In this month's article we discuss some obvious, and some not-so-obvious, financial tips for those starting out in the working world. Independence from parents may seem fun, but often young people get caught out by by common financial traps, and so understanding the finance world is a key step in avoiding such pitfalls. Warning: Do not be fooled in thinking that just because you are not young in age anymore that the below principles are irrelevant to your circumstances.
Despite what you may have been told, the secret to budgeting is not simply spending less than you make. No, the key to this (and any other form of planning) is to have a firm vision in place. Some dream or spending goal that you wish to work towards. One that is so precious to you that you will not think twice about foregoing added luxuries or impulse buys. This could be the goal to go and watch the next world cup in Russia, or to buy your first home. Or maybe you like the idea of owning an elephant. Whatever your dream may be, work out what you need to save each pay day and make sure that this money is put away first.
Another important facet of budgeting is to monitor (record) what you spend, at least for a few months if not longer, until you know exactly where your money goes (i.e. how much exactly do you spend on coffees, on your mobile, etc). And lastly, continually review your budget and your goals, so that you can make adjustments as these change.
Stay out of it. Apart from important debt that may be an investment in your future (HECS, home loan, car loan, margin loan) you really should not incur any debt whatsoever. And even for these items you should only purchase what you can afford to repay easily (i.e. a modest home, car, etc). Watch out for credit card debt and mobile phone bills, but essentially do not borrow money to buy things that you are just going to consume - i.e. do not go into bad debt.
If you take care of the first point above (budgeting), debt should not be an issue. But if it is, this is likely to be one of your first budgeting goals (i.e. to eliminate bad debt).
Yes, super is boring, but it is your money and could very well be your biggest financial asset that you ever own. So take the time to understand your superannuation - How is it invested? What fees am I paying? How many different funds do I have? What is this insurance cover for?
If you do have a number of funds or have had a number of different jobs, look to consolidate into an appropriate fund and make sure you tell your current and future employers of your fund. When you start with a new employer, it can be common for your new employer to offer good superannuation benefits or fund choice, so make sure you look into this as well.
A lot of young people understand what car insurance is or what health insurance does, but have not really considered the role of life insurances for themselves. And for most who are independent without anyone dependent on them, life cover may seem irrelevant. But this presumption is incorrect, making it important to understand what life insurance is and its 3 main forms - death cover, disability cover and trauma cover.
- Death Cover - This self explanatory, being that if you die, your family will get some money (a lump sum). This cover may not seem necessary to most young people who haven't started their own family yet, but should still be considered;
- Disability Cover - There are 2 types of this cover - a lump sum payment for full total and permanent disability and a monthly payment for partial or temporary disablement. Both these covers can work hand in hand and are very important for anyone who has started working;
- Trauma Cover - This is a lump sum payment paid if you suffer a traumatic illness such as cancer, stroke, heart attack, etc. Even though chances of these happening to you are low when young, this type of cover can provide integral support in an otherwise devastating time.
Importantly, the first 2 of these covers, death and disability, can be taken out inside of super (and most of you probably already have a small amount by default), which can be a good way of managing your budget appropriately (i.e. premiums paid from your super balance), while having the financial security of life insurances.
Taking the time to manage your finances can help you create a brighter future and generate greater confidence in your financial independence. Planning and discipline may be more necessary for some, but through the forming of good financial habits you can help your dreams become your reality.
LBW Financial Services Pty Limited is an authorised representative of Wealthsure Pty Ltd, AFSL 238030, ABN 93 097 405 108. The information contained within these articles is of a general nature only. Any rates (tax rates, Centrelink rates, exchange rates, etc) are correct at time of publication and are subject to change. Whilst every care has been taken to ensure the accuracy of the material contained herein at the time of publication, neither the author, authorised representative, nor licensee will bear responsibility or liability for any action taken by any person, persons or organization on the purported basis of information contained herein. Without limiting the generality of the foregoing, no person, persons or organization should invest monies or take action on reliance of the material contained herein but instead should satisfy themselves independently of the appropriateness of such action.