In your twenties it can be difficult to think about issues affecting your financial future like superannuation and retirement.
However good planning and financial discipline now is important for your financial security - whether it's buying your first car, travelling overseas or saving for a house deposit.
Budgets
Establishing a budget and sticking to it is the best way to manage your day-to-day living costs. It helps to ensure you always have funds available to meet your regular expenses, such as rent, phone, electricity, groceries, fuel, car insurance, registration, for example.
Step 1: Write down your net (after tax) income and then list your regular outgoing expenses. This is your basic cashflow system - that is, inflow less outflow equals net cashflow. Doing this will help you determine what surplus cash you may have left over which can be put towards a dedicated savings plan.
Step 2: Work out how much you can save on a regular basis (each week, fortnight or month), and how long it will take you to reach a specific goal. Organise for this money to be debited directly from a nominated bank account into a chosen investment strategy so it makes saving that much easier.
If you don't have surplus funds left over after the bills are paid, use your budget to review what outgoing expenses you are paying and determine whether these can be reduced. Simple methods include:
- Consolidating debt
- Making your lunch instead of buying it
- Shopping around for better insurance rates and credit card interest rates
Regular savings plans
Regular savings plans enable you to invest any surplus income you may have while still allowing you access to funds if required.
You generally make an arrangement with a fund manager to invest an initial lump sum followed by regular investment instalments; the most common instalment period being monthly.
Minimum monthly investments usually start at $100. You can nominate your own amount above this according to what you can afford to save.
This monthly payment is then invested on your behalf by the fund manager in the same manner as the initial investment.
Debt management
If you have a credit card – as many people in their twenties do - you need to be able to effectively manage the debt on these cards. It is so easy to get into financial trouble using credit cards
We recommend you:
- Choose the appropriate credit card limit for your income. Students and low income earners who do not pay off the card each month should choose a budget card with low interest rates. Interest rates can vary from 7% to 24%, so shop around for a budget card.
- Meet your minimum monthly payment, or better still, clear the balance to avoid higher interest rates or excess penalty fees. Meeting the minimum monthly repayment won't clear your debt - ever - so try to repay as much as you can over the minimum limit to reduce the outstanding balance.
- Don't accept offers from the credit card providers to increase your credit limit. This is the next step to financial disaster. Stick to a limit you can manage.
- Never use your credit card for investment purposes. If you want to start investing there are far more appropriate investment loans, where the interest is not only lower but also tax deductible.
Superannuation
Superannuation is a savings vehicle where the main purpose is to provide funds in retirement.
If planned well, you can enjoy a comfortable lifestyle throughout retirement without having to rely too heavily on government pensions.
Funds are built up via contributions over your working life and you can increase these contributions at any given stage.
Even though retirement may be a long way off if you're in your twenties, it is still important to understand the role superannuation will play in your future financial security.
Contribution options
Superannuation Guarantee Contributions: Your employer is obliged to make contributions of 11% of your salary to superannuation on your behalf.
You may be eligible to request your employer to direct these contributions into your own nominated superannuation fund. This depends on the type of award or industrial agreement that you are employed under.
Government co-contributions: If you are a low or middle-income earner, you can take advantage of the super co-contribution payment by making eligible personal super contributions to your super fund. The government will then match up to $1,000 of your personal super contributions ($500 from 1 July 2012).
Wealth Protection
Accidents and illness are often the last thing on your mind when you're in your twenties, and the idea of protecting your wealth against these can seem a little over the top.
You may not have a mortgage or dependants, but personal loans for credit cards, holidays, cars and HECS or HELP are still financial commitments, as is paying rent.
Personal insurance allows you and your family to cope with these obligations should anything happen to you.
Income protection
Income protection will provide replacement income if you are unable to work due to illness or injury. It will help you continue to meet your financial commitments and daily living expenses, such as rent, food, bills, and loan repayments.
Life cover
Life cover provides your beneficiaries with a lump sum that can be used to clear any debt you may have, should your assets not be sufficient to clear it.
Seek advice before choosing your cover because there are many different personal insurance products on the market. You need to think about everything from insurance levels to ownership structures and funding arrangements.
