Minimising your Financial Risk



5 things every individual should consider to secure your financial future

New studies have shown that the youngest generation of Australians are more exposed to personal and financial risk because of a lack of understanding of their financial situation, particularly in regards to their superannuation and life insurance. On top of this, many young Aussies are unwillingly committing to credit card contracts without consideration of the terms of the obligation, which are often high-interest, long-term and unaligned to their capacity to pay the debt off.

This means that those under 35 will be more susceptible to economic and income shocks and more likely to rely on the aged pension in retirement. First Vice President, Financial Adviser at Morgan Stanley, Fabiola Gibson says, ‘Too many people don’t have a plan. They expect it to work out but it actually takes affirmative action to get into a financially secure position’

“What we are seeing is a comprehension crisis. Australians have to get smart about their super, their savings and their life insurance if they are going to be prepared for an increasingly long and expensive retirement period. It’s not enough to be complacent.”

So, we have developed a few critical factors every young Aussie should consider to get ahead in their financial position.

  1. Personal Insurance: Do you have personal insurance? Is your package the best option for you? Whilst thinking about life insurance can seem a bit morbid, the reality is that everyone needs it and the younger you are when you get it, the cheaper it is and the more options you have to tailor it to your own circumstances. Too many people find they have inadequate indemnity when they are unable to work or when their partner is unable to work. This is really just about ensuring you can live the life you want to live, without fear or risk of financial destitution. So the advice is: Get researching and benchmark your options: What insurance do you actually need? What do you think you should be paying? What does each option cover? Particularly for women, if you want to have children – think about how long you will be out of work and plan for it. For those in relationships, consider ‘equalising your super’. Bet you don’t know what the means, do you? Find out. And for god’s sake, make sure you have Trauma Cover.
  2. SuperannuationWhat is your superannuation balance? Do you make voluntary contributions to your super balance? Do you know how? Many young Aussies are unaware of what is required for superannuation and retirement planning, with only 6.5% possessing a retirement plan. In fact, most don’t think about funding their retirement until they are close to reaching it (CIFR, 2014). This is really worrying because an underestimation of the funds needed increases the likelihood that retirees will rely on the aged pension. Those in the 25-34 age group possess a startling lack of knowledge about superannuation, with many overestimating their knowledge and only one-fifth expressing trust in the financial services industry. Advice: Given that younger generations will face even greater financial pressure in the future as they attempt to support their elders, familiarising yourselves with superannuation now, and creating a plan will have a significant impact on your quality of life and financial independence. Pick up your telephone, call your Super Advisor and have a discussion about the terms of your agreement, your options and take control! Access your Super details, login, check the balance regularly and set up a voluntary contribution scheme. And take a look on this website, it might help: http://www.australia.gov.au/information-and-services/money-and-tax/superannuation
  3. For those people who have held multiple jobs, ensure you look for all lost super you may have accumulated through your career span and set about consolidating it (be mindful of any insurance you hold in your super fund). Lost super is typically eroded over time by fees and may not be invested in an appropriate investment option for each individual.
  4. Investment education: Do you know where your money is best invested? Do you know which term deposits will earn you the greatest result? Studies in the last five years have shown that young Australians (particularly women) have limited knowledge about their investment options and the best way to invest their money. The problem is the longer you leave it to start investing your money in a smart way, the less likely you are to achieve your financial objectives within your ideal time frame. “I have quite a lot of savings, but I actually don’t know where the best place is to direct them. I honestly wouldn’t know who to ask either.” – Male, 27, Vic Advice: Not everyone is friends with a business magnate with an impressive portfolio who drips good advice over glasses of Moet and who can help them make a killing in a year. Most of us have the internet and a small budget with which to pursue advice. So where do people with no clue go to get a clue? Well, the Australian government has caught on that there is a dire need for financial information among its youngest demographic and they’re pretty keen to provide it given the minor level of concern going around about the future of the Australian economy and the 31% of welfare currently dedicated to the aged pension (ABC, 2015). So there are actually some great resources out there if you know where to look. Consider thisand this
  5. http://www.australia.gov.au/information-and-services/money-and-tax/investment

http://www.asx.com.au/education/first-time-investors.htm

and this

http://www.asx.com.au/documents/resources/getting_started_in_shares.pdf

  1. Budgeting: Do you have a personal budget? Do you know how much you spend on groceries a year? Or retail? These things matter! A 2015 study by ANZ Bank has shown that women have lower scores on average than men in financial knowledge and numeracy and lower financial confidence in asset allocation and investment decisions. (WGEA, p. 4). Women were found to save less and to start saving later and were less likely to use financial planning services or undertake long-term financial planning (WGEA, p. 5). This warning extends to all young Australians who need to be pro-active about their saving and financial comprehension if they hope to get ahead in the medium to long-term. “I know some of my friends are thinking about buying their first house, but unfortunately I think there is a sense of complacency among my female friends that we can just start thinking about it later or that it’ll just happen somehow. My question is, ‘How do my male friends know what they know and how come I don’t’ – Female, 23, Sydney. If the thought of constructing a budget makes you fall asleep, take a look at this excellent Budget Planner where you simply have to fill in the gaps: https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/budget-planner
  2. Saving: How much do you save a month? How much money do you need to be saving to put a deposit on a house? What rate applies to your credit card? Aussies are accumulating debt at a younger age, with over half of Australian adults in debt and only 19% believing they will pay off their debt within the next five years. In fact, the average person has 2.18 credits cards (Credit Card Finder, 2016). Banks are increasing credit limits which means many Aussies are struggling to repay their balances and are shouldering massive debts with higher interest rates for longer periods as a result. For example, if someone makes only the minimum repayments on a credit card balance of $5000 with an interest rate of 19%, it will take that person 7 years and 8 months to repay the balance and they will end up paying $9,377 over the period. That’s nearly double. The point is if you don’t have the money now then don’t spend it!
  3. Advice: If considering a credit card, go on this website and calculate whether you can afford to make the repayments and how long it will take you. https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/credit-card-calculator  Also, take a look at your credit card statement – most banks will show you in the monthly summary, how long it will take to repay a card if you only make the minimum repayments. Open up Microsoft Excel, plot your fortnightly spending: deduct your rent, your bills, and your groceries – how much do you have left? How much are you saving a week? Walk into your bank and ask them which option will give you the highest interest earning. Open an account, set up weekly automatic transfers and don’t bloody well touch it.

Every individual needs to consider these five financial areas if they to ensure their own financial security. Understanding and evaluating your options will mean you can choose what is right for you and make it work with your lifestyle.

So get to it!


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