Financial planning and managing your money is more than saving for when you’re old. Yes, you should start saving and investing for retirement as early as possible, but pay attention to the journey. How you get there matters as much as the destination itself—making decisions that work for you during different life stages so that you are simultaneously investing for the short and long term.
Financial Planning in your 20s and 30s
When you’re starting out in your twenties and thirties, you probably have more proportionally disposable income than you will for decades. Most people in this demographic are only responsible for themselves and carry little debt, except for HECS or HELP loans and credit card or car loan debt. Use that income to pay down debt before you start an aggressive investing plan.
Pay down debt
Two great investment options during these years are your education and your career. In today’s economy, specialisation is almost a necessity in most professions. That education is costly, especially in higher-paying fields. If you have educational debt, a voluntary repayment scheme will help you clear that debt out much faster than if you stick with compulsory payments.
If you have credit card debt, put that in the same category as student debt and pay more than the minimum every month so you’re not cycling through interest-only payments. If you can transfer that debt to a card with a lower interest rate, do so—but continue to overpay until you have a zero balance.
Another clever use of disposable income is to put money into an emergency fund for anything from a job loss to a serious illness. Youth is no natural hedge against catastrophe. Experts disagree on how much cushion you’ll need, but here are two basics: at least a few months, and more is always better.
Introduction to Investing
Your super is just one component of what should be a multi-pronged approach to a balanced portfolio. At this point, there’s no real advantage to over-funding your super since you have decades of investing and compounded interest ahead of you. Exchange-traded funds (ETFs) are a great way to start your investing, but consulting with a financial advisor before you get started helps you make the right decisions. ETFs are large funds that hold various assets and can be traded anytime. Since they include such a diverse range of investments, you can get an idea of how different classes of assets–shares, bonds, and real estate perform over time.
Mid-career investing in your 40s and 50s
At this point, you likely own a home, have a family, and are looking at education for your children. That emergency fund you started in your 20s? It needs to grow with your responsibilities— so your disposable income may be somewhat limited after you beef up that account. You can put those funds into a cash management or money market account that is safe, liquid and pays slightly better interest than a term deposit or savings account.
Investing now means balancing growth and value funds to get the maximum benefits from each (one is bought for growth in value while the other provides dividend income) or using some of those dividends to purchase an investment property. Ask your financial advisor about any tax advantages to a salary sacrifice in your super; there may be some tax savings if you invest additional income there.
Towards your late 50s, you should adjust your portfolio into more conservative value stocks and bonds that provide a more significant income stream. Divest those aggressive growth shares you bought 15 years ago into assets that pay better dividends, or go deeper into real estate or other alternative investments. Continue to pay down debt—if you can retire debt-free, or at least with intentional debt with tax benefits, you’ll rest easier knowing your income supports your lifestyle now, not twenty years ago.
Ready, set, retire—your 60s and beyond
By now, most of your portfolio should be in conservative assets, with a few aggressive instruments designated for your heirs. As you draw income from your super and portfolio, be sure your financial advisor guides you in withdrawing in the most tax-advantageous strategies.
This is when you can take a hard look at your overall estate and start planning your legacy. Working with your estate attorney and financial advisor, you can determine how to prepare for your family to realise the greatest inheritance with the least tax burden.
General financial planning strategies
You may have noticed some common threads for all your life stages. An emergency stash–always have cash on hand for unexpected expenses. Pay down high-interest debt as quickly as possible so you have more income to invest, and pay off all your credit cards monthly. You don’t need high-interest cards for unforeseen expenses if you have an adequate emergency fund.
Don’t wait until you’re 45 to figure out your financial goals; for one thing, they evolve as you mature. As long as you have clear goals and a strategy, your financial advisor can guide you through the optimal instruments for your portfolio. Your advisor may encourage you to choose an entire portfolio of high-growth, aggressive mechanisms when you’re in your early 30s—if you have the nerve for high-risk investing. Shift those high-flying startup investments to something more conservative as you get closer to preservation—you don’t want to take chances with that hard-earned income as you get older.
Let’s finish with a few words about “clear goals”. How do you want to retire? Do you want to downsize from a large home to a condo and travel? Are you interested in working part-time or consulting past your official preservation date? Would you like a great big house at the beach for the entire family to enjoy? Or do you want to build a significant legacy for your heirs or give away most of your assets? And, if you want to spend every penny, that’s okay too–make sure you plan how you’ll save those pennies. Start with a trusted financial advisor who will guide you through all your life stages.
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