Imagine being given the chance to offer some financial tips to your younger self. Even without the benefit of hindsight, most people would be in a stronger position by simply keeping a better grasp on their financial situation.
In June, the government launched new campaigns through online, print and radio advertisements to focus on the money issues that many people face, including having a baby, saving for a holiday, reducing credit card debt, buying a dream home and having enough money for retirement.
So what tips would you give your wide-eyed self? Or, more realistically, what financial literacy skills do you have to pass on to your children and grandchildren?
Instant gratification vs. long-term reward
Many would remember touching on the term “compound interest” when studying basic mathematics at school. But imagine how powerful that understanding can be when translated into real-life examples.
For example, a 15-year-old might inherit $20,000 and ask how to make $1 million. If they were to invest that money in an account with a return of 5.80 per cent and add around $50 a week, they would have an extra $1 million before retirement. More importantly, more than $800,000 of that $1 million comes from the interest being compounded.
Spending and saving
Learning to balance the scales of spending and saving is something with which many people struggle, even as they approach retirement. Recent surveys suggest it’s 18 to 25-year-olds who are driving credit card growth, while less than a third of baby boomers say they’re actively saving for retirement.
It can help to have lists and goals. Sitting down and working out exactly how much something is going to cost is an effective way to begin implementing savings plans with real-life end goals.
Read your financial statements
It’s often said that the rich teach their children to read financial statements and the rest do not. Learning the difference between a balance sheet and an income statement can be as valuable in the workplace as it is at home. Identifying different features of statements also helps the savvy investors pick out the best deal and determine when something is ‘on the nose’. It can also be a wake-up call in case any finances are a mess.
Saving for emergencies
A recent RaboDirect survey found around 46 per cent of working Australians have enough savings to last just one month or less should they lose their job. Most experts recommend having at least three months’ worth of living expenses set aside for emergencies. Some of the most effective techniques for increasing this buffer include opening a high-interest savings account and monitoring credit card debt.
How many Australians have never paid attention to their banking affairs only to scramble for the best financial deals closer to retirement? Even children can be taught to compare the best savings accounts for students. On a $250,000 mortgage, this can mean a difference of $278 a month, or $3336 a year. A 0.25 per cent interest rate cut slices about $60 off the monthly interest cost of the average Australian mortgage.
Diversify your investments
Diversification can be a tactic to reduce overall risk in investment portfolio. It can apply to a share portfolio or to a mix of shares, as well as physical property and cash. If young investors understand how to spread their risk, they may find losses made on one type of investment can be balanced by gains on another.
Whatever your level of financial literacy, knowing how to identify financial weaknesses can stop them turning into habits. A focus on proven techniques leads to better long-term investing decisions.