When it comes to money, what steps should you take now to set yourself up financially for the future?

For those just starting out in the workforce, it's very easy to adopt a “live today, worry about finances later” attitude.

But the reality is when you are young with fewer responsibilities you often have the greatest potential to start building a strong financial foundation for the future.

This doesn't mean you have to forgo all the luxuries such as going out, clothes, holidays and other fun things to get ahead - it's just a case of finding the balance

Modifying your spending a little can help you free up a small amount of cash so that you can start to accumulate savings.

It’s important to remember that it's not what you earn, but what you learn and do with your money that will determine where you end up financially.

For those at the beginning of their working lives, there are a number of areas that need to be looked at in order to devise the most effective way of achieving their goals and objectives.  These include, amongst other:

• Budgeting
• Managing debt
• First Home Owner Savings Accounts
• Income Protection
• Superannuation

In this document, we explore each of these areas in brief detail.

By arranging a initial consultation, free of charge with one of our financial advisers, we can begin to determine whether all of these areas need to be addressed and which combination of strategies will provide you with the best chance of achieving your financial goals and objectives.

Budgeting – It really works!

A budget is a powerful tool you can use to help you take control of your money. 

Some people say they can't budget.  They say it's too complicated or they don't know where to start.  Or they think they've got enough money and don't want to be restricted by a budget because it might mean going without.

The truth is, everybody who does a budget can see how it pays off.  Basically, it helps you understand where your money goes so you can take control.  A budget helps you decide what you want and plan how to achieve it.

How do you get started?

You can start a budget by simply writing down what you spend over a couple of months.  Remember, your budget is your personal tool and you can choose how much detail you want to include.  When you are starting out, you may find it helpful to put your spending into categories - such as groceries - rather than keeping tabs on individual items such as shampoo, breakfast cereal and pet food.

Think about what categories you would like to use.  Some people find it helpful to work with two groups of expenses:

• Essentials - bills you must pay to keep your household and family running, such as utilities (electricity, gas and water), housing (rent or mortgage), groceries, health, transport (car or public transport to travel to work or school), education and so on.  
• Extras - the other expenses in your life such as entertainment, holidays and gifts.  
• There are no hard and fast rules for creating a budget.  What is important is that it is easy for you to understand.  Remember to keep the list of categories simple and useful to you.  And be flexible.  You can change the categories you use if you find they don't work for you.

How do you stick to a budget?

If you want to stick to your budget you may need to look at your expenses.  If you need to trim your spending, look at cutting down your extras list first.  Don't cut them all out.  If your budget is too tight, it will be harder to stick to.

How do you manage unexpected expenses?

Some people worry that an unexpected bill will derail their budget.  The best way to prevent this is to plan for it.  Try to save enough to give yourself a small buffer you can use in emergencies.

Managing Debt

When used properly, debt can be a very effective tool that may help you to achieve your financial goals.  Debt can be used to purchase a range of items that, otherwise, you would not be able to afford.  It is also important to understand the important difference between ‘good’ debt and ‘bad’ debt.

Debt can assist you to buy property, purchase a car or consumer goods and also enable you to purchase investment assets such as shares or managed funds.  By using debt smartly, you may be able to reach your financial goals sooner.

‘Good’ debt and ‘bad’ debt

Where debt is used to acquire investments such as shares or property, this is known as gearing and this is often referred to as ‘good’ debt – due to the potential to claim a tax deduction in respect of the borrowing as well as the fact that you have borrowed against an asset that can appreciate in value.

‘Bad’ debt is non-deductible debt like borrowings for consumer goods such as cars and holidays.  Even though a loan for the family home is non-deductible, it should not necessarily be viewed as ‘bad’ debt – the value of the home has the ability to grow over time.

Borrow to invest

Borrowing to invest simply allows you to access a greater asset amount than would otherwise have been possible.  Gearing is, however, not without its risks – while it may allow you to multiply your gains, similarly, it may also magnify any losses.

First Home Owner Savings Accounts

First home saver accounts became available from the 1st of October 2008.  They offer you a simple, tax-effective way of saving for your first home through a combination of government contributions and concessional tax rates.

Eligibility

To open one of these accounts, you need to:

• Be aged over 18 and under 65 years
• Have a tax file number you can quote in your application
• Have never owned a home in Australia that has been your main residence
• Have never previously had a first home saver account.

The benefits for you

There are several incentives to open a first home saver account:

• The more money you save, the more the government will contribute (up to a certain limit each year).
• There’s a tax incentive to save money for your home because you don’t pay tax on any earnings on the account.  Earnings on first home saver accounts are taxed at 15%, but this is payable by the account provider.

You can use the money you save as a deposit and to meet other costs you incur in buying or building your first home.  If you decide not to go ahead with buying or building your first home, you generally can’t withdraw the funds – you’ll have to put them towards your super.

How it works

After each financial year, you’ll receive a government contribution based on your personal contributions during that year.  When you’re ready to buy or build your first home, you withdraw the funds and close your account.

Income Protection

Take a moment to think about your greatest asset.  Is it your home and its contents? Your car? Possibly your life? Many people understand the importance of insuring these assets.  Yet, all too often, they don’t adequately protect what is potentially their greatest asset – their ability to earn an income.

Think about it this way.  If you are aged 35 and earn $850 per week, you could earn more than $2.9m1 before you turn 65.  Isn’t that worth protecting?

Now take a moment to consider what could happen to your lifestyle if all of a sudden you were unable to work for an extended period due to illness or injury.  Day–to–day bills and expenses could quickly run down your savings.

Fortunately, there is an alternative.  By taking out income protection insurance you can protect your greatest asset and avoid putting your financial future at risk

How does Income Protection work?

If you suffer an illness or injury and are unable to work, income protection insurance can pay you a monthly benefit (typically of up to 75% of your pre–tax income) to replace lost earnings.

You can generally claim the premiums as a tax deduction, which can reduce the after–tax cost by up to 46.5%.  Also, any benefits received are usually assessable as income for tax purposes.

You can choose from a range of “benefit payment periods”, with maximum cover generally up to age 65.  Most income protection policies also offer a range of ‘waiting periods’ before your insurance benefit starts accruing (with options normally between 14 days and two years).

As a general rule, the shorter the waiting period and the longer the benefit period, the more the insurance will cost.  Where cash flow is limited, it is generally better to choose a longer waiting period rather than shortening the benefit period.

The Government Co-Contribution

If you earn less than $60,342 per year, make personal contributions to superannuation and meet other eligibility criteria, the Government will assist your retirement savings by making an additional contribution on your behalf at the rate of $1.50 for every $1 you put in, up to a maximum of $1,500.

• You will be eligible for the superannuation co-contribution in a financial year if:
• You make personal contributions (after-tax) to a complying superannuation fund;
• Your total income2 is less than $60,342;
• At least 10% of your total income is from eligible employment, carrying on a business, or a combination of the two;
• You do not hold an eligible temporary resident visa during the financial year;
• You lodge a tax return for the financial year;
• You are less than age 71 at the end of the financial year.

Calculating the co-contribution amount

If your total income is less than $30,342 the Government will contribute $1.50 for every $1 you contribute, up to a maximum of $1,500.

However, if your total income is between $30,342 and $60,342, the following formula is used to determine the amount of the co-contribution:

$1,500 – [0.05 x (total income -$30,342)]

Note that the formula gives a maximum amount so that where the eligible contributions are less than $1,000 the co-contribution is limited to 150% of the amount of eligible contributions. This is the case whether the total income is less than the lower income threshold or above it.

How does the process work?

Assuming you are eligible, all you need to do is make the personal contribution/s and lodge a tax return at the end of the financial year. You can relax then as the Tax Office will do the rest.

The Tax Office uses the information from your tax return together with contribution details provided by your superannuation fund to determine whether you are eligible for the co-contribution – and if you are eligible, the Tax Office will lodge the co-contribution directly into your superannuation account.

In terms of timing, most superannuation funds are required to lodge contribution details with the Tax Office by the 31st October each year, so assuming you lodge you own tax return by that date, you can expect the co-contribution to arrive in your account not long after that.

In any case, the Tax Office will send you a letter confirming the amount of the co-contribution and to which superannuation fund it has been deposited. Note that the co-contribution will be paid into the same account that you made the personal contribution, unless you advise the Tax Office otherwise.

So where to from here?

Now that you've made the first step of finding out what financial planning is about, how do you move further down the path to financial security?

All of our clients begin with an initial consultation, free of charge, where we gather together all of the information we need to understand your current situation.  This may include details about your assets and liabilities, income and expenses, superannuation, property, investments and insurances.  This helps us understand where you currently are at in a financial sense.

We then look at what your specific financial goals might be whether they be short or long term, temporary or permanent.

We also take into consideration any concerns you may have regarding your financial situation and other financial issues there may be for example - your tolerance to risk or your ethical investment concerns.

Once we have identified where you are, where you want to be, and the way you hope to get there, we then move on to preparing a Statement of Advice for you that includes any strategies that may be recommended and explains what is involved in implementing them.

Now that you have read your Statement of Advice, it's up to you to decide whether to implement the recommended strategies or not. 

Once your initial strategies have been implemented, we review the financial plan on a regular basis to ensure your strategy is in keeping up with changes in your life, work, relationships and goals.

1 Assumes salary increases by 5% p.a.
2 Total income is your assessable income plus reportable fringe benefits

Disclaimer

The information contained in this document is given in good faith and has been derived from sources believed to be accurate as at this date.  It contains general information only and should not be considered as a comprehensive statement on any matter and should not be relied upon as such.  Gilham Financial Management does not give any warranty of reliability or accuracy nor accepts any responsibility arising in any other way including by reason of negligence for errors or omissions.

This information doesn’t account for your investment objectives, particular needs or financial situation.  These should be considered before investing and we recommend you consult a financial adviser.  All forecasts and estimates are based on one set of assumptions which may change.  A small change in any one of the assumptions may lead to a large change in the results.

This information is based on current laws and their interpretation.  The levels and basis of taxation may change.  The application of taxation laws depends upon an investor’s individual circumstances.  You should, therefore, seek professional advice on the taxation implications of investing and should not rely on this information which should be used as a guide only.