Common issues amongst this group seem to be income related. First career type jobs, promotions, bonuses/overtime income, study time, student loans, lifestyle considerations, first home purchases, starting small businesses, weddings, family and/or children, travel etc.
Basically, it’s a stage of life that focuses very heavily on you and your needs.
The consumer credit trap or early debt
Now that you have started earning an income, consumer credit will seem like an easy option to get what you want quickly (i.e. Credit Cards, Car Loans, Personal Loans etc). It’s no big deal because you can always pay it back later, right...? WRONG!
This may not seem like a big deal to begin with, but a lot of people get into financial stress because of debt.
Some people are better with money than others, this much is true. But If you find yourself constantly spending more than you earn, not able to pay off credit cards each month in these early years of low financial commitments then you are walking a fine line.
Consider creating an expenditure budget. Budgeting doesn’t mean you need to spend less, it just means you need to be aware of what you are spending. By putting your income and expenses down on paper (or iPad), you will start to see very clearly what you can and cannot afford to do.
The Power of Compound Interest
Learn the power of Compound Interest early!
Simply put, Compound Interest is when the interest you earn each year is added to your principal, so that the balance doesn't merely grow, it grows at an increasing rate - is one of the most useful concepts in finance.
e.g. Did you know - that if you take a $10,000 lump sum, invest it for 40 years at an interest rate of 10% you will end up with approx. $450,000!
In saying that, the compounding effect of interest can be a double-edged sword. It is great when applied to earning interest, like bank deposits or investments that reinvest the earnings, but it is not so good when it is applied to Credit Card debt.
Understanding your Superannuation
While adjusting to this new stage of life, job roles may chop and change. Gain a basic understanding of your Superannuation Savings is a must (after all it is part of your salary package!).
It is not uncommon for each new employer to create a new Superannuation fund on your behalf. This can result in multiple funds being run simultaneously. Each have their own fee structure, investment options and potentially insurance policies (which you may or may not be paying for).
If you are not sure where to begin, then make contact with one of our Drakkar Group advisers today!
By this stage, you may have a family of your own, a mortgage, been divorced, changed careers, been made redundant, faced a health scare, be planning to retire, realised you need to help your parents with health/money issues etc.
Life in no longer just about you. There are now likely to be others to consider when making financial decisions.
Protecting the family
With larger financial commitments like home loans, investment debt, children and/or family issues, it’s time to start addressing life insurance. Imagine something unfortunate happened to you tomorrow, death/disability etc. Freeze your financial situation in its tracks. How would your loved one’s cope? If the answer is not well, then you need to consider appropriate insurances to cover this potential risk.
The dependency on your income is probably becoming greater also. Income Protection Insurance can help to provide you with a financial back up plan should something go wrong. This is a payment that will help you ‘survive’ a period of being unable to work for physical or mental reasons.
A qualified Drakkar Group adviser can help you determine what insurance protection you should have and how to structure it.
Addressing the mortgage
Paying off the mortgage seems like that goal that is constantly, just out of reach (at least the debt is coming down, oh wait a minute it’s renovation time… here we go, under control again, oh wait school fees… at last we are back on top of it, oh wait divorce, ah to hell with it!)
Our home loan is probably one of the biggest financial commitments that any of us will undertake throughout our lifetime. It makes sense to get on top of it early.
Paying a small amount extra per month, using an offset account, changing the payment frequency to fortnightly or weekly instead of monthly can all help to bring down the loan term. Remember the Compound Interest speech?
Did you know that the term ‘Mortgage’ comes from Old French (and Latin before that), to literally mean death pledge! Yikes!!
Stacking the Super Fund
Superannuation has got to be one of the best LEGAL tax haven in Australian when it comes to investing your money. The obvious trade-off is that you cannot access it until much later in life.
Provided that you and your Drakkar Group adviser have sat down and made adequate plans for all your short term and medium-term cash needs, then it makes sense to build your Superannuation.
Reviewing your investment settings and costs regularly is also prudent.
These are generally the highest income years, kids are grown and/or becoming more independent, you are thinking or preparing for retirement etc.
It’s time to focus back on you and/or your partner.
Role of Superannuation
Superannuation is about to become more relevant and important to you than ever before. Leading up to retirement, we need to start considering where are retirement income is going to come from and how long it will last.
The table below will give you a rough idea of how much money you need to support a modest or comfortable retirement. It applies for people retiring at age 65 who will live to an average life expectancy of about 85. It assumes you own your home.
|ASFA Retirement Standard||Annual living costs||Weekly living costs|
|Couple - modest||$34,855||$668|
|Couple - Comfortable||$59,971||$1,150|
|Single - Modest||$24,250||$465|
|Single - Comfortable||$43,665||$837|
ASFA estimates the lump sum needed to support a comfortable lifestyle for a couple is $640,000 (or $545,000 for a single person) assuming a partial Age Pension.
ASFA also estimates that because a modest lifestyle is mostly met by the Age Pension the lump sum required to support it for a couple is $35,000 ($50,000 for a single person).
There are a range of factors that will continue to impact your final retirement balance (i.e. contribution amounts, fees/charges, growth rates of your super and investment settings, use of transitional strategies etc), so it is important to review periodically.
Debt in Retirement
Not something that people like to think about, but very important none-the less.
If you are heading into retirement and still have a small mortgage left on your home then how does this get paid? Will you downsize the home, use proceeds from superannuation or continuing to service the loan using retirement income stream monies?
Your Drakkar Group adviser can assist you in planning the best option for you.
During this stage of life, we need to consider where our income sources are coming from, how long they will last, where we want to live and/or if we are entitled to any Government support. It’s also time to get the house in order by reviewing your Estate Planning instructions to ensure that they still reflect your current wishes.
At last, it’s time to kick back and enjoy the next phase of life.
Hopefully by now, we have given proper attention to building your Superannuation. For most, this will form a large part of our retirement funding. If not, the we may need to rely on the Centrelink Aged Pension.
Other options can always include releasing equity from the Principal Home via downsizing or in extreme cases financing.
In any instance, it is important to not only look at the sources of income but also how long they will last.
If you have never thought about where you wanted to live during retirement, it’s now time. As we get older our needs also change. You may wish to be close to friends, family, the sun, the beach, maybe you live in a double story home that is becoming more difficult to navigate or perhaps recognise that you will also need some ongoing help and carer support.
Aged care is becoming a big business these days. With an aging population here in Australia, it will provide great a peace of mind to consider these options sooner rather than later.
Understanding your entitlements beyond the Age Pension can also be of enormous benefit. You may be entitled Carers Payment, Medicines or Treatments Allowances, Concessional Discounts for Utility bills etc.
During retirement phase, your accumulation ability will be substantially reduced so making every dollar count should be a priority.