Q: My 22 year old son is finishing university this year. What should he focus on from a Financial Planning perspective when starting his career after a 3 month holiday?
A: The transition from Uni student to full-time employee is one of the most critical times when it comes to establishing good financial planning habits.
He may well enjoy the freedom that the first full-time employment opportunity provides. With that freedom comes responsibility and there are a number of basic elements to starting his financial planning that he should address.
My suggestion would be to start with a focus on setting goals and objectives. Based on my experience, money itself is often not a great motivator, it is what money buys that will usually motivate savings habits. In setting a financial goal, quantify the cost and set these goals as savings objectives.
Do a budget and identify where the dollars go. Once he knows where he spends his money, he can then determine if he needs to “modify behaviour”. Trying to fit behaviour to a predetermined budget is usually unsuccessful. Identify areas of spending that can be tweaked and always consider the cost of instant gratification against the long term consequences to a savings objective.
Once he knows what surplus cash flow is available, he can then determine how long it will take to save to achieve the savings goal. He can then revisit his budget to find possible areas to increase savings or reduce spending or alternatively push the savings time frame further out.
Debt in the form of Credit card, personal loans and lines of credit can inhibit an individual’s ability to take control of their personal finances. If he has unsecured personal debt, then he has spent more than he earnt and his first objective should be to consider paying the debt off and start afresh.
Another good idea could be to build up a savings buffer that will provide access to funds in the event of an emergency. A good rule of thumb is to save 2-3 months’ salary. A credit card limit is not an emergency fund. Accruing credit card debt to fund emergencies increases your personal debts at the time you can least afford to have them.
If the savings goals are short term say 3 years or less, a high-interest savings account might be an appropriate investment to use. Perhaps try to find an account that will offer bonus interest if you make additional deposits and no withdrawals within a specified period. Read the fine print as some banks will only offer a bonus rate for a set period of time.
Funding retirement is unlikely to be on his priority list but there are opportunities he should consider. He could take advantage of the Government Superannuation co-contribution. If he earns less than $38,564, the maximum co-contribution is $500 based on 50c from the government for every $1 you contribute. The amount of the Government co-contribution reduces as your earnings increase above this up to income of $53,563.
He could also consider making personal deductible contributions to Superannuation. This can be an excellent way to accelerate retirement savings and receive tax benefits. Tax on personal deductible contributions is typically 15%. Deductible contributions are limited to the Concessional Contribution cap of $25,000 including employer contributions.
He should also consider establishing a Power of Attorney and preparing a Will. Whilst he is travelling, it will be easier to manage his financial affairs if he grants a power of attorney to someone he trusts in his absence. Likewise, it is important that he has a Will in place that specifies his wishes in the event of death. A Will can simplify the process of settling an estate, inexpensively at a time of great grief. Whilst travelling, ensure he has comprehensive travel insurance and registers with a smart traveller.
Presuming that he is single and has not taken on debt, arguably his main need for insurance will be Income Protection when he secures his first full-time job. His greatest asset will be his ability to earn an income. Income protection pays a benefit, usually 75% of salary with a benefit up to age 65. It is tax-deductible and the costs are usually less than what he will pay in Medicare levy.
He should also consider Private Health insurance. He will no longer be covered under the family policy once he works full-time and subject to incomes test may pay a Medicare levy surcharge if he does not have private cover in place.
Setting good habits early on is the key, get the basics right and a world of opportunities will open up. The hardest part is starting, making the ongoing commitment and being accountable to one’s self.