Dear Aussie Advisor: I’m 23, have $5k in my savings and a $1k credit card debt

This 23-year-old grad needs a financial plan. Source: Getty

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I’m a 23 year old graduate entering my first grad job. I’ve currently got $5,000 in savings and am about to earn $65,000 plus super at my new job. I have a credit card with around $1,000 left to pay. I’m wondering whether I should take advantage of the government’s early super release scheme and withdraw $10,000 and pay down my HECS debt, which is $45,000. Alternatively, should I consider taking the money out for a house deposit? I am looking to purchase a house within the next two years, but I’m worried the bank will look unfavourably on my HECS debt.

Thanks,

Anonymous

Dear Anonymous,

Firstly, congratulations on your first job! How exciting.

You have raised some excellent questions. As this is your first job out of university and you have some savings accumulated, I have made the presumption that you’ve been working whilst you study.

The first step to establish is a strong budgeting habit. This will take a few months to work your way around as you’re yet to receive your first pay cheque. Once you do so, effectively understanding your after-tax salary and budgeting from the start will set your ongoing savings up.

$65,000 plus superannuation is a great starting package for a 23-year-old to be walking in to. After tax, that should see you take home around $936 a week, or $4,872 per month after tax.

Your HECS debt will be paid automatically through the tax system on a regular basis. If we assume you won’t make any further income this year aside from your $65,000 salary, you could be looking at a repayment rate of around 3.5%. This will change as time progresses and your earnings increase.

Here’s your strategy

1. Firstly, get your credit card paid off. You have $5,000 in savings, which is presumably earning less than 1% interest. However, your credit card of $1,000 will be charging you anywhere from 15% to 20% interest. A credit card can be a great tool to help you use the banking system to your advantage. However, used incorrectly and it can do just the opposite. A small $1,000 credit card debt left unresolved can become your biggest nightmare over time.
   
   You’ve mentioned you want to buy a home within the next two years. Used in conjunction with your mortgage, once secured, you could consider putting all your monthly expenses on to your credit card, using your budget to keep you on track. Your salary could then be kept in an offset account that offsets the interest on your mortgage where the interest is calculated daily and added at the end of the month. You must, in this case, ensure you are repaying your credit card at the end of the month, before the interest date falls due. This will allow you to use your salary and any budget surplus to reduce your mortgage costs dramatically.
   

2. Create a budget as soon as possible. Budgeting is not about writing down your expenses versus your income once and hoping it fits as your lifestyle progresses. This is where people go wrong. Using your budget in this way will have you trying to react to large, unexpected expenses as opposed to effectively planning ahead.

   Your budget should be written down in a clear and concise format with as much information as possible. Consider things like bills, food, pets, petrol, travel costs and leisure money. At the end of each week, check it against your actual expenses. Over the course of the month, I guarantee there will be some costs you didn’t bargain for, forgotten about or even acquired over the period. However, spending 15 minutes a week on this will alleviate the need for you to spend hours on it every six months.

   Check out the Moneysmart.gov.au website. They have a great budgeting tool you could implement.
   

3. Regarding your question around the early release of your super, this scheme was established to assist eligible people to see through the negative impacts of Covid-19, you don’t seem to meet the eligibility requirements which would be unemployment, on Government assistance or have been made redundant or have your hours reduced. Given you are just starting out in the professional world and that you have not indicated you are in a position of need currently, I would suggest you refrain from accessing it and allow it to keep growing.
   

4. Up until 2017 there were discount benefits in repaying your student loan early. However, at present, repaying your HECS debt early won’t provide any added benefits. It will be repaid over time, regardless, using the tax system. If you’re planning to purchase a property in the next two years, you could direct your attention to growing your deposit over this time rather than focusing on your HECS debt. When it comes to lending and banks looking at your HECS debt when considering a mortgage, yes, it will be considered. However, only from the perspective of your after-tax income. Not as an asset. This will decrease your serviceability, but not as much as having a lower deposit.

Outcomes

Complete a budget and understand your savings capacity. Pay off your credit card and start to save your money in a high-interest savings account.

The $1,000 credit card is charging you $150 per annum. Once you pay it off, start to build your cash with monthly savings and begin to regrow it.

At current, you can find high-interest savings accounts offering as much as 2% interest. On $5,000, that’s $100 gained in interest per annum. As it grows, you may like to consider putting some of that saved money into a medium risk investment. This could provide an opportunity to earn more than any high interest savings account can offer.

If you were to direct the remaining $4,000 into a medium risk investment straight away as opposed to leaving it in a high-interest account, you could potentially earn around 5%.

Depending on your established budget, you could contribute an extra $500 per month to this investment. In two years’ time, that investment could be worth $24,023. Alternatively, let’s say your expenses are quite low and you can afford to add an extra $1,500 per month. That could amount to $62,776 in year two - a very healthy first home deposit.

Good luck,

The Aussie Advisor

Brendan Gow, The Aussie Advisor, is a Senior Private Wealth Advisor. Prior to his current role in a leading Private Wealth Firm, Brendan worked in financial advice across banks and institutions in Australia, and spent four years in Dubai as a Global Investment Advisor. With over 15 years of experience in wealth and financial management, Brendan delivers investment advice on a wide range of areas, including equity trading, portfolio and risk management, margin lending, bonds and fixed interest.

Brendan Gow, an authorised representative (no. 427470) of Shaw and Partners Limited AFSL236048 (the “Aussie Advisor”). This article has been prepared without taking into consideration any investor's financial situations, objectives or needs. Accordingly, before acting on the advice in this article, if any, you should consider its appropriateness to your financial situation, objectives and needs. Every reasonable effort has been made to ensure the information provided is correct, but we cannot make any representation nor warranty as to the accuracy, completeness or currency of that information. To the extent permissible by law, no responsibility for any errors or misstatements is taken, negligent or otherwise. Shaw or its authorised representatives may also receive fees or brokerage from dealing in financial products, see Shaw’s Financial Services Guide for information about the services offered by Shaw available at http://www.shawandpartners.com.au/.

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