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. 6 Cost-of-Living Insights To Prepare Your 2023/24 New Financial Year Budget - Investing As we enter the new financial year, financial planning is essential to achieving a secure and stable economic life. Amid the ongoing economic turbulence and inflation, anticipating changes and preparing our budgets becomes even more crucial. This article will help you navigate through the upcoming financial year 2023/24 by highlighting six critical cost-of-living changes to consider as you plan your budget.Assessing the Current Economic Climate
Before we deep dive into the specific areas that are likely to impact your cost of living, it's worthwhile to take a step back and understand the broader economic picture in Australia for the 2023/24 new financial year. With numerous factors at play, we've witnessed a surge in interest rates, a challenging housing market, and inflating costs, which have collectively burdened many Australian households in a way we haven't seen since the financial crisis of the 90s. Many leading economic experts are divided - some suggest that we might see inflation rates gradually easing off in the coming months, while others caution that these rates could climb higher before any decline is seen. However, what is agreed on is that these rates will continue to hover above the norm till at least 2025. Given this backdrop, it's fair to expect that the following issues will significantly influence our financial landscape:1. Housing Costs and Interest Rates
Housing costs have been on an upward trend, and 2023/24 will be no exception. Whether you're renting or owning a home, be prepared for potential increases. If you're a homeowner, it's essential to review your mortgage terms and consider refinancing options to minimise the effects of any impending rate rises and reduce your monthly payments. While homeowners should factor in potential mortgage rate increases, renters should be prepared for possible rent hikes. Rent has exponentially increased across the country,with over 40% of suburbs recording rental increases of 10% or more in the past year. To mitigate these effects, consider proactive measures such as refinancing your mortgage for a better rate, negotiating rent increases, or exploring shared housing options to distribute costs.2. Inflation and its Impacts
Inflation can erode the purchasing power of your money. To combat its effects, consider reviewing your investment strategy, exploring options with higher yields, and diversifying your portfolio. Additionally, be mindful of price increases when budgeting for discretionary expenses. Seeking financial guidance can make a world of difference in how to make your money work best for you.3. Increasing Energy Costs
The ongoing global economic shifts have led to rising energy costs, these will significantly impact households, an increase in both electricity and gas bills is to be anticipated. To prepare, consider implementing energy-efficient solutions like LED lighting, energy-saving appliances, improving insulation and smart thermostats to manage these costs. Additionally, reviewing your current energy provider's rates and comparing them with other providers may help you find more cost-effective solutions.4. Rising Food Costs
One area where you may notice a significant impact on your budget is food expenses. Due to various factors, including inflation and supply chain disruptions, food prices are expected to rise. With fluctuating food prices, your grocery budget might need an overhaul. The costs of staples such as grains, dairy products, and meats are expected to rise. However, there are ways to counter these increases. Consider buying in bulk, focusing on seasonal produce, and planning meals to minimise waste. Exploring local farmers' markets could also offer quality produce at more affordable prices. Shopping online can also help you stick to your budget and prevent unnecessary impulse purchases.5. Fuel and Transportation Expenses
Changes in oil prices, insurance premiums, and public transportation fares can impact your transportation budget. Car owners should prepare for potential increases in fuel and maintenance costs, while public transit users might face fare hikes. Consider alternatives like carpooling, cycling, or walking to counteract these rises. Regular maintenance checks can also prevent costly repairs for vehicle owners. Additionally, adopting fuel-efficient driving habits and comparing petrol prices can help reduce your overall transportation expenses. There are many free online tools that can help you quickly compare and find the best fuel prices in your local area.6. Healthcare Expenses
Healthcare costs have also been steadily climbing, with prescription medicines, health insurance premiums, and out-of-pocket expenses expected to increase. To manage these costs, review your private health insurance plan to ensure it suits your needs and consider setting aside funds for unexpected medical expenses. Regular health checks can also prevent larger expenses down the line by ensuring early detection and treatment of potential health issues.Navigating the Upcoming Financial Year
Now that you understand the expected cost-of-living changes, here are a few strategies to consider to help you effectively plan your budget for the 2023/24 financial year:- Emergency funds:A well-planned emergency fund can act as a safety net for unexpected expenses or changes in the cost of living. Aim to save at least three to six months' worth of living expenses.
- Budget review and adjustment:Regularly review and adjust your budget to reflect changes in your income and expenses. Track your income and expenses to identify areas where you can reduce spending or reallocate funds. This will help you stay on track with your financial goals.
- Automate savings:Establish automatic transfers to savings accounts to ensure consistent savings contributions. This could be a set percentage of your regular pay or a small weekly amount. Any amount helps the end goal.
- Review and adjust insurance coverage:Evaluate your insurance policies to ensure they adequately protect your assets and adjust them if necessary. It's also a great opportunity to see if you could perhaps save money by switching providers.
- Debt management:Efficiently managing your debt can free up more income for savings and investments. Consider paying off high-interest debt first and refinancing loans where possible to secure lower interest rates.
- Diversify income sources:Diversifying your income can offer additional financial security. Consider side hustles, freelancing, or investing to increase your income.
- Invest in financial knowledge:Staying informed about economic trends and financial planning strategies can help you make smarter financial decisions. Consider financial blogs, podcasts, and consulting with your financial advisor.
Finance Management Tips
While preparing for these changes is crucial, it's equally important to maintain a balanced outlook. These potential increases in living costs do not necessarily spell doom and gloom. Instead, they present an opportunity to reassess your financial strategies and make changes to secure your financial future. Let's apply some practical tips for effective personal finance management:- Stay Adaptable:Economic trends are just that - trends. They can fluctuate and change. Stay adaptable and ready to adjust your budgeting strategies as necessary.
- Focus on What You Can Control:While you can't control global economic trends, you can control your response. This includes your savings, your spending habits, and your investment decisions.
- Stay Informed:Keep ahead of changes in the economy, the cost of goods and services, and any other areas that may impact your budget. The more informed you are, the better decisions you can make.
- Remember Long-Term Goals:Getting caught up in the immediate changes and challenges is easy. However, remember to keep an eye on your long-term financial goals, whether that's retirement, buying a house, or building an investment portfolio.
- Seek Professional Guidance:Speaking with a financial advisor can provide personalised advice and guidance tailored to your unique financial situation. A team of experts can help you navigate the challenges of the new financial year and help you make decisions that will best serve your financial security.
Understanding Superannuation in Australia
Superannuation is a long-term investment strategy designed to help you accumulate funds for retirement. In Australia, the superannuation system is a compulsory arrangement where employers contribute a percentage of your earnings to a super fund of your choice. This percentage, known as the Superannuation Guarantee (SG), currently stands at 11%. The super fund invests the funds in your superannuation account to grow your retirement savings over time. While the SG contributions provide a solid foundation, they may not be sufficient to cover your desired lifestyle during retirement, especially considering factors like increasing life expectancy and inflation. This is where supplemental superannuation contributions come into play. By making additional contributions beyond the mandatory SG, you can enhance your savings and improve your financial security throughout your retirement years. Several ways to make supplemental superannuation contributions include salary sacrificing, personal contributions, and government co-contributions. It's essential to understand each method's benefits, limitations, and tax implications to determine the most suitable approach for your circumstances.Assessing Your Retirement Goals to Determine the Right Supplemental Superannuation Contributions
An essential step in planning for retirement is to estimate how much money you'll need to maintain your desired lifestyle. This process involves assessing your retirement goals and calculating the right supplemental superannuation contributions to achieve those objectives.Step 1:Begin by creating a guide for anticipated spending levels during retirement. Consider your housing situation, day-to-day expenses, healthcare needs, and leisure activities. It's essential to consider factors such as inflation and life expectancy to ensure you have a realistic projection of your future expenses.Step 2:Examine the impact of minimal contributions on your retirement. Assess your current superannuation balance and consider the potential growth of your account based on the mandatory SG contributions alone. This exercise will help you understand the limitations of relying solely on minimal contributions and the gap between those contributions and your desired retirement lifestyle.Step 3:Once you understand your retirement goals and the limitations of minimal contributions, you can calculate the correct additional contributions to meet your financial objectives. Consider factors such as:- your risk tolerance
- investment horizon
- type of investment options available within your superannuation fund
Investment Options and Superannuation Fees
In addition to determining the right supplemental superannuation contributions, it's essential to understand the investment options available within your super fund and the fees associated with managing your account. Optimising your investment strategy and minimising fees can significantly enhance your retirement savings. Diversification and asset allocation are important aspects of a well-rounded investment strategy. Your superannuation fund typically offers a range of investment options, such as shares, property, fixed interest, and cash. Each asset class comes with its risk and return profile, making it essential to strike a balance that aligns with your risk tolerance and investment horizon. A diversified portfolio can help you manage risks and achieve better long-term returns. While investment performance is a key determinant of your retirement savings growth, it's equally important to be mindful of the charges associated with your superannuation fund. Fees can include administration fees, investment fees, and insurance premiums. Over time, these fees can significantly erode your retirement savings. It's essential to understand your super fund's fee structure and compare it with other funds to ensure you're getting the best value for your money. Strategies to minimise fees may include:- consolidating multiple super accounts
- selecting a lower-cost investment option
- negotiating fees with your super fund