We all have things we wish we could go back in time and tell our 18-year-old self. Whether the topic is relationships, life, career or finances, we have all learned lessons over the years which, if we knew back then, would place us in good stead for the future. Alas, we all made mistakes, and gradually learned through life’s experiences, the lessons that have made us who we are today.
Recently I had a hard conversation with my brother about money. Discussing how to manage hard-earned cash is a tough, but vital, conversation to have with someone you love.
What I took from that conversation was that managing money is difficult and confusing and sometimes not very logical. This got me thinking about what I have personally learnt while studying and working in the financial planning industry for the past 10 years. I then asked myself, knowing what I know now, what are the top money tips I would give my 18-year-old self?
1. Pay yourself first
Every time you get paid, pay yourself a set amount into a separate savings account. Make sure the amount you allocate challenges you. Not so much that you can’t afford your bills, but enough that perhaps, by the end of the month you are forgoing some of the ‘nice to have’ things, like eating out.
If you need to, make that bank account difficult to access (for example it doesn’t include a debit card or internet banking, so you are forced to go into a branch to withdraw money). Perhaps sign up for an account that rewards you for contributing regularly and for not touching the balance (and make sure it has a great interest rate). As you get older, money gets harder and harder to save thanks to increasing financial commitments, so get into good habits early and save, save, save!
2. Save three months of income
How much is enough savings? There is no right or wrong answer here, but I wish someone had told me as I left high school that a three-month salary buffer it would be a great base line savings amount. When you have that amount in your account, call it your $0 balance and be strict with yourself not to go below it, except in emergency situations (no, holidays do not count as an emergency).
3. Keep your finances simple
Your finances will inevitably get more complex as you get older. Enjoy the simplicity of not having many financial responsibilities in your teens and early 20s and try to keep that simplicity right through your (financial) life. Question any regular subscription payments you have, to make sure they are still appropriate. Keeping your finances simple should mean you are able to reconcile your bank accounts (i.e. what is going out and coming in) at least fortnightly. If for no other reason than fraud happens and you need to always be vigilant.
4. Bad debt is bad
Bad debt is debt that doesn’t give you anything in return (like generating more income or increasing your net worth). Examples of bad debt include car loans, personal loans and credit cards. While I’m on that point, keep credit cards to a minimum and you pick the limit – don’t let the bank dictate your credit limit. Also, you don’t always need to take up that credit card limit increase, just because the bank offered. Other bad debt, like personal loans and car loans are for extreme situations only. If you want something, like a car or holiday save up for it, don’t just borrow from the bank to ‘have it now’. It will be so much more rewarding.
5. Create a variety of income sources
In this day and age, there are so many ways to make a little extra money. Don’t rely on one income source, from your employer. Get creative. The more you diversify your income from different sources, the better off you will be. The best type of income is a passive income – one that doesn’t rely on your personal exertion. Think about things like savings account interest, investment property rent, dividends from shares or even creating that great app that people are buying from iTunes/Google Play. Other income sources could be setting up an online business on the side or even cashing in on social media by being an influencer.
6. Understand your superannuation
Although it’s a long way off, your superannuation will generally become your second biggest asset in life, behind property. Don’t be afraid to understand what it is and how it works. At the end of the day, when you want to retire, this will be your nest egg, and will dictate at what age you can retire and how much income you will receive, so look after it and treat it well.
If this all seems too hard and confusing, consider outsourcing’ your finances or just get a second opinion about your financial position from a qualified financial adviser whose aim it is to guide you through your financial goals and ensure you are on track.
At the end of the day, your financial situation is dependent on you. By setting yourself up financially, you will gift yourself the freedom to enjoy the things you want and have the life you want to live.
*This article first appeared in Money Magazine on 8th March 2o17 and can be found here.
*This information is general in nature and does not take into consideration your individual circumstances. Please contact us for further information.