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What to do in your 20s, 30s and 40s to build wealth


When Smart Investor asked four wealth advisers what those in their 20s to 40s need to avoid when it comes to building financial foundations, they all agreed that the biggest mistake is to have bad debt.

“Credit cards, buy now, pay later, car loans, personal loans – these are signs that money management is not where it should be,” says Dawn Thomas of The Wealth Designers.

“This is not a judgment as most of us are not taught how to do this. It is about being aware and setting yourself on a path to clear bad debt and get on top of cash flow management.”

HLB Mann Judd wealth management director Lindzi Caputo agrees. “Not being able to repay credit card debt each month is often the first sign that your personal cash flow is in trouble.” But let’s say you’ve successfully avoided, or paid down debt, where to next? Many young people don’t know the answer. Nearly 60 per cent of Gen Z women feel overwhelmed by their finances, as do 41 per cent of Gen Z men, according to a survey by the Australian Securities and Investments Commission conducted in October. Here are some tips for what to do during each decade:

Your 20s: Build a budget and focus on cash flow

This decade is about learning how to stick to good financial habits, says Caputo. If you’re in your early 20s, this may be the first time you’re earning a full-time salary, so it’s the perfect time to set up automatic contributions to a savings account. Bad habits are hard to break, so it’s best not to form them, and lifestyle creep – or the tendency to spend more money as we earn more – is common.

“Make saving a habit,” says Caputo. “Ten per cent of your income is ideal, but if that’s not affordable set an amount that works for you and stick to it. Set a regular transfer aligned with your pay cycle and adjust the savings amount each time you get a pay rise.”

It also doesn’t hurt to be aware of your own spending habits, and how brands may manipulate you to encourage you to spend more. Speaking of pay, Ryan Watson, chief executive of financial planner Tribeca Financial, says it’s important to build good income foundations. So, it’s worth looking at what others with the same qualifications and experience are earning. If you’re earning less than them, you’ll need to figure out if you’re being underpaid, or if your skills are underdeveloped. Then, come up with a plan to solve the problem – either through upskilling, or negotiating a pay rise.

“The keys to building momentum in your personal wealth are what you earn and what you spend. Be sure to know what you are worth, and therefore be paid accordingly for the value you provide in your job.”

Thomas agrees that your 20s are all about mastering cash flow – especially if you’re living with your parents.

“If you … are in debt from credit cards, personal loans, car loans or BNPL, the first step is using your budget and a loan repayment strategy, like the snowball strategy, to get to the point of not carrying this kind of debt,” she says.

The snowball strategy means paying off debts in order of smallest to biggest. The idea is that by starting with the smallest and working your way up, you can gain momentum. As you clear each debt, you put that minimum payment you were making into the next debt.

“You can still enjoy the YOLO [You Only Live Once] concept if you know that what you are spending has been intentionally allocated for those wild trips and experience. You do not want to start your 20s with bad habits.”

And get used to talking about money with romantic partners, Thomas adds. “Find out how they approach money as well. Good financial management should be #couplesgoals.” Andre Lot is an economist and finance lecturer at the University of Sydney. He agrees with both Thomas and Caputo that the 20s is about bedding down those good lifelong habits. Avoid Afterpay-type commitments and recurring credit card balances, along with high-interest car loans, when a simpler vehicle can do the job, he says. In fact, regardless of life stage, one thing to almost always avoid is buying pricey cars, Lot says.

“New cars are a rapidly depreciating asset, and over one’s lifetime they typically are by far the largest semi-durable expense item. Savings on smarter choices of vehicle purchase and use can be substantial at the time of retirement.”

Lot recommends setting both long and short-term savings goals. Having purpose helps keep you on track. Also, find the best interest rate for your savings. A saver with $25,000 who has their money in an account earning 1.1 per cent would make $289 in interest over a year. But if they swapped to a high-interest saver, they would  make $1665 in interest. That’s based on them deposit $1000 every month. And make sure you don’t have multiple superannuation funds because you will be paying multiple sets of fees.

Your 30s: Reduce debt, protect your income and focus on accumulation

It’s time to really think about asset accumulation, says Caputo.

“Consider what type of asset best suits your lifestyle and circumstances. Property could be purchased as a home (considered a lifestyle asset as no income is generated) or investment property. Property is usually a long-term investment of at least 5 to 10 years.”

“Consider your goals when deciding how to invest your savings. For instance, where working toward a deposit for property in a shorter time frame of less than five years a high-interest savings account may be best [rather than investing in the sharemarket].”

On the other hand, investments in equities usually need to be held for a longer period to ride out any volatility. At the same time, think about your non-deductible debt – that is, debt that can’t be deducted against wages – so credit card or car loans. Pay that off as a priority. Then, focus on your mortgage, says Caputo.

“Consider setting repayments fortnightly instead of monthly, so that you get an extra payment in each year. Review your interest rate regularly – ask your bank to negotiate,” she says.

Lot has a slightly different take on this. He says you need to think carefully about the pros and cons of pouring all of your spare cash into your property, when maximising your super is also an option.

“This is also the age when substantial contributions to your super become even more attractive as your salary increases and becomes taxable at higher brackets,” says Lot.

“In most cases, reasonably expected net returns on concessional super contributions, including the implicit tax benefit, exceed common mortgage interest rates. So, for most households, it is better to make additional super contributions, up to the concessional cap, than to pay down a mortgage faster.”

Watson says this decade is about avoiding excessive mortgage debt. His rule of thumb is to make sure repayments don’t occupy more than 35 per cent of your after-tax income. Either way, if you’ve started a family, it may not be a bad idea to think about income protection insurance, says Caputo. After all, your ability to earn is one of your biggest assets. “Income protection insurance can cover up to 75 per cent of your income if you are unable to work due to illness or injury. The premiums are tax-deductible.” Adds Thomas, if you have or are thinking of starting a family, think carefully about how this will affect your income now and into the future, and what you need to do to best protect yourself.

“If family is on the cards, it is important to honestly talk about what careers will look like for both parties,” she says. “There are real impacts to women who take breaks in work or give up career progression for flexibility while kids are young.”

One option worth considering is for both parties in the relationship to go part-time, instead of one completely pulling out of paid work. It’s also worth looking at how you can best split your super over this period.

Your 40s: Maximise super, stay the course

It’s time to really engage with your super, if you haven’t already. Your super is the most tax-effective place to invest wealth for retirement, says Caputo, as the earnings are tax-free when drawing a pension.

“Build a strong super balance in the most tax effective way by maximising deductible contribution opportunities. The concessional contribution limit is $27,500, increasing to $30,000 from July 1, 2024,” says Caputo.

A person earning $150,000 would be able to contribute an extra $10,000 a year, resulting in a personal tax saving of $3700. And consider catch-up contributions. Currently, savers can carry forward unused concessional contribution limits from the previous five financial years, as long as their super balance is below $500,000, says Caputo. These can be useful after taking a break from paid work to care for children, or to shore up savings in years where income is higher than usual.

“To the extent possible, this is the time to maximise savings. There is still plenty of time before retirement to accrue interest, and compound interest is your best friend in securing a comfortable retirement,” he says.

“Also, there is still enough time left that it makes sense to keep a more aggressive portfolio allocation of your investments.”

Bear in mind that if you’re planning to open a business or become self-employed, you’ll need to start carrying out retirement projections, to best understand how that sort of change would impact your retirement. When the double whammy of kids and a mortgage is considered, Thomas says your 40s can easily be a “pain point”.

“It just feels so hard to be an adult as your time and finances are pulled away for everyone else – you can tell I am in this age group. This is a good time, if you have kids, to think about what you would have done differently, with what you know now about money.

“No matter how tense this life stage can be, it is important to have a positive flow of energy around money conversations and topics in the household, so that the kids see their role models, demonstrating a healthy relationship with money.”

Watson agrees. He says that your 40s are equally about living for today and setting up tomorrow. “Be sure to not always be chasing the dollar and working to excess, but rather be financially savvy and enjoy life [for] what it is each day.”
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