We all want to be financially secure; naturally, we want our children to be financially secure.
If I had to give only three tips to young adults, I would suggest the following as a great start;
Start early.
My financially secure clients generally started saving early in life. Children can learn very early by saving small amounts of pocket money or birthday gifts.
Looking back, I see that the best opportunity was after leaving school. After completing school, we generally got a job or went to University and had a part-time job. Living at home, not paying rent (maybe making a small commitment for board to our parents). We had no mortgage or rent and no children. We could choose to spend or save most of what we earn each week. This is when those early lessons can pay off if you understand how to save.
However, I have noticed that most people focus about 90% of their effort on earning more money and only 10% on what they do with it. When we are young, we assume that if we leave school and enter Medicine, Law, Engineering, Science, the Arts, etc., we will be set for life and become and remain financially secure.
Whilst earning money is essential, there is more chance (chance is the key word) of becoming financially secure if you are on $200,000 per annum than being unemployed; that is true.
Still, many who have had very rewarding salaries their whole lives don’t have enough money for retirement or continue to be in debt in their late 50s and 60s.
While interest rates were in decline, there was a decade of opportunity to reduce debt. And those who were conscious savers have seen their wealth compound.
I strongly encourage young adults to save at least 10% of their first pay, regardless of their income. The first pay may be from a part-time job earning only $100, but it establishes an excellent saving habit. These people tend to go through life a little more frugally and value money long-term. As that $100 increases, so does the amount that is saved.
Earning $100 and saving $10 per week = $520 per year.
Earning $1000 and saving $100 per week = $5200 per year.
Establish a 3-year goal.
Goals help establish a saving habit. What would you like to have in 3 years? A car? A deposit for a home or investment property?
A 3-year goal is an Ideal period; it is not too futuristic but long enough to remain focused on the prize at the end of the three years. Also, it is long enough to accumulate a sufficient sum to purchase something of value in the future.
For example, if a teenager wants to save for their first car, three years is not long. Planning for that purchase makes financial sense. Planning early is better than having no money saved and creating a spontaneous decision in your 20s to purchase a car.
A spontaneous decision such as buying a car when you have no savings can result in entering into an expensive car finance arrangement for five or more years. This car debt may affect their borrowing capacity in the future should they plan to purchase a home or an investment property.
The person who saved for the car is a mile ahead financially.
Maximise the return on your savings.
Once you have saved your first $1,000, you should shop around for safe, secure term deposits. Term deposits generally pay a higher interest rate than savings or interest-bearing accounts. Term deposits usually are for 3,6,9 months or longer.
One of the benefits of term deposits, in addition to a better return on your cash, is that you are locking away your money for three months or longer. This stops the temptation of accessing your savings for immediate or spontaneous discretionary spending. Thus, term deposit money is earmarked for your 3-year goal.
Once you have built your investments up to $10,000, you should consider blue-chip shares and ETFs. These investments tend to perform better than cash over the longer term. I strongly recommend only investing in ETFs and shares representing large capitalised companies that continually make a profit.
Should you require further information in relation to investing, please feel free to contact Peter Quinn by submitting an enquiry or calling us on +61 2 9580 9166 to book an obligation free appointment.
The information in this document does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. It is important that your personal circumstances are taken into account before making any financial decision and it is recommended that you seek assistance from your financial adviser.