The sooner you start planning for your future, the better. Developing healthy budgeting and savings habits in your 20s can help you now – and set you up for future financial wellbeing.
If you’re in your 20s, chances are that life could feel like a bit of a rollercoaster right now. The economic fallout of the coronavirus (COVID-19) may have knocked your personal finances for six and at the same time, you could be juggling new expenses and experiences for the first time, such as moving out of home and starting your first full-time job. Learning to juggle competing financial priorities and save for the future is essential.
While these lessons may be confronting at the moment, they can also teach valuable skills that your future self will thank you for. If you do things right in your 20s, you can lay the foundations for a solid financial future and set yourself up for life. Here’s how to put some sound plans in place to give yourself more choices about how you live your life in the years ahead.
It might seem obvious but getting in the habit of budgeting when you’re young is one of the best ways to boost your future financial wellbeing.
Start by tracking what money you have coming in (your income) and going out (your expenses). It’s important to understand where your money is going and what proportion you’re spending on essentials, like rent, food and utilities, and non-essentials, like entertainment and clothes. Brush up on the basics of creating a budget, then use a budget calculator to help you get started.
Practise mindful spending
No matter what your financial situation is at the moment, this is an ideal time to learn savvy spending techniques. Practising mindful spending is an easy way to ‘trick yourself’ into saving money. And when you do need to buy a big-ticket item, do your research, shop around and where possible, look out for seasonal sales to help stretch your hard-earned dollars further.
If you get in the habit of doing all of this from an early age, saving money will become second nature; you’ll start to put money away for your future without even thinking about it, which could benefit you in the long term.
Compound your interest
When you’re in your 20s, your budget is usually pretty tight and there are plenty of other demands on your income. But if you can spare a few dollars from your pay, it can make a big difference later on.
By starting to save in your 20s, you have a great opportunity to maximise the growth potential of compound interest. This means that you not only earn interest on whatever funds you deposit into your savings account, but you also earn interest on that interest. It’s extra money – without the extra effort.
For example, if you begin with $100 in an account earning 2% interest a month, and deposit just $10 into the account every month, in 10 years you’ll have $1,449 in the account – $149 of that pure interest. If you keep doing that for your entire career, say 50 years, when you retire you’ll have $10,568. Of that, $4,468 – almost half – is pure interest. You can test this out for yourself on the MoneySmart interest calculator.
One of the simplest ways to make compound interest work is to ‘set and forget’: establish a direct and automatic transfer from your everyday account to your savings account, so you don’t have to do anything to make your money work harder for you.
Watch your super grow
Once you earn over $450 a month, superannuation is compulsory in Australia for most employees, which typically means you’re in the fortunate position of being able to start planning for your retirement as soon as you get your first job – whether full-time, part-time or casual.
So, rather than thinking of super as a burden, think of it as an easy way to save for retirement in your 20s. It can be tax effective and harnesses the benefits of compound savings.
Choosing your super account
When thinking about super, your first task should be to choose a super fund. Your employer may have, for example, a default MySuper fund that they pay your superannuation guarantee (SG) contributions into, but it’s your choice whether to stick with it or move to a different fund.
The next step might be to consolidate your super accounts. If you’ve held multiple casual and part-time jobs, chances are you’ll have multiple super accounts – you may not even know they all exist. Think about bringing them all together to minimise the fees you’re paying. Make sure you understand the differences between each super account and any insurance benefits you have and may lose, when you’re thinking about consolidating.
Your final, but most important, task is to make sure your super account is working hard for you. When you’re time-poor, it’s easy to let your superannuation tick over in the background. But it’s a good idea to be mindful about your retirement savings and become familiar with the different investment options your fund offers.
Around one quarter of superannuation assets in Australia sit in a default MySuper fund1. If this includes yours, it’s worth looking into whether this type of fund is best serving your needs.
Another reason to take a more active role in your super is that it makes it easier for you to choose a fund that’s in line with your own values. For example, it might be important to you to find a fund that is ethical and seeks responsible investments that support the planet, people and animals.
If you withdrew your super early
If you’ve been affected financially by the coronavirus (COVID-19), you may have withdrawn some of your super early, under the government’s early super access scheme.
While it might have helped in the short term, it’s important to consider the long-term implications of withdrawing any money from your super. Just as compound interest works to grow your retirement savings over time, the reverse is also true, and any money that was withdrawn this year could be worth much more by the time you’re ready to retire. If you did withdraw some of your super early, think about whether you can commit to a plan for paying it back, once you’re back on your feet. You can do this by making personal contributions to your super.
Ditch personal loans and credit card debt
It’s easy to over-extend your finances when you’re young and starting out in the workforce. In your 20’s your social life can often dictate you expenses, and even become unconscious spending habits. Add to this your existing debts and the high cost of everyday living and your expenses can build up, making it tempting to take out loans. But falling into credit card debt at an early age can quickly spiral into an unhealthy financial future.
If you do have any spare cash at the moment, it may be a good idea to prioritise debt repayments. Write down all the money you owe, then rank each debt in terms of the interest rate on the amount. Payday loans and credit cards generally have higher interest rates, so you should prioritise paying them off first.
Learn to invest wisely
While you’re in your 20s, retirement isn’t just around the corner, which means you have more flexibility with your finances than someone in their 60s who may be planning to leave the workforce in a few years.
With fewer financial responsibilities, you may be in a position to take a few more risks with your investments – the thinking being that if things don’t work out, you have time to fix them.
Start early and consider talking to a financial adviser about choosing a mix of investments that will bring you gains you feel comfortable with, given your financial investment style.
While you’d like to think you’ll be healthy and happy forever, chances are you’ll need medical assistance at some stage in life, including retirement. If you’re thinking about taking out private health insurance, there are incentives to doing so while you’re young.
In fact, if you take out hospital cover after your 31st birthday, you’ll have to pay a lifetime health cover loading on top of your insurance premium2. This works out to be an extra 2% on your premiums for every year you’ve waited. That’s a big financial incentive to invest in your future health, right now.
If your super is in a MySuper account, check whether this is right for you.
Roll over the balances from any additional super funds into your primary fund.
Remember to look at what insurance cover and benefits you may lose by doing this before you consolidate.
Compound your interest, repay early withdrawals and grow your super to make your money work harder for your future.
How to save for retirement in your 40s12 November 2020 It’s not too late to make savings decisions that will have a big impact on your future financial wellbeing. Here’s how to save for retirement in your 40s. Read more
How to save for retirement in your 50s27 October 2020 Boost your retirement savings and maximise your financial wellbeing when you say goodbye to the workforce. Learn how to save for retirement in your 50s. Read more
How to save for retirement in your 60s29 May 2021 Don’t let financial angst put a dampener on your retirement. Here’s how to save for retirement in your 60s and make your move out of the workforce a smooth one. Read more
Tools & calculators
This information is provided by AWM Services Pty Ltd (ABN 15 139 353 496), is general in nature only. It hasn’t taken your personal circumstances into account. Before deciding what’s right for you, it’s important to consider your particular circumstances and read the relevant product disclosure statement or terms and conditions available from AMP at amp.com.au or by calling 131 267.
You can read our Financial Services Guide online for information about our services, including the fees and other benefits that AMP companies and their representatives may receive relating to products and services provided to you. You can also ask us for a hard copy.
All information on this website is subject to change without notice. AWM Services is a part of AMP group. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek professional advice before making any financial decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability for any resulting loss or damage of the reader or any other person.