Commencing full-time work is a significant milestone, and for many young adults, it marks the beginning of ‘life in the real world’.
This phase of adulthood is shaped by the sense of relief and accomplishment provided by finishing tertiary education, a TAFE course or an apprenticeship and by the excitement in knowing that there is finally a paycheck waiting for you in the future. That’s right… goodbye student pastimes like eating two-minute noodles for lunch, waking up at 10am and filling up the car with a quarter tank of fuel.
However, with this transition in life comes added financial responsibilities. Unfortunately, ‘Personal finance’ or ‘home economics’ is not offered in most high schools or universities, resulting in many young adults entering the workforce with limited education on how to manage their money.
If you are new to the workforce or have children who have recently commenced full-time employment, here are a few tips to steer you in the right direction:
Keep track of your money
Yes, I know… the concept of ‘budgeting’ is not exciting or glamorous, but it is an incredibly important habit to develop from a young age. Many people associate creating a budget without sacrificing your morning coffee, cutting down on your weekly Pilates sessions or skipping Friday after-work drinks. Rather than thinking of budgeting as a necessary evil that forces you to sacrifice the luxuries you enjoy, it should be thought of to develop an understanding of your spending habits. This can be easily achieved with a little self-discipline and half an hour set aside each month.
Personally, I like to go through my monthly card statement and break down the expenses into categories, i.e., food, going out, one-off expenses, bills, transport, etc. This way, I can work out the different areas where my money is being spent. If you prefer not to do it this way, several great free budgeting apps are available.
When coming up with a budget, it’s more effective to go through your ‘actual expenditure’ rather than what you think you spend, as, in most cases, you spend more than you think you do. This can be an eye-opening but valuable experience.
Once you know how much you are spending, you can easily work out the surplus cash flow you should have left from each pay.
Remove emotion from your financial decisions
Whether we like it or not, our emotions impact the decisions we make in our everyday life. This is especially prevalent in our financial decisions.
Behavioural finance has shown that it is easy to let our financial decisions be influenced by factors such as recency bias, herd behaviour, overconfidence, or an example, in layman’s terms – the suggestion of a ‘great investment opportunity from a close friend.
To help make more balanced and rational financial decisions, it is important to create financial goals and stick to them. Think about the lifestyle that you want to live and what steps are required to get there. If you are unsure of how to achieve the above, seek advice from an expert, as they will help you make informed financial decisions by taking emotion out of the equation.
Start early… but think long term
Start thinking about the financial goals that you want to achieve. The earlier you can begin this process, the longer you have for your money to ‘work for you’. Embrace the 8th wonder of the world… compound interest (see figure 1 below)*. The effects of compound interest are magnified when you start investing or saving from an early age. The longer you allow your money to compound, the greater the chances of growing your wealth for the future.
Avoid a ‘get rich quick’ mindset and take a long-term approach when deciding how to invest your money. You should only invest funds that you do not need access to in the near future. E.g. if you need that money to pay your rent, it shouldn’t be invested.
Additionally, you should only begin investing when you feel comfortable doing so. First-time investors need to understand the risks and volatility associated with investing in share markets.
*Figure 1; if you earn 10% on $100 over a one-year period, then at the end of the year, you have $110, and you’ve earned $10. At the end of the second year, you don’t just earn another $10 – you end the year with $121, and you would have earned $11. This process then continues year on year as you allow your money to compound.
Focus on ‘doing you’
It can be easy to compare your financial situation against those around you, especially when you have friends buying houses or purchasing new cars. The important thing to remember is that each person’s financial journey is different and that your financial goals should be based on what’s important to YOU. Setting financial goals should be done with a long-term mindset, so get comfortable moving at your own financial pace as it is a habit that will hold you in good stead both now and in the future.
If it seems too good to be true it probably is
The rise of the internet and social media has allowed information and content to be spread like never before. While several great benefits have arisen from both the internet and social media, scammers and product promoters now have a worldwide platform to reach everyday individuals.
These can come in many different forms, whether it be:
- self-proclaimed ‘foreign exchange traders’ on Instagram posing in front of a Ferrari sliding into your DM’s offering you a ‘once in a lifetime investment course’ *insert upwards trending graph emoji*.
- Cryptocurrency influencers telling you to buy the newest meme coin (I won’t dare repeat some of the names of these coins); or
- An advertisement for an investment fund guaranteeing high levels of investment returns.
Whilst you might think that surely no one ever falls for any of these, a great number of people do, and in most cases, people are too embarrassed to admit when they have fallen victim to a scam or have made a costly financial decision. To avoid finding yourself in a situation like this, always seek a second opinion if you ever have any doubts and adopt the mindset of ‘does this decision align with my financial goals’.
It’s never too early to start putting in place good financial habits for the future. Make the most of this period of time where you have very few financial commitments and give yourself a greater probability of reaping the rewards in the future.