Time investments made early can bring great financial rewards down the track.
Most of us recognise the benefit of being financially organised and the great reward that can come about when this starts early. This is – in part – because of the value of time when it comes to investing and the so-called ‘magic of compounding’. Getting started early can also create a great sense of accomplishment, setting up a foundation for a confident and active approach to money management as a young adult.
Many of our clients have shared with us that if they had started the journey with APC earlier, they would have felt in a stronger position today. They wanted to make sure their children benefited from this realisation. This led to the establishment of APC’s Foundation Client Service designed to assist the children of our clients in the beginnings of their own financial journey.
While their needs and goals may differ from Mum and Dad’s, there are a number of financial ducks that can be lined up which can put one on a great footing. If the New Year inspires some motivation to get started, here are some items which may be worth considering if getting financially sorted is part of this year’s resolution.
The benefit of time
While a hunt for higher returns almost certainly requires acceptance of a higher level of risk, time is a force to be reckoned with. The importance of making a conscious choice about superannuation investments is a decision that can make a marked difference to the investment value and trajectory over time. In practical terms, this might be the difference between choosing a ‘balanced’ investment option rather than a ‘high growth’ option. The longer you have to invest, the greater the impact – and 1 or 2 per cent higher average return per annum might make a greater difference than you think. Looking at the effect of an early savings strategy, the chart below is a simple illustration of the amount of monthly saving required for one to save $1m at age 65. It might have many of us wishing we could turn back the clock!
Income protection insurance
Most of us tend not to think about the possible health issues that can unfortunately happen, especially when relatively young, fit and healthy. But if you had a machine at home that spat out the equivalent of your income every year, you probably would insure it – right?
When the unplanned occurs, parent’s often step in to help their children if they are not covered or simply need financial assistance – which can in turn impact their own retirement plan.
You can typically cover up to 75 per cent of your income with payments until you are aged 65 (if an illness/injury means you cannot work). Getting the cover locked down in your early 30s – or before – can be a good idea. It often means you have yet to experience major health issues that the insurance company might otherwise specifically exclude or attach an additional cost to cover.
Health insurance premium loading
Lifetime Health Cover is a government initiative, which was introduced with the aim of encouraging younger people to get and maintain hospital cover. In summary, an extra cost applies to hospital cover unless you have it in place by the July 1 following your 31st birthday – 2 per cent for every year over 30.
So, one could end up paying, for example, a 20% loading by age 40 and so on – up to a cap. If there is no other impediment to taking action on health cover, these provisions make it worth getting the ball rolling.
The act of automation simply makes for an intelligent approach to money management. It is just as much about making it all easier as it is about consistent action – which can be the key (see chart above!) We probably don’t need to tell most young people that technology is their friend. When it comes to saving, investing and budgeting there has been fantastic innovation with a myriad of online tools and apps available. When it comes to ‘paying yourself first’, making it automatic can be most effective at reaching important goals and staying on track.