People in their 20s seem to fall into two groups: spenders or savers. The former find it really hard not to spend everything they earn while the latter have no problem building up a stash in a high-interest savings account but don’t know how to take the next step.
Let’s tackle the spenders. For many, there are too many competing spends, such as rent, food, entertainment, overseas trips and transport, to have a strategy. Drawing up a budget might seem complicated but you can figure out where you can cut back and divert that money to a savings account instead.
Think about how many times you buy food at work. Two cups of coffee and lunch easily gets to $20 a day. Even just three times a week that’s $60 a week, $240 a month or just over $3000 a year.
Matt*, a smart 27-year-old reader, puts that $20 to better use buying ingredients for his lunch each week. He’s trimmed his discretionary spend enough to have saved $50,000 as a deposit for his first home. While that amount sounds huge, he’s tackled it bit by bit – putting away just over $1000 a month in four years.
Tellingly, he doesn’t use a credit card – a very smart move for those who may be tempted to spend what they don’t yet have.
Once you’ve decided what you’re going to cut back on, open a high-interest account. Research these on comparison sites like finder.com.au or ratecity.com.au. The interest rates on these accounts look pretty uninspiring at about 2.7 per cent but bonus interest (if you don’t withdraw or make regular deposits) can bring this up to more than 4 per cent.
MAKING SAVINGS WORK
Now to the savers who want to know what to do next. Unlike Matt, another reader Sam*, 26, doesn’t want to buy a property but wants to “start the process of building up assets that will be beneficial in the long term”. She and her partner have saved $25,000 and want guidance about what to do next. “We’re not necessarily saving for anything but have a vague notion of financial security.”
Like Matt, Sam and her partner have learned to live on less. Each time they change jobs or get a higher salary, they save the extra. They’re thinking of working overseas for a few years and won’t need to access their savings for up to 10 years.
Advisers say that given their time frame, investing in growth assets such as shares is probably the next move. They can buy individual shares – hard to pick and, unless they’ve got many of them, a bad way to spread risk because they’re exposed to only a few companies or sectors (like resources, banks or healthcare) so risk taking a big hit if those areas of the market drop in price.
A managed fund is another option. Your money and others’ is pooled and invested by a fund manager across a range of assets. A balanced fund would invest across all four asset classes – shares, property, bonds and cash – for diversification on the principle that over the long term, price falls in one asset class will be balanced by rises in others.
It’s worth thinking about a “passive” or index fund as the simplest way to access the sharemarket. Rather than an “active” fund where you’re paying higher fees for the manager’s investment skills, in an index fund you’re simply buying into a portfolio of investments that track or “mimic” an index. The Vanguard Australian Shares Fund, for instance, gives you exposure to the 300 largest companies and property trusts listed on the Australian Stock Exchange. You can invest in index funds with as little as $5000 and the annual fees are about 0.75 per cent.
Adviser Mike Ingham of Godfrey Pembroke says whatever you invest in, make sure you can add to it along the way and that dividends are reinvested which will compound – or boost – your return.
Investing regular amounts at regular intervals, or “dollar cost averaging”, means you’re not risking buying everything when the market is at a high but are buying through cyclical ups and downs.
Advisers cite exchange trade funds (ETFs) or listed investment companies (LICs) as other ways to diversify. But because these are listed on the ASX you have to go through a broker each time you want to buy in, which can make regular contributions difficult. You can find more information on managed funds – active and passive – on the MoneySmart website run by the Australian Securities and Investments Commission.
If Sam wanted to use her savings to buy a home in a few years, she may be better off staying in a high-interest account rather than taking on the risk of the sharemarket in such a short time frame.
Another thought for Sam, says adviser Suzanne Haddan of BFG Financial Services, is to buy into an insurance bond invested in growth assets. Because tax is paid internally in the fund, earnings won’t be included in her tax return. This may help her tax situation if she moves overseas for a few years. But the money would have to stay invested for 10 years.
And if you’re still not convinced of the huge advantage of investing in your 20s, Westpac planner David Simon says if someone your age started with $5000 and invested $500 a month, it would grow to $800,000 by age 60. Someone in their 30s doing the same thing would get only $440,000 by 60.