- They don’t usually have the cash to pay for advice,
- They don’t have heaps of disposable income to invest, and,
- Retirement is a long way away.
But what I’ve noticed recently is the ‘late teens/early twenties’ cohort of today seems to be much more financially aware than my friends and I were at a similar age. In the same way it now seems cool to be smart at school, it’s now cool to be smart with your money as a young adult.
Consequently, I’ve spent a bit of time recently putting together simple bits of advice for the adult children of my clients. I figured if it was helpful for them, it would likely be beneficial for others too.
Here are my eight favourite financial tips for young adults.
1. Spend less than you earn
Some might say, ‘this is easy to say but hard to do’. But it’s not actually hard to do. It just requires discipline. And the easiest way to be disciplined is not to require yourself to be disciplined.
Let me explain.
Imagine it’s been a long day, and at 9.30pm, you find yourself heading to the fridge for a sweet treat. If your fridge contains a chocolate doughnut and a bowl of fruit, it’s going to take some discipline to reach for the fruit rather than the doughnut. If your fridge only contains the bowl of fruit – no discipline needed!
You can apply the same principle to your spending by:
- Automatically transferring a portion of your weekly pay to a savings account.
- Not having a credit card.
Scott Pape, the Barefoot Investor, suggests saving 40% of your take-home pay and then directing the remaining 60% towards essentials like food, bills etc. The most practical and easy way to make this happen is to ask your employer to split your pay. They would pay 60% into your ‘everyday living’ account and the other 40% to a savings account. Even better is if your savings account is with a different bank than your everyday living account. That way, when you log in to your everyday account’s internet banking, those saved funds aren’t sitting there taunting you and begging to be spent.
2. Beware of lifestyle creep
When you get a pay rise, the natural thing to do is direct all that increased disposable income towards upgrading your lifestyle. And while you should definitely reward yourself for your hard work, resist the urge to direct all that increased income to lifestyle. Mainly because if you establish that constant upgrade habit when you’re young, you’ll tend to keep going with that same habit when you get older.
We’ve all heard stories from when the mining boom ended here in Perth of people who were making $300K a year, lost their job, and somehow had zero savings to fall back on while they looked for a new one. And when they did get a new one, it was a lower-paying job that couldn’t support the lifestyle they were used to. Not fun.
If you get in the habit now of only making small lifestyle upgrades with each increase in income, you’ll be setting yourself up beautifully for later in life.
3. Save with purpose
In your late teens and early twenties, it’s easier to save if you understand exactly what you are saving for. For most people in this age cohort, holidays, cars and house deposits are the main saving goals. Having those goals means your saving has a purpose and will make it easier to build that saving habit. Write down a number to target, rename the account to reflect your goal, and make sure to celebrate the achievement when you get there.
4. Know the difference between good debt and bad
I define ‘good debt’ as acceptable, unavoidable debt – things like a HECS debt, home loan or investment loan. All these debts deliver some level of long-term return: education or capital growth.
Bad debt, on the other hand, usually sees you paying interest on things you might want, but don’t necessarily need. Almost all kinds of personal loans (credit cards, store cards, Afterpay, and most car loans) fall in this category. If you’re going to commit to a bad form of debt, commit only if you truly need the thing, have no other choice, and where possible, can pay it off relatively quickly.
5. Don’t be afraid to rent
Renting has developed a bit of a bad name over the years, seeded by the refrain of ‘why would you pay off the loan on someone else’s investment’?
But there are many good reasons to rent:
- It allows you to try out living in an area before you commit to living there in the long term.
- Even with interest rates as low as they are now, it can still be cheaper to rent than pay off a mortgage, especially if you have housemates.
- It doesn’t lock you into a long-term commitment at a time in your life where it might serve you better to be unfettered.
6. Only buy a house when it’s right for you
How do you know the time is right? There are many factors but the main ones for me are:
- You have a stable job
- You’ve spent time living in the area
- You’re not in a situation where you have to buy with a friend or a family member
- You don’t need to borrow more than 80% of the value of the property
- You’re able to take advantage of the First Home Super Saver or stamp duty exemptions available on certain homes
- No more than 30% of your take-home pay will be going towards paying the minimum mortgage repayments. You should also be willing to commit to a plan for exceeding these minimum mortgage repayments.
7. Only put your money into investments when it’s right for you
Just like buying a house, investing is a good idea but only at the right time for you. To get a proper return out of investing, you need to lock your cash away for a minimum of 5 years. But if you really want to leverage the true power of investing (compound interest), 10+ years is a better time commitment. I generally advise that people don’t invest cash until:
- They have bought a home or saved up enough for a 20% deposit
- They have built a decent offset balance
- They have set a trajectory for paying off their debt at a decent pace
8. Don’t benchmark yourself on your peers
It’s so easy to feel ‘left behind’ when it seems like all your friends are buying homes, going on big expensive holidays or are on a trajectory that seems way ahead of where you’re at. The thing is, you can’t be sure if your friends can truly afford the lifestyle they have, nor do you know what kind of debt they’re carrying in the background. If your peers are financially secure and way ahead of where you are right now, good on them. But you are not obliged to keep pace.
Being comfortable running your own financial race is a good habit to build. Moreover, it’s one that will serve you well, both now and in the future.