Brad’s first job was as a casual at Bunnings. He worked there for three years and put the money he earned towards buying a car and having fun.
After starting his first full-time job as an apprentice electrician, however, Brad felt it was time to cut back on his spending and put the money he was earning towards setting him up for the future.
He started an online share portfolio account after some recommendations from friends and family and his own research. He started thinking about saving for a house. And while he had aspirations to travel sometime in the future, he was in no rush to do that.
I find myself having conversations with many people like Brad these days. They’re young adults in their early to mid-twenties who’ve recently started working full-time. For most of them, it’s the first time in their lives they’ve had surplus income. Often that surplus is solid as they’re still living at home, and they want to be sure they’re making the most of it.
When chatting with these people, there are three areas I typically point to with regard to putting their income to work to get ahead of the game financially:
Before starting with investing, it’s important to understand the following:
- What your investing goals are
- What your risk tolerance is
- How much you have available to invest
- What investing options are open to you.
For those who are at the beginning of their investment journey, there is often the capacity to do something like put a certain amount per pay into an ETF.
ETFs (exchange-traded funds) are a simple but effective way to get exposure to the share market. They give investors access to bundles of shares that follow a particular theme or index. The benefit of ETFs is the broad range of shares they offer access to. Even if one company in the ETF goes under, the broader ETF would generally be unaffected.
If you want to take the non-ETF route and experiment with individual shares, this will usually increase the volatility in your portfolio. Investing in a variety of different areas (i.e. $1,000 into a range of different companies) is generally better for long-term performance and returns.
When you start working full-time, your employer must contribute to your superannuation. This contribution is 10.5% of your before-tax income. As an employee, you have the ability to choose the super fund your employer contributes to on your behalf.
Any money deposited into your super fund is then invested by the trustee of the super fund on your behalf. Where those funds are invested depends on:
- The super fund
- The mix of investment options/asset classes you tell the super fund to invest in on your behalf. (If you don’t tell the super fund anything, they will use a default investment profile.)
If you choose your own mix of investment options/asset classes, your options will depend on your attitude to risk. Some people might also choose to take more risk when they are younger (more risk = potentially higher returns) and switch to more conservative options when they are older.
Which super fund might be best for you?
An Industry super fund can be a good fund to start with. Industry super funds tend to have lower fees while still providing strong long-term performance.
If you’re looking for more investment options than an Industry super fund provides, there are many other funds you can choose from. The fees may be higher, but you will also be able to access more investment options.
Another thing to consider regarding super is that most super funds give you the ability to use the funds in your super account to pay for personal insurance like Life Insurance. As with all things, there are pros and cons to going this route. Insurance provided through a super fund is usually cheaper but may not provide the same level of cover as insurance sourced outside the super fund.
3. Saving for and purchasing a home
Before going down the route of purchasing a home, you should have 10-20% of the purchase price saved up. If you don’t, you will be required to get lender’s mortgage insurance. This is a one-off premium that’s added to your home loan that protects the bank against a loss they might incur if you’re unable to repay your loan.
The first home super saver (FHSS) scheme introduced by the Government in 2017 makes saving for your first home easier. The scheme allows you to put money into super taxed at 15% (rather than the marginal tax rate), and that money can sit in super until you need to withdraw it to buy your property. The ATO keeps track of your contributions to super versus your employer’s contributions. Only the contributions you make, and earnings relating to those contributions, can be withdrawn and used to buy your first home. You can only contribute $15,000 per financial year, and a maximum of $50,000 can be released towards your home purchase.
When it comes time to purchase a property, you want to make good decisions here, too, as poor decisions can lose you tens to hundreds of thousands of dollars in the long term.
- Are you looking to buy off the plan?
- Are you buying the property to rent out or to live in?
- How long do you expect to hold on to the property?
The earlier you start paying attention to your finances, planning for the future and putting surplus income to work for you, the better you will be set up financially later in life. There are many things to consider when making decisions such as the above. Getting sound financial advice won’t just help you feel sure you’ve given due consideration to all your decisions, it can save you thousands of dollars in the long term too.
This information is of a general nature only and has not taken into account your particular circumstances. Before making any decision to act, you should consider whether the strategies are suitable for your personal situation and needs.