an investment that will grow in value or generate long-term income although, as with most things, there are always risks. Examples of good debt include:

Tertiary or VET Education

Investment in education opens the door to many opportunities in life, not the least of which is greater employment opportunity. It is widely understood that educated workers have greater choice and earn more throughout their working life than those who finish with a secondary education.

Small Business

With effort, entrepreneurial skills and a desire to be your own boss, investing in a small business can bring financial independence, work satisfaction and even generate employment opportunities for others.

Real Estate

Historically, real estate is a fairly stable investment. This applies to buying a home, which provides security and stability, residential real estate to generate income, or property development for profit.

Travel

Although travel does not necessarily build a steady financial future or generate income, it can bring value in so many ways to a person's life such as complex life skills, new understandings and connections with people and places that offer a broader and more open view of the world.

Bad debt is debt that cannot be recovered. When buying on credit or taking out a loan it's a good idea to keep in mind that if the purchase is going to fall in value or not add to future wealth or income, it is regarded as a bad debt. Loans taken out for luxury goods and holidays also come under this category. Examples of bad debt include:

Cars

Although a vehicle is more often than not a necessity, its value depreciates rapidly from the time it leaves the showroom.

Tips:

  • If you cannot pay cash, pay it off as quickly as possible
  • If you cannot pay cash, pay it off as quickly as possible
  • Buy a good second-hand car instead of a new one

Consumables (clothing, holidays etc.)

Consumables are items that are used and replaced. Before the interest has even been paid, shoes wear out, clothing goes out of fashion and short-term holidays are merely a memory. The interest spent on these is better spent elsewhere.

Tips:

  • Pay cash for consumables

Credit cards

The high interest rates charged on credit cards mean they are the baddest of the bad!

  • Find a low interest bank loan if a loan is necessary.

The motto of everything in moderation is the right approach to take where debt is concerned. Even good debt has a potentially bad downside.

Managing Financial Risk - The Financial Vortex

We've all heard the term 'spiralling debt'.

The most important financial lesson students can learn is not to spend more than they earn! Doing so time and again will find them spiralling into a risky financial vortex.

Many people have found themselves in this type of debt.

What starts off small can get quickly out of hand. Being in such debt puts people at risk of losing their home, their health and their emotional wellbeing.

Young people should never struggle or be without support in any financial situation.

Whether your students are:

  • Attending university full time
  • Working part time and attending tertiary or TAFE studies
  • In an apprenticeship or traineeship
  • Living away from home and studying
  • Leaving home for their first job
  • Aboriginal or Torres Strait Islanders
  • Aboriginal or Torres Strait Islanders
  • Carers
  • Living in remote or rural areas
  • Living with a disability

They can fnd information about support and assistance on the Australian Government website.

www.australia.gov.au/help-and-contact/faqs/government-assistance

For straightforward and factual information on saving strategies and financial services and advice, students can visit a number of handy websites, or seek advice from their financial institution.

Financial advisors

Financial counsellors provide support and advice for anybody with more complex issues such as financial hardship and debt. Financial counselling is a free and confidential service offered by government agencies, community organisations and legal centres. Financial counsellors:

  • Help with budgeting, financial goals and plans of action
  • Advise on government assistance
  • Explain financial options and consequences
  • Negotiate with creditors
  • Refer to other services as necessary

Professional advice is also available for big life events such as retrenchment, inheritance or planning for retirement.

A great website for all types of financial advice, and information on financial services is ASIC MONEYSMART.

www.moneysmart.gov.au

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Assessment Task