Financial foundations you need to set up in your 20s and 30s

This article is submitted to us by Helen Baker, an Australian financial adviser and founder of On Your Own Two Feet, part of the Career Money Life Supplier Community. 

It’s easy to think that the 20s and 30s are years to experience life, live it pay to pay, and worry about ‘the future’ later: YOLO!

While every woman, I believe, needs to have five financial foundations in place to maximise her independence, there are some actions that truly can’t be overlooked now—and will allow you to ‘have a life’ now!

Let me share some tips I gave client Rahni, a 27-year-old qualified engineer who shares my passion for travel and outrageous shoes. She’d landed a FIFO job paying (obscenely) well. No one would have blamed her living it up to the new salary level but she recognised the financial opportunity this career move offered and wanted to know her options. What I said was not simply “invest”…

  1. Invest in yourself.

You are your greatest asset. Specifically, your ability to earn is. Invest in professional and personal development, wellbeing and take out appropriate personal insurances now. Income protection is a key personal insurance to look at in your 20s and 30s.

Here’s an exercise: calculate your current annual salary and multiply by your working years. Let’s assume you earn $80,000 (which former PM Malcolm Turnbull nominated as an average salary), you are 35 and you are expected to work until you are 70. Without any rise in pay or issues with inflation, that amounts to $2.8Million. House prices aside (and let’s face it, $1Million is not uncommon), you need to take out taxes, plan for retirement; you may have travel dreams and if family features, you’re likely to want time out then.

  • Understand that not all debts are equal.

About half a million Australians have a HECS/HELP debt of more than $30,000. It’s a good debt in the sense that there’s no interest (although it does get indexed). Credit card debt or a car loan, for example, are bad debt – they need to be serviced pronto. Smart debt is the debt you use to invest as the interest you make is tax deductible.

  • Establish an ‘emergency fund’.

I recommend every woman holds an emergency fund, a stash of cash that’s hers alone. It may be just what you need to set up again if a relationship goes sour or… the washing machine goes on the blink, you unexpectedly lose your job, you decide to take time-off travelling overseas and working, or you just have to have that Groupon deal to Bali!

  • Get some professional financial coaching in setting up a spending and investment plan.

The earlier you begin the habit of saving, and learn how to invest wisely, the sooner you start to amass ‘wealth’ for your later years. A professional financial adviser will talk to you about your values and your life goals and help you work out a strategy to make them real. Even if you start now and need to stop investing for a while, your investments are likely to be working, growing, pushing you ahead of where you’d be if you waited until ‘later’.

Making your money grow faster

You’ve probably heard the maxim ‘spend less than you earn, borrow less than you can afford’. This was at the core of my advice to Rahni. I asked her to imagine she kept earning the same income and maintained her lifestyle expenses. Every other dollar was put to work in investments.

For couples in their 20s and 30s who are both working, I suggest considering living on one income and using the other to build your home loan deposit, pay down your mortgage or put into investments (whatever is your priority). This particularly works well if you are planning to have children someday. When parenthood hits, the reduced income won’t be as big a shock to the system.

In avoiding bad debt and taking advantage of doing smart things earlier, you can anticipate a stable platform for your future, increasing savings and investment opportunities as you move into your 40s and 50s.

Build your people’s financial wellbeing and confidence. Book a demo now or contact us to learn more about our Financial Education Programs.

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