Five steps towards a financially secure future

It’s true, financial planning can be daunting but it doesn’t have to be overwhelming. Think you’re too young to start planning towards a financially secure future? Think again. 

There are simple steps you can take to start managing your money early and take control of your financial security, according to Michael Nowak, adviser and partner at Joe Nowak Financial Services Group and national president of the Association of Financial Advisers. 

1. Start saving and investing sooner

Savings

Nowak suggests that you begin your journey to financial freedom by allocating a portion of your earnings towards savings. These funds can be used to buy assets and other investments, and bolster your budget during tough times.

“The sooner you start, the sooner and more likely you are to achieve your financial goals,” Nowak says.

Whether you are saving for a deposit on your first home or accruing cash for your next overseas holiday, starting early can help you establish a habit of saving that will come in handy throughout your life.

“I’ve found that it’s not the people who earn the most money who have the most; it’s the people who use their money wisely,” Nowak says.

Compare a number of different savings accounts for a simple, low risk way to boost your nest egg. Remember to select the account that best suits your needs and goals, not necessarily the one with the highest interest rate.

Investments

While it’s important that you regularly assess your financial situation and not overspend, it’s also shrewd to devote some of your money towards building a diverse portfolio of investments.

Diversification is an investment strategy that can reduce your risk of exposure and, in turn, perhaps provide stable returns. Simply put, you’re investing your money across a range of different asset classes based on the notion that if some underperform, you have a counterbalance.

Explore RateCity’s comprehensive beginner’s guide to financial investments for information on a number of different investment strategies, including active and passive investing. Additionally, you may want to consider micro-investing as a more affordable means of expenditure.

2.  Pay off your non-deductible debt as a priority

The family home is the biggest debt most of us will have and, in tax terms, it’s a non-deductible debt. That is, a loan for a non-income producing asset. Other non-deductible finance commitments might include a car or holiday costs.

“The sooner you pay off your home loan, the sooner you can use your discretionary income to invest in shares, other investments or towards your retirement plan,” Nowak says.

Most home loans generally run over 25 or 30 years, which means a large chunk of your repayments is directed towards the interest rather than the original amount you borrowed - known as the principal of your loan. The longer you take to pay it off, the more money you’ll pay in interest. Making extra repayments and having an offset account linked to your home loan can help you chip away at the principal and pay off your home loan sooner.

“By modelling differing repayment options, for example $500 or $600 per month, you can see the difference extra payments will have on reducing your interest and time to pay off your loan. This can be tens of thousands of dollars saved and many years on repayments,” Nowak says. 

Use RateCity’s mortgage calculator to see how different rates, loan terms and features can affect repayments.

Additionally, you may want to consider these four forward-thinking options to pay off your home loan sooner.

3. Have a back-up plan

What happens if you get sick or lose your job? What if you or your spouse dies unexpectedly? Sure, nobody wants to experience financial hardship but it can happen. Achieving financial security is more than accumulating wealth; it’s also about protecting your assets and your ability to create wealth.

Income protection insurance (which can pay up to 90% of your personal exertion income if you lose your job or are unable to work for a period of time), mortgage protection insurance and life insurance can all be beneficial elements of a financially secure future.

“Life insurance is an essential component of any financial plan,” Nowak says. 

“Australians are drastically underinsured, which is alarming given most would say they would like to maintain their own and their family’s lifestyle on death or disability.”

Home insurance and car insurance can also play instrumental roles in safeguarding your assets.

4. Take control of your super

Superannuation is your security blanket - a pool of investments that are expected to fund your retirement.

Your superannuation fund invests money on your behalf and typically allows you to choose from a range of different investment options. Selecting suitable investments can help you build a generous balance over time.

The type of super fund investments you choose may vary based on a variety of factors including age, priorities, risk appetite, contributions, personal values and ethics. Therefore, the investment strategy you elected when you first began working may no longer be appropriate now, and as you approach retirement age. 

“You are never too young to own and monitor your super. First steps are consolidating your super into one fund and choosing the most appropriate investment strategy,” Nowak says.

“Don’t be afraid to get professional advice if you need it as it can give you the help and certainty, and the confidence you need, to start you on your retirement funding journey.”

When you’re younger, you might gear your asset allocation towards growth options, such as shares and property. As you grow older, you may choose to vary your investment mix to accommodate more conservative options, including bonds and cash. Enacting this strategy can take some of the headaches out of choosing specific investment options throughout your life or career.

5. Start your pre-retirement planning early

Nowak recommends starting your retirement planning at age 50, or earlier. Start by setting a date for retirement and calculating how much money you would like to have each year. From there, you can calculate how much you will need in your retirement to achieve your goal.

Considerations prior to retirement

There are a number of things you may want to examine as part of planning for your post-work life, including: 

• If you have any assets, including a home, savings, and investments outside of super
• If there’s any healthcare you need to pay for
• When can you access your super
• How much you’ll spend annually in retirement
• How deep are you willing to dip into your savings
• If you’ll be able to access the Age Care pension
• Whether you want to sell your property and downsize
• What kind of lifestyle you want to live in retirement. For example, do you intend to travel or take up new hobbies?

When you choose to retire is up to you, unless you’re forced to leave the workforce early due to redundancy, poor health or a lack of job opportunities. There’s no set retirement age in Australia, nor a legal requirement to stop working. There is, however, a certain age you can access your super and the Age Pension if you’re eligible.

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