Make 2002 the year of managing your money more effectively. Reduce debt, make savings where possible and drive investments harder. It will boost your revenue handsomely and you don't even have to be a genius to pull it off.

By putting an end to ad hoc, chaotic budgeting you can achieve two worthwhile things: a statement of your true financial position and the ability to plan for the future.

The start of the new year is the ideal time to do this because it's traditionally the worst period for big spenders, especially when the spree has been financed with other people's money.

Debt

For most people the real damage to their finances won't become apparent until they receive their credit card statements in January.

But that credit card splurge on Christmas shopping and new year's sales could easily lead to financial troubles and, in some cases, bankruptcy, says a spokesperson for the accounting body CPA Australia.

It found 24,000 people were declared bankrupt last financial year not just high-flyers but ordinary people who do not know how to handle credit properly.

The typical profile of a bankrupt is a person aged 25 to 44. They have pushed their credit to the limit and have run into problems. CPA Australia points to Government statistics showing that credit card debt has jumped dramatically in the past year to become the second most common cause of personal bankruptcy behind unemployment.

Tackling credit card debt should be a priority because of the high interest charges involved (see box).

Jennifer Brookhouse, technical manager with the financial planning firm RetireInvest, says: "Taking corrective action early on will often save months and sometimes years of unnecessary anguish."

Emergency cash

"This has become especially important over the past few months with corporate collapses and companies downsizing leaving people out of work," she says. "If disaster strikes, where do you get your hands on $1000 or $2000 to get over tough times?"

It may be cash at the bank, it may be redraw from your home loan or it may even be access to an equity line of credit where you can at least access money at a cheaper interest rate than, say, a credit card, she says.

If you have a mortgage, however, by far the best savings buffer is a redraw facility, says Colin Lewis, technical services manager with IPAC Securities.

"It reduces your non-deductible debt and the money is there if you need it," he says.

And if you don't have a buffer? "It may be you need to liquidate shares or managed funds," Menschik says.

But this involves taking stock of your investments, as well.

Investments

Some people work on the theory of rebalancing their portfolios every year.

"It can be hard pulling out of performing asset classes and investing into an underperforming asset class," Menschik concedes.

But Lewis says: "Rebalancing is necessary if you are sticking to the objectives, goals and strategies from the outset."

He says professional fund managers have the discipline to do this and retail investors should, too.

But, most of all, it is important to know when to give a badly performing investment the boot.

"It is a hard decision to make," Menschik says. "It is so easy to hang on and say it will come good."

But, she says, you need to ask: if I had new money, would I put it in the badly performing investment or would it be better off somewhere else?

Superannuation

"People tend to get an increase in salary but tend not to review their level of contribution," he says. "Equally, they get a bonus but then it is too late to arrange for it to be contributed to super."

It is important to not only contribute to super but to ensure it is invested correctly. "Your super is tied up until retirement, so you can be more aggressive," Lewis says. "People often wait until their mid-40s or even later before taking it seriously."

But those who leave it until later always say they wish they had started contributing earlier, he says.

Michael Dwyer, managing director of industry fund ASSET, says: "Younger people don't appreciate the magic of compound interest."

Equally, many people don't appreciate the importance of consolidating their super funds.

"Over the past 10 to 14 years people have been earning double-digit returns," he says. "Suddenly they will be noticing single-digit returns and the fees levied over three, four or five accounts will be eating away at the returns."

And think about what type of fund you will consolidate into. "A fund that charges a flat dollar amount is always more attractive than one which charges on total assets," Dwyer says.

Insurance

For example, with ASSET, for $1 a week someone under 41 can have $71,000 in death cover. For $5 they can get $350,000 in cover.

Menschik says it may even be worthwhile not consolidating a particular fund with the rest of your super if it gives good insurance coverage.

But also be aware of insurance limits, she says. "If it is an employer fund you need to ask can you get enough insurance. It might have a limit of $200,000 and you want $500,000."

You might want to take out life insurance if your superannuation policy doesn't give you adequate coverage.

When planning how much insurance you need, plan for the worst-case scenario, Menschik says. "You need to include how much you would need to pay the mortgage off, how much to pay for the kids' education and how much to get the extra help you will need around the house."

Equally, she says, many super funds provide income-protection insurance for up to two years. This means if you have this insurance outside the fund, you can elect for a longer waiting period and pay a reduced premiums.

Lewis stresses the importance of updating the beneficiaries listed in your super fund.

"When a marriage breaks down, super is often the last thing on people's mind," he says. "It is important to review it."

Reviewing your home and contents insurance is an easier task than many other financial chores because the company will send you a renewal notice every year.

"But you should review it, not just renew it," Menschik says.

Natalie Atkins, home portfolio manager with NRMA Insurance, says many customers fail to upgrade their insurance cover to include valuable Christmas gifts and new purchases, which leads to underinsurance.

"Gifts such as handheld computer games, a cordless drill and a DVD player would rapidly increase the value of a householder's contents by up to $2000," she says.

"Historically, home burglaries increase during holiday periods, which makes it even more important for customers to make sure they have adequate insurance for their home and contents."

NRMA Insurance provides an online calculator to help customers estimate the cost of their contents (www.nrma.com.au).

Banking

Andrew Willink, managing director of interest rate monitor Cannex, says all accounts can be fee-free you just have to know how to use them correctly.

One of the easiest ways those with a mortgage can save on fees is to participate in so-called "package banking" combining all their banking products.

"For example, National Bank will offer credit cards with no annual fee and no transaction fees on accounts if you have a home loan," he says.

But even if you don't have a mortgage, you can eliminate fees. "By taking care to keep your balance above the minimum monthly balance level applicable to many accounts, you can avoid monthly account-keeping fees," Willink says. "Some banks will even allow an accumulated relationship. For example, if you have $20,000 in total in accounts [deposits and loans] then you will be exempt from transaction fees."

Above all, he says, do not invest large sums of money in a transaction account: "The interest rate is negligible."

A spokesperson from CPA Australia says there are a number of alternatives to low-yielding bank savings accounts: high-yield accounts, cash-management trusts, term deposits, bonds and mortgage trusts.

Willink adds: "Consider options such as online savings accounts. These offer consumers cheaper banking alternatives and better returns than traditional branch-based accounts, as they are less costly to maintain online with no branch access."

It may change as more people take to the medium, but at the moment the cheapest way to bank is by telephone or electronically. "Use ATMs, EFTPOS, Internet and phone banking when you can, as their transaction fees are lower than over-the-counter fees," Willink says.

Consumers should also be on the lookout for any of the additional charges imposed by the banks. "For example, if you overdraw, the penalties can be up to $10 with penalty interest for even going over by a couple of cents," Willink says.

The other big no-no is using other banks' ATMs, which can cost up to $2 a time. "Most financial institutions will not include these charges in the free transactions allowed," Willink says.

Clearing the debts

"It is not a flattering comment on consumer spending," she notes.

The problem is that credit card debt is easy to build up, with many people progressively overextending on shopping sprees, only to fall into the black hole of paying high interest rates for their indulgence, she says.

RetireInvest has outlined a number of strategies to avoid or manage credit card debt:

Find a way to consolidate the debts into a regular fixed-term loan, which has a lower interest rate and requires regular reductions off the loan balance. Again, avoid using credit cards until the debt is paid off.

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