How does our relationship with our investments change as we get older?
At every stage of life, Australians face brand new personal and financial challenges and these must be catered for by incorporating appropriate financial strategies. The result of not adequately planning and adopting the right strategies can affect you later on in life – Industry Super Australia has recently revealed that within the next four decades, approximately 50% of Australians will not have enough savings to retire comfortably.
Let’s explore the most common investment mistakes made by each age group. Although not all money mistakes are age-specific, some of them are more common in particular age ranges.
Teens to your 20s – Not passing on financial literacy
As cliché as it may be, it goes without saying that we should be teaching our children how to fish starting at a young age, as opposed to simply providing for them. Starting early will provide your children with a healthy mindset, and also teach them about the practical realities of budgeting.
Recent studies by Georgia Southern University have shown that the current younger generations have much lower financial literacy and financial independence than their older counterparts. This is unprecedented in previous generations. Accordingly, parents need to ensure that they pass on their financial knowledge to their children well before they land their first “adult job”.
We recommend beginning with baby steps and moving forward incrementally. Start by letting your children pay for their phone bills, then their transport, and eventually contributing to their own rent. Contrary to popular belief, research suggests that children who receive allowances spend less than those receiving purchases directly from their parents.
You will see that developing their financial independence will benefit both your children and yourself in the long term. Doing this doesn’t make you a bad parent, but a responsible one. Here, show them our list of the most badass personal finance blogs out there.
20s to your 30s – Ignoring the nest and being too conservative
Perhaps understandably, most 20-somethings do not recognise how saving money and having an emergency fund may be relevant to them. Startlingly, statistics have shown the current cohort to be the least financially responsible generation in history.
Excited to launch our careers and without a high amount of disposable income, we have the tendency to overspend. Consequently, we often resort to our convenient credit cards, and play a large part in contributing to the national credit card debt of $50 billion.The golden rule of thumb is that credit cards are only convenient payment options, and if you cannot repay your balance when it's due, then using the card is something you cannot actually afford to do.
Instead of falling for this easy pitfall, we should consider this as the perfect opportunity to start building our nest. Start simple budgeting through keeping count of your spending and setting aside a portion of your pay every pay cycle in a savings account. You might not see the relevance of retirement, but research has shown that compound interest works wonders. Your retired self will deeply thank you for starting early.
The current generation of 20-somethings is also unique in their low-risk appetite. A recent study by Georgia Southern University suggests that our conservative attitude towards investments is not as apparent in our predecessors. Due to our low financial literacy and witnessing various periods of financial instability, we overwhelmingly favour cash and minimum risk financial products. However, don’t go and pool all your funds into highly leveraged share options – although it won’t hurt for you to incorporate a little more risk into a well-diversified portfolio.
Savings accounts are minimum risk and designed to store cash
Rates last updated November 17th, 2016
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ME Online Savings Account
Ongoing, variable 3.05% p.a. rate when you link to a ME Everyday Transaction account and make a weekly purchase with your Debit MasterCard using tap & go. Available on balances up to $250,000.
3.05%
1.30%
1.75%
$0
$0 / $0
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ING DIRECT Savings Maximiser
Ongoing, variable 2.75% p.a. when you link to an ING Orange Everyday bank account and deposit $1,000+ each month. Available on balances up to $100,000.
2.75%
1.60%
1.15%
$0
$0 / $0
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Bankwest Hero Saver
Ongoing, variable 2.65% p.a. rate when you deposit at least $200 each month and make no withdrawals. Available on balances up to $5,000,000.
2.65%
0.01%
2.64%
$0
$0 / $0
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Australian Unity Easy Saver
Introductory rate of 3.05% p.a. for 4 months, reverting to a rate of 1.70% p.a. Available on balances below $250,000.
3.05%
1.70%
1.35%
$0
$0 / $0
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Citibank Online Saver
Introductory rate of 3.00% p.a. for 4 months, reverting to a rate of 1.70% p.a. Available on balances below $500,000.
3.00%
1.70%
1.30%
$0
$0 / $0
Open
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30s to your 40s – Making the wrong mortgage and family decisions
Buying our first property is one of the biggest cornerstone moments of our lives. Notwithstanding this, the accomplishment can be disastrous if our mortgage is not properly managed and the right property is not chosen. We may be inclined to attempt to mimic the living standards set out by our parents and peers, which can cause us to irrationally purchasing a property more expensive than what we can afford. A townhouse by Bondi Beach is unquestionably an ideal place to live, but it is an option for when we’re closer to the end of our career.
First home buyer home loans can help you step into the property market
Rates last updated November 17th, 2016
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HSBC Home Value Loan - Resident Owner Occupier only
Enjoy the low variable rate with $0 ongoing fee and borrow up to 90% LVR.
3.55%
3.57%
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UBank UHomeLoan Variable Rate - Standard Variable Rate Value Offer (Owner Occupier P&I)
Pay no application fee or ongoing fees with this loan.
3.64%
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loans.com.au Essentials - New Purchases Only Up to 80% LVR (Owner Occupier, P&I)
Low variable rate for new purchases as well as no application or ongoing fees.
3.39%
3.41%
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State Custodians Standard Variable Spring Special - LVR 80% (Owner Occupier)
Special Owner Occupier Rate. Free Offset Account.
3.59%
3.92%
$0
$299 p.a.
80%
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Many of us are also starting our own family as we progress through our 30s. Studies have shown that we are now getting married later than the previous generations. After the question is popped, we may be tempted to join finances with our partner. However, it may be wise for us to keep a portion of our investments aside under our own name. This will keep us afloat in the unfortunate event that the marriage breaks down.
We also don’t recognise that now is the best time for us to commit to an insurance policy. We should be able to lock into an inexpensive rate now and benefit from this as we age. It is crucial to ensure that our policy is as holistic as possible. As a minimum, life, TPI and disability need to be covered.
Insurance is a bigger “must” if you have young children. Being adequately covered will safeguard the wellbeing of your loved ones if anything should happen to you.
40s to your 50s – Being “sandwiched” and under-saving
What is unique to today’s 40-somethings is that they are painfully “sandwiched” between their dependent children and their elderly parents. We have to financially support both sides and can be easily torn apart in this balancing act. At the same time, Australia is one of the most longevous countries in the world, and our parents may well live into their 90s.
As we have now married in our 30s, our children are still young and we have to provide for them. Luckily, thanks to HECS-HELP, we do not have to pay for our children’s university tuition. However, many Australians choose to send their children to private high schools and tuition fees can be just as expensive, with premium schools costing as much as $9,000 per semester. Whilst we all want the best for our young ones, it is important for us to carefully evaluate education decisions. As mentioned above, encouraging our children to be financially independent and budget aware will be beneficial to both parties.
Likewise, we may have to look after our ageing parents who may need additional support. We need to ensure that they understand the implications of their lifestyles and alternative options including retirement villages and nursing homes. However, their biggest spending may be health related.
Due to being “sandwiched”, we often do not save enough for ourselves. As such, it is important for us to regularly review our super and mortgage to ensure that we do not fall behind. In order to address these multiple financial goals, it may be useful for you to consult a financial planner.
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50s to your 60s – “Dipping into” superannuation and underestimating retirement costs
When we are at the door of retirement, we face the strong temptation to access our retirement funds. We tell ourselves that we have come all this way and it won’t hurt for us to reward ourselves. However, many of us underestimate our retirement costs, in particular potential medical expenses. Some of us upgrade our lifestyles and adopt a new standard of living which our superannuation will not be able to support in the long run, whereas others may decide to pool their funds into starting their own business in a completely unfamiliar industry. These decisions can ruin the super fund which you have spent your entire career building up.
We may also be persuaded to co-sign a mortgage for our children. Whilst this is a generous offer and it helps relieve their burden, we need to ensure that this does not jeopardise our own retirement plans. After all, they have decades of their career in front of them, and we are taking the final steps in ours.
How much you need to save to retire comfortably in Australia.
60 plus –Adopting a “carefree” approach to income
Although we have now retired and we can finally enjoy our time off, we often slip into the mistake of not actively looking after our income. As we keep mentioning, Australians now live well into their 80s and 90s, and many of us may not have enough super. We should try and avoid relying solely on our super as our only source of income, and we should maintain active management of our finances.
This is not to say that we should adopt aggressive investing strategies, but instead maintain a well-diversified passive investment portfolio. Low-risk and high-income securities such as blue-chip shares and government bonds will nicely complement our super streams. All in all, to make sure we cater for ourselves, we need to have a “hands-on” approach.
Find out whether government bonds are a suitable option for you.
Top tips for all age groups
Plan ahead
At every stage of our lives, it is always paramount for us to plan ahead. Although there's no way for us to fully future-proof ourselves, daily budgeting can go a long way. You should also re-evaluate your budget from time to time, to ensure that you are keeping up with your lifestyle and your career. Your future self will always thank you for having extra savings set aside. It's simple stuff, but make sure you do it regularly and make it a part of your daily life.
Utilise all your resources
The recent financial crises and general financial uncertainty means that we need to be financially literate even more so than previous generations. Yet, the good news is that the Internet has also given us access to an unprecedented amount of educational content. You will be able to find many useful articles and tutorials online, which can teach you how to be more finance savvy. We have many guides to help you compare savings accounts that will earn you the highest interest on your balance.
Take care of your mortgage
Regardless of which age bracket you’re currently in, your mortgage forms the core of your financial standing. It would be wise to have your mortgage paid off as early as possible, and ensure that repayments are catered for at all times. Banks are more competitive today than ever before, so don't be scared to refinance if another bank offers you a better rate. Some lenders also offer complimentary consumer products bundled with home loans, such as home and contents insurance. Make sure you utilise these invaluable resources. You can find the best home loans here, and see some tips on how to manage your home loan.
Choose a reliable super fund
You need to recognise that even after you retire, you will still have at least 20 years to yourself. When this happens, you will be dependent on your super fund. Having said that, from day one, you need to become best friends with your super and know everything about it off by heart. Although switching super is becoming a common practice, you still need to make sure that you find a provider that suits your needs and characteristics.
Understand your risk appetite and diversify
To accumulate wealth over time, you will have to invest and with every investment comes a different level of risk. Understanding how susceptible you are to risk is crucial for all of us, as we all have different risk profiles. Of course, diversify your investment portfolio to ensure that you are only taking risks which you cannot avoid.
Consult a professional
None of us are born champions in the financial arena. Don't be scared to see a financial planner or your local accountant if you need a hand in making a financial decision.
Rates last updated November 17th, 2016
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