Each stage of life holds unique financial opportunities for an individual. During your 20s, you have the benefit of time on your side.
With professional planning and guidance from an adviser, you can easily establish a wealth creation plan that maximises your opportunities and hopefully delivers a big payoff in your future.
Harness Compound Interest
When you invest over a period of time, compound interest is your best friend. In effect, it means you are earning interest not just on your own capital, but also on the interest you’ve already earned. Over the long term, this might be phrased as “interest on interest on interest on interest on interest …”. (Refer to our article here for more information about how compound interest works).
The true power of compound interest on investments shines over the long term. It can be difficult to prioritise your financial future during your 20’s but investing early gives you a unique advantage to harness the power of compound interest for your future and long-term investments. Our team can help guide you in developing an investment strategy that maximises this opportunity during this stage of your life.
Although we use the term “interest” and most know the interest rates available are pretty poor currently, there are other investments that can unlock the benefits of compounding.
The average 25-year-old has around $10,000 in super, but the decisions you make now, even with relatively small sums of money, could earn you hundreds of thousands of extra dollars over your working life.
If you are working, then your employer should be paying 10% of that into your super fund. Most funds offer a range of investment choices and some will do better than others. The investment approach you choose in your 20s can have a much larger impact on your super than you may think.
Let’s say you have the average $10,000 in your super at age 25, a yearly income of $35,000 per year (increasing 2% per year), and a fund that earns 5% per year. After 40 years when you retire, your super will be worth $662,313. Now change just one thing – you choose an investment option that earns 8% each year. Now your balance could grow to over $1,446,783. That’s over three quarters of a million dollars extra, just for ticking a different box on your super fund application form. Talk to one of our team to find out which option best suits you.
Starting early and adding extra payments when you can makes a big difference. Let’s say it’s 40 years before you can retire. If you start now by making an extra post-tax contribution of just 1% of your annual income to super ($350 from a $35,000 salary – and the government could add to that with a co-contribution) at an 8% investment return could add an extra $149,000 to your retirement fund. If you wait 20 years before starting to make that extra contribution, you’ll only get a boost of $49,000. That’s $100,000 less. Continuing this small extra contribution as your salary increases will turbo boost your super fund balance.
Also, super can be an excellent tool for saving for a home deposit. The First Home Super Saver Scheme allows some contributions to super to be withdrawn for a home deposit. Another reason to seek advice!
Good job, no kids or other dependants? Why do you need insurance? Well, even in your 20s illness or injury can strike, and any prolonged periods off work can have a huge impact on your current lifestyle and financial future.
Income protection is the key insurance in the ‘carefree’ 20s. Trauma and Total & Permanent Disablement (TPD) could also be useful add-ons. As soon as you have children, or significant debt, life insurance should also be considered.
Taking out insurance when you are younger can also ‘lock in’ cover when you are fit and healthy, rather than facing difficulties getting cover as you get older.
Where will the money come from?
Utilising the power of compound interest and making extra payments to your super sounds like a great idea. For those in their 20s however, finding this extra money can sound impossible. With some professional guidance, it can be a lot easier than you might think.
Perhaps this is best illustrated with an example. Jessie is 23 and works full-time, she wants to move out but can’t afford it. Jessie’s parents introduced her to their financial adviser. She doubts he could help her, after-all, she barely made it from pay to pay, but she agrees to see him.
The adviser started by reviewing Jessie’s financial position.
After meeting her obligations, Jessie had $690 per month left over which she couldn’t account for.
Her adviser helped her set a realistic budget and Jessie found she could save $220 each month simply by using public transport and taking a “cut-lunch” to work.
He then recommended the following:
- Take advantage of high introductory interest rates offered by online savings accounts to build up an initial deposit of $1,000 to invest in a managed fund.
- Set up an online savings plan with an initial $220, and additional monthly deposits of $220.
After earning 2.1% p.a. for the first four months on her initial investment plus the monthly top-ups, Jessie would have $1,100 saved. $1,000 is then invested in a geared managed share fund that had earned over 18% in the previous year. Her adviser explained to Jessie how this investment worked and emphasised that past results are never a surety for future returns. He also advised that a geared investment carries a higher risk of loss and is not suitable for everyone.
However, Jessie was rapt to learn that after just two more years earning a more conservative return of 12%pa her initial $1,000 plus continued $220 per month investment would grow to more than $7,263. About $980 of that would be from interest earned on the investment – “free money”! A few more years of this strategy, and she could afford to move out!
By implementing a simple strategy with the guidance of her financial adviser, Jessie was able to find the money to start reaching her goals. These monthly savings could just as easily become extra super contributions that fund her retirement or help her save a house deposit with assistance of The First Home Super Saver Scheme.
It is important to always remember, seeking higher returns generally involves taking higher risks but some of those risks can be managed with an effective and professionally constructed investment strategy.
We regularly work with clients in their 20s, starting out of life’s journey. Getting past the “I’ll see a financial adviser when I have money” is the hardest part. Contact us to chat about your hopes and dreams, and we’ll put you on the right path.