Smart Money Moves for every age

Navigating through different life stages presents unique financial challenges, opportunities, and priorities. Whether you're building your career in your 20s, starting a family in your 30s, building assets in your 40s or starting to plan for retirement and beyond, making sound financial decisions is crucial for securing your future prosperity. 

Here are five common mistakes to avoid along the way:

1. Not paying attention to superannuation

Yes, for some of us, retirement is literally decades away but the earlier you start paying attention to your superannuation, the brighter your overall financial future will be.

There are various ways you can top up your superannuation, ranging from salary sacrifice and after-tax contributions to spouse contributions. Whatever your personal circumstances and budget may be, there's a strategy to give your retirement savings the boost they need.

For instance, let’s consider a 40-year-old who contributes an extra $5,000 annually, after tax, to their super fund. Assuming a conservative 7% annual return after fees and tax, this individual's super balance could potentially increase by nearly $70,000 by age 50. Even if they cease making these additional contributions at 50 and allow compounding to work its magic, that money could grow to almost $300,000 by the time they reach 65.

Making additional contributions early on in your wealth-building journey can also offset the impact that time out of the workforce has on your retirement savings. Whether you're considering taking a break from traditional employment to travel, start your own business, or focus on raising a family, making contributions before you take leave, or as soon as you are able to start again, will make a significant difference.

Even if you don’t have extra funds to allocate towards your retirement, you can still have a substantial impact by managing your investment allocation, monitoring the fees you are paying, and assessing your funds' performance. By being proactive and strategic with your retirement savings, you can significantly enhance your financial security and ensure a more comfortable future for yourself.

2. Living above your means 

'Keeping up with the Joneses' is a common financial pitfall that many people fall into, often leading to unnecessary stress and financial strain. So, how can you avoid getting swept up in this cycle?

Understanding your cost of living and tracking your expenses are foundational steps toward achieving financial stability and living within your means. This practice is one of the most crucial aspects of mastering personal finance, as it enables you to gain a clear understanding of what it actually costs to sustain your lifestyle.

While many of us had become accustomed to low interest rates and relatively stable expenses, we've witnessed a significant shift in the financial landscape over the last few years, with the cost of living steadily rising. Unfortunately, there doesn't seem to be much relief on the horizon.

For instance, just this week, on April 1st, many Australian households experienced yet another increase in their cost of living, as private health insurance premiums surged by an average of 3%. Faced with such rises, it becomes imperative to reassess your financial priorities. This may entail making adjustments to ensure you can continue to fund expenses that are important to you.

At every stage of your life, it's crucial to reflect on whether the life you've built and the expenses you're  funding genuinely align with your values and aspirations. By regularly scrutinising your lifestyle expenses, you can identify potential discrepancies and realign your financial course.

3. Treating all debt as equal

Not all debt is created equal, yet many people make the mistake of treating it as such. While the ultimate goal may be to become debt-free, it's crucial to adopt a strategic approach that prioritises paying off the least valuable debt first.

Tax-deductible debt refers to loans where the interest paid can be deducted from taxable income, such as mortgage interest on an investment property. On the other hand, non-tax-deductible debt includes loans like your home loan, credit card debt, and personal loans, where the interest is not tax-deductible because the asset bought with the debt does not generate taxable income.

Generally, focusing on non-tax-deductible debt and high-interest debt first is a smart money move. Utilising banking products such as redraw facilities or offset accounts can also help reduce the interest you pay.

Imagine you have a $400,000 home loan at a 6% interest rate, spanning 30 years. By having $50,000 in savings deposited into an offset account linked to your loan, you effectively reduce your outstanding loan balance to $350,000. This simple action could save you a staggering $71,897.22 in interest payments over a 30-year loan term.

Recognising the distinctions between various types of debt and strategically managing them can play a pivotal role in achieving long-term financial success at any age.

4. Waiting to invest

In our top 5 most common financial mistakes individuals make is waiting too long to begin investing. While it's understandable to want to wait for the "perfect" time or until you have more disposable income or have paid off debts, delaying your investment journey can significantly hinder your long-term financial growth.

Time is one of the most powerful factors in investing. The earlier you start, the more time your investments have to grow and compound. Even small contributions made consistently over time can yield substantial returns, thanks to the power of compounding interest. While the market may experience fluctuations in the short term, historical data shows that, over the long term, it tends to trend upwards. By staying on the sidelines, you risk missing out on the opportunity to capitalise on these gains and maximise your investment returns.

Waiting to invest can make it more challenging to reach your financial goals. Whether you're saving for retirement, a home, or other long-term objectives, delaying your investment efforts means you'll need to save and invest more aggressively later on to achieve the same outcomes.

For instance, a 30-year-old investing $500 per month could accumulate around $1.5 million by age 65. However, a 50-year-old starting to invest at the same rate would need to invest approximately $2,639 per month to reach the same amount by 65. 

Moreover, the longer you delay learning about investing and becoming comfortable with investment concepts, the steeper the learning curve becomes. However, by starting early with small investments while focusing on other financial goals, you gradually familiarise yourself with the investment landscape. This incremental approach allows you to build confidence and knowledge over time. When you eventually shift your focus to investing as your primary strategy, you'll be well-prepared to hit the ground running. By laying the groundwork early on, you've already gained valuable experience and developed a solid understanding of investment principles. This positions you to make informed decisions and navigate the complexities of the market with greater ease and confidence.

Ultimately, the key to successful investing is not timing the market but time in the market. By starting early, staying consistent, and taking a long-term perspective, you can harness the power of compounding and position yourself for financial success in the years ahead. Don't wait for the perfect moment—start investing as early as you can and let time work in your favour.

5. The wrong insurance mix

Finally, not protecting your most valuable asset—you, and your ability to earn an income—is an all too common financial mistake. As you age, the risk of illness, disability, or death increases, highlighting the importance of having appropriate insurance coverage.

Consider this: the average wage in Australia is currently $69,888. For someone in their 30s, earning this average wage until they reach 65 would accumulate over $2.5 million in their working lifetime. Now surely that’s worth insuring! 

Life insurance, total and permanent disability (TPD) cover, income protection, and critical illness insurance can provide financial security for both you and your loved ones during times of need. Typically, people seek sufficient cover to manage living expenses if they can't work, potentially pay off debts, and handle family expenses like medical costs and children's education in the event of illness or death.

As you reduce debt, build assets, and your life circumstances change—such as children leaving home—your insurance needs will change. Regularly reviewing your insurance policies is crucial to ensure you're not paying for unnecessary coverage, which can be just as detrimental to your financial future as being underinsured. Finding a balance is key.

A financial adviser can assist in determining the optimal level of cover, the best insurance provider, and the most suitable structure. This may involve holding the cover in your name, paying for it out of your bank account, or incorporating it into your superannuation, or a combination of both.

By addressing the five mistakes outlined in this article – from neglecting superannuation to overlooking the nuances of debt – you can take proactive steps towards financial success. Remember, it's never too late to reassess your financial strategy and make positive changes. Whether you're just starting your financial journey or seeking to enhance your existing plan, staying informed and proactive is key to achieving your long-term financial goals. 

*Please note that this article is intended for educational purposes only and does not constitute financial advice. It is important to consult with a qualified financial advisor or professional before making any financial decisions.