Your financial life in your 20’s is where good or bad habits can be formed, and can either set the foundation of financial success or lead you down a path of debt and stress that can take decades to recover from if you ever can.
Risk number one: A low paying dead end job
Your income will most likely be the second biggest determinate of your financial success, second only to your expenses.
Consider this, the Australian Minimum wage is $31,000 p.a. after tax. The minimum I have seen anyone live a modest lifestyle on (excluding rent or mortgage repayments) is $16,000 a year. That leaves $15,000 or $290 a week. This might pay for a very modest rental but certainly is not enough for a mortgage or long term savings. Now consider the dole (Newstart allowance) is less than half of that income.
Solution: your education
Some of the best investment advice I have received is that:
The best investment for a 20 something year old, is an investment of time and money into education.
Certainly education does not just refer to formal education, but let’s start here anyway.
This table clearly shows the difference between a formal higher education and just finishing school:
Clearly the category you don’t want to end up in is “No qualification”. That will leave you with a greater than 50% chance of being unemployed or not in the labour force (unemployed and not even looking for work).
But don’t make the mistake in thinking a piece of paper (a formal education) will automatically lead to success. There are plenty of well-educated unemployed people.
Depending on what you study, some degrees only have a 60% employment rate post university:
But the good news is that your income will generally be higher if you have a formal education past year 12.
Now, you might be thinking “yeah, but I am going to study something I am interested in and if I am working in a field I love I will never work a day in my life.”
I don’t disagree, but it might be helpful to think about it this way:
You can either have a passion that enables an income, or you can have an income that enables a passion (Just make sure that passion is somewhere in the equation). If you have a decent income your passions can change, and you can pursue different things (as well as being financially secure). If you have a poor income in a field you love, you might not be able to pursue other passions down the road.
That all being said, I actually think there is something more important than your choices around formal education. That is around your informal education.
Employers more and more employ based on attitude and communication skills figuring they can teach you any technical knowledge you do not know. I find the best way to improve in these areas is to read some non-fiction books, whether it be autobiographies or “self-help” style books.
Risk #2: Racking up unsecured debts
Arguably more important than your income is the management of your expenses. No matter your income, if you spend more than you earn then you are stuffed. Unfortunately, this is a lesson all too often learnt by experience for people in their twenties. It is becoming easier and easier to get a credit card. A credit card is a very dangerous thing for someone who has not learned how to use it and the risks related to it. If you end up with credit card debt you can enter a cycle whereby more and more money is going to paying minimum interest repayments and something that can be really hard to get out from under.
You have to make sure you never spend more than you earn. The budgeting toolbox is a video education course on how to set up a spending/savings plan that includes getting motivated, structuring your accounts, and tracking what is going on.
Risk #3: Not understanding long term investments
If you have a job you are already saving for your retirement. 9.5% of your income going into superannuation. Something that might not be immediately obvious to you is that you can choose where this money is invested. I am not referring to which company manages it (Sunsuper, Australian Super, QSuper, AMP etc.) but I am referring to where they put that money once they have it. Generally, they put it in a combination of shares, property, fixed interest and cash. You need to lean what these things are because, although your balance might start as a small amount, the power of compounding is mind blowing. Assuming you earn $60,000 (increasing by 3% a year), the following graph shows the difference in your super balance if you receive a 10% p.a. investment return in comparison to a 7% p.a. investment return.
That is a difference of $1,488,000. Forget winning the lotto – just do some self-education on investing.
Solutions: Education and investment selection inside superannuation.
Start by taking a couple of hours to read Motivated Money by Peter Thornhill. From there it might be worthwhile to spend an hour with a financial adviser (someone with a formal education on the investment options). I am generally happy to do a one-hour education session free of charge to get someone on the right track.
What you should be careful about is assuming friends and family know much about this topic. This can be very dangerous. My experience is that 90% of people don’t really understand the various investment options and have more than a few misunderstandings and incorrect assumptions based on their limited experience or who they got advice from.
Honorable Mention: Starting a family
Starting a family can be one of the biggest financial hurdles that anyone can clear. This often happens in your 20’s but I have included it in The Top 3 Financial Risks to protect against in your 30’s, which you might want to check out and get a head start on.
Getting your income, expenses and superannuation under control are three big ticks that can really set you up. Yes, money does not make you happy, but money enables experiences around the three things that do: hobbies/passions, family/personal relationships and helping others. If you would like any further information please do not hesitate to contact me on 1300 472 000 or firstname.lastname@example.org.
Disclaimer: This is not an exhaustive list of all risks and your specific circumstance might have other, more important, risks specific to you. This article also did not cover the risk of developing a long term health problem or disability. Insurances should be considered at almost all life stages including in your twenties.