Or they might fall out of the pattern of driving a surplus during the middle years under financial stress and resist re-evaluating their position. And we as a community don’t like to discuss the ‘boring act of budgeting’. But we should, and then we should get on and do it, updating it regularly.
2. Setting lifestyle goals within our means
Everyone lives the ‘good bits’ of their lives differently. It’s easy to covet thy neighbours’ ways of living well, wishing for fancy holidays and nice new furniture we can’t afford. In these modern easy credit times, it’s pretty easy to spend like that neighbour, even if we can’t afford to.
But fundamental to good financial management is knowing when we can afford to spend up on life’s little luxuries and when we need to buckle down and save up before we can have them. In an era of buy now, pay later, this important lesson can get lost.
So my suggestion is that we each create a lifestyle budget that is separate from our cost-of-living budgets, so we can see the difference between our needs and our wants.
Plan up to three years ahead for the one-off or regular lifestyle purchases and epic experiences you want to do, and put a price tag on each in today’s money. Work out how much you need to save for each to be viable, and only do things you can afford to.
3. Understanding compound investing and managing risk
Understanding compound interest is a game changer for financial success. Yet, this fundamental concept often gets overlooked.
Many people don’t realise that money invested over the long term at a 7 per cent compound return will double every 10 years, and money invested at a 10 per cent return will double every seven years.
Teaching this concept also underscores the need for risk management. It’s not always about chasing the highest returns but diversifying investments, considering insurance to protect against losses, and building an emergency fund.
4. Buying a home and paying it off
Buying a home isn’t just about having a place to live. It’s a cornerstone of financial stability. But with the current housing affordability crisis, owning a home seems out of reach for many.
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Paying off a home offers a few unparalleled benefits: we get financial security, and we get a lower cost of living every year for the rest of our lives – because we don’t have to have the cash flow for rent.
The other thing we get, as our house grows in value over time, is a growth in our asset value that can be used to fund our lives in retirement.
Many people downsize from their family homes that are paid off later in life, and contribute some of the funds into superannuation, providing them with income generating assets for the years they need it. Others choose to stay in their homes and access their equity through a reverse mortgage.
5. Understanding and leveraging taxation benefits
Understanding the ins and outs of the tax system early in life offers numerous benefits. By mastering how taxes impact your income and leveraging tax concessions, grants, deductions, franking credits, and tax-advantaged accounts like superannuation, you can enhance your wealth significantly.
In Australia, there are incentives tailored to different financial endeavours. There are reductions to tax rates and first home buyers’ grants that make it worthwhile buying a home early in life.
There are tax rulings that make it beneficial to own a rental property under the right circumstances, tax credits available for people who buy Australian equities, and tax concessions to encourage you to put money into superannuation while you’re earning well in life.
6. Maximising superannuation contributions
Finally, there’s one foundation that brings the others together. We need to understand how superannuation works as early in life as possible – so we make more conscious contributions if we can afford to, leveraging tax benefits, embracing the power of compound interest, and reaping the rewards that come from investing over a long period of time.
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If we could encourage and support all Australians to get their financial foundations in place, we’d then be starting a lot further ahead when we need to plan for retirement.
Bec Wilson is the author of the bestseller, How to Have an Epic Retirement. She writes a weekly newsletter at epicretirement.net and she is the host of the Prime Time podcast.
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making financial decisions.
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