Ever wondered what to expect from financial planning? Or do you have money or investment questions you’d love some guidance on from a financial advisor?
We bring you – ‘Dear Aussie Advisor’: Our new weekly advice column that sees our very own Aussie Advisor, Brendan Gow, answer your questions and show you the value of a solid financial plan.
Dear Aussie Advisor,
I’m a 25 year old IT worker earning $70,000 a year. I have no investments but I’m interested in learning more about investing. I’ve got $30,000 saved. I spend $200 on rent per week and don’t have any major expenses, although I like to dine out with my friends, shop once in a while and go on the occasional holiday or weekend getaway. I have $18,000 in my super. I don’t know my way around finances too well, and I’d mostly like to put my money aside and have it grow while I sleep – what should I do?
Getting into the habit of budgeting is always the most difficult step when it comes to smart money moves, so to have successfully adopted that practice and saved $30,000 over a presumed three-year period is a great foundation.
With no major expenses, a decent income and affordable rent, this is an opportunity within your life that you need to nurture.
Whilst you continue to live within your means, remaining money conscious and spending less than what you’re earning, you can capitalise on this by strategically putting your money to work for you.
What you should know
My first point of discussion is your superannuation. One of the most important financial understandings millennials need to have is what is being contributed to their super, and the fees involved annually. This will help us to ascertain what the most effective super fund for your needs is.
Considering you have worked full-time for the past three years, with an assumed 9.5 per cent super guarantee rate on your $70,000 salary, I would estimate a total contribution of around $19,950 to your superannuation, assuming your salary hasn’t changed over that period. However, you note you currently have $18,000 in your superannuation account.
Contrary to your budgeting, it appears your superannuation balance is going down in value as opposed to growing. This could be due to a series of faults, including:
High superannuation fees
Super contributions invested too conservatively
High insurance costs within current super fund
A combination of the three
The next point of discussion is around your financial goals. My understanding, from the information you have shared, is that your main financial goal is to ensure enough disposable income to create the flexibility for a little bit of shopping, dining out with your friends and the occasional holiday or weekend away.
From these points, we can make the following assumptions for your overall budget:
$10,000 a year sent into savings
$10,400 contributed towards rent
A salary of $55,384 after tax
Your lifestyle expenses are likely to be around $34,984
Let’s presume that you wish to retain your current level of spending, with the goal of maintaining a minimum of $10,000 in savings each year whilst ensuring you continue to have the flexibility of your disposable income to enjoy your lifestyle.
Based on your age, your budget surplus, the amount of time you have left in your working career until the average retirement age and taking into consideration your limited investment knowledge and experience, with a scale of 1 to 5 where 1 is conservative and 5 is aggressive, we can presume your tolerance to risk would be around a 4, being moderately to aggressively tolerant.
At this level, we would conservatively look for an average of 8 per cent p.a. growth on your investment. With that being said, it is important to bear in mind that markets do go up and down and, in some years, you may only see 4 per cent growth, but the next you may see 12 per cent.
Here’s your strategy
Invest $20,000 of the $30,000 you have saved into an investment portfolio, targeted towards your risk tolerance, keeping the remaining $10,000 in your cash account for emergencies.
You can then continue to contribute an additional $10,000 per annum into your investment portfolio. In your case, I would aim for a series of domestic shares that are primarily large to mid-cap stocks.
You can choose to do this either through a managed fund, or using a direct share portfolio. It is important to remember that, if you use a managed fund to invest, there will be a management fee involved. However, if you decide to build a share portfolio yourself or through a broker, you will also pay a small amount of brokerage fees.
As a rule of thumb, you should try to keep those fees below or around 1 per cent of the value of your investment. Remember, the focus here is to grow your wealth outside of superannuation, so this investment is for the long term.
Review your superannuation. The lower than expected balance of your superannuation is a red flag. You are young, and haven’t disclosed any major health problems, so the likelihood that insurance is eroding your superannuation is slim.
As such, I expect the most likely reason it is lower than it should be is due to your super being invested too conservatively for your current life stage. This, combined with potentially higher fees, can lead to a decline in your retirement savings.
In this case, you’ve contributed $19,950 over three years to your super, however, it is currently $1,950 lower than it should be. Whilst that may not seem a lot, it is still a 10% decline. When you are 50, with a balance of $300,000, that’s $30,000 less a year.
Call your superannuation fund and ask for some direction on your investment options. What do those investments cost you, and what are the ongoing fees of the superannuation fund? Calculate all these costs together, and if you’re paying more than 1.5 per cent per annum, you’re paying too much.
Get those fees reduced or change that investment allocation to one which is more suited to your risk tolerance. If your current super fund doesn’t allow that, then it’s time to move to another fund.
Review your insurances. Ensure your superannuation includes Income Protection, Life Insurance and Disability Insurance. You may also like to consider trauma insurance, otherwise referred to as Critical Illness Insurance.
This won’t be offered by your superannuation fund, however Life, TPD and income protection should be. Whilst this may not seem important to you right now, this is the best time to get a small amount of personal insurances in your portfolio. Why? Because it is cheaper whilst you’re young. You can always increase these insurances as time goes on.
These will be the outcomes
1. A difference of more than $64,000
Keeping all your savings in your cash account will:
Be worth $81,260 in 5 years
Be worth $133,814 in 10 years
By investing $20,000 with a further contribution of $10,000 every year after, calculated at an averaged 8 per cent growth per annum, your investment could result in the following growth:
Be worth $98,306 in 5 years
Be worth $198,555 in 10 years
With this being said, we can be more conservative by taking into consideration the possibility of a few bad years in equity markets, such as factors like Covid-19. Events, like these, could see returns lower than expected.
Let’s average 5 per cent average per annum instead. This could see the following potential outcome:
In year 5, your investment could be worth $91,035
In year 10, your investment could be worth $168,868
2. Small changes could mean an extra $204,000
If you review your superannuation fund and establish you are paying 1.5% per annum in management fees, admin fees and underlying investment fees, and you ascertain your fund is currently investing in a conservative investment option that generates an average growth of 4% per annum, your superannuation balance at age 65 could be $158,341.
However, should you decide to convert this to a fund where you are paying 1 per cent per annum in fees, increasing your risk exposure within your fund and your investment grows at an average growth rate of 5 per cent per annum, your superannuation balance at age 65 could be $362,347.
Making small changes now could have a drastic change to your net worth over the next five to ten years as well as the near term. As your life changes, so will your goals. By monitoring and reviewing your financial strategy on a regular basis, you can effectively plan-ahead for changes instead of reacting.
The best thing you’ve done for yourself to date is budget. Continue using this to your advantage.
Well done, and I hope this helps.
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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