I have been asked what advice I would give a recent graduate, and the more I thought about it the more I realized the advice is basically the same as the advice to an experienced professional. The benefit to a graduate is that if you implement these ideas, and maintain them through your professional career, you should put yourself in a very strong financial position, as you have time on your side. The keys really are:
- Spend less than you earn
- Ensure you are aware of and adequately protected against significant risks
- Use debt wisely – or avoid it
- Establish and maintain a cash reserve
- Save for a goal
- Get to know your money behaviour
- Be aware of your superannuation
The benefit of working on these as a graduate is that you can form good habits early and benefit from these habits over time. If you leave working on your financial position until later in your career, often you will not find the time, and, by starting later means you will have missed opportunities.
So, in a little more detail:
Spend less than you earn
This would seem to be very basic however in my experience is not always practiced. As our income rises professionals will often find a way to spend the extra income. If the habit of saving a portion of your income is not established as a discipline, then expenses rise to meet the new income level. By establishing a budget, I know that sounds like a dirty word, but in reality it will help you to get ahead, you become aware of your regular spending and allow some money for extras. Even the simple matter of preparing a budget will give you a greater awareness of your expenses.
Ensure you are aware of and adequately protected against significant risks
There are a number of risks that you really should take into account as a recent graduate. Some of the simple ones are the risk if you drive a car of damaging your car, someone else’s car or property or injuring someone. A simple way to protect against this risk it for some form of car insurance. There is also the risk that you become unable to work due to illness or injury. This is something that could have significant ramifications for the rest of your life. You also need to consider the risks when you share a house or unit, and when you enter a relationship or buy property together. What about if you decide to travel Australia or overseas, if you are left stranded somewhere or break a foreign law that you may have been unaware of. Another risk is professional negligence but as a recent graduate hopefully this will be covered with professional indemnity insurance by your employer. If you choose to start your own business, there are a whole range of other risks you will need to consider.
Use debt wisely – or avoid it
I have come across a lot of people who have used debt ineffectively and are now struggling with repayments. If you are planning to buy a car consider what is realistically affordable and whether you need an expensive car now or whether it is better to start with a cheaper car. Image is important, however so is being able to afford the repayments! In fact, if you are able to save enough money to buy the car outright that will leave you in a stronger financial position.
There is also currently a big push to readily available finance for smaller purchases, including interest free. Be wary of deals that are “too good to be true” or “never to be repeated” offers. You need a plan to fully repay the loan within the interest free period or the penalties may be high. You also should make sure that you are living within your means, not stretching yourself too far.
If you plan to use a credit card, be aware of your money behaviour and avoid the ever increasing limit. Credit cards can be helpful when used correctly and with discipline, but with a lack of constraint will easily lead to financial trouble. Having a credit card with an ongoing balance may prevent you from getting your first (or subsequent) home loan.
Establish and maintain a cash reserve
Perhaps your first saving goal should be to establish a cash reserve. I know that as a recent graduate nothing could go wrong, however it is still worthwhile having an amount of money available to you in case of an emergency. For example, what would you do if you need to replace a household appliance (like a fridge or television) urgently? By having some savings that you can call on, you can make the purchase and then work out how to top up your savings again, rather than being forced into some form of debt or borrowing money from family and friends. Also, if you happen to enjoy a few too many drinks one Friday night and get into trouble and lose your job, you will have some money available to keep paying your expenses until you secure a new job. How much should the reserve be? This really depends on your lifestyle and living expenses but as a starting point I would aim to have enough money saved so you could pay all your bills for 3 months, including any loan repayments and groceries etc.
Save for a goal
Once you have built a cash reserve, work out what you would like to save for and set yourself the goal. This could be a car, or a holiday, or a house deposit, depending on what interests you and what you are trying to achieve. Set yourself a target amount and date to achieve it. If you like a visual aid, you can try something like my saving thermometer that you can download and put somewhere that you will see it at least monthly, but as often as weekly to ensure you stay on track. For bigger goals, if you break down the goal into achievable pieces you can enjoy the feeling of achievement as you progress towards the larger goal. If you are working towards a larger goal, also include little rewards for achieving milestones along the way to help maintain the discipline.
Get to know your money behaviour
At a basic level, people are either spenders or savers. Spenders get joy from spending money, either on themselves or others. They will typically be best not having a credit card and setting up automatic deductions from their everyday account to limit the amount of money they have available to spend. Savers on the other hand will only spend what is required and squirrel away money. They are typically good at budgeting and enjoy seeing their savings grow. Whatever your money behaviour, by being aware of it, you can establish your accounts in a way that you can make the most of your income by creating forced discipline with automatic transfers. If you don’t see the money sitting in your everyday bank account you will be less likely to spend it.
Be aware of your superannuation
For a recent graduate, retirement, or the need to not have to work to pay your expenses can seem like a long way off. Even though you are not able to access it for a long time, superannuation is still your money and you should at least take some interest in it. By making good decisions about your superannuation now, it could build to a significant lump sum by the time you are ready to stop working and support your lifestyle at that time. If you ignore it, you may miss the opportunity to make a good return over time. You may also be paying for life insurance that is not appropriate for your requirements which will reduce your superannuation balance.
There are a lot of issues to consider and an adviser can help by working out what is important to you and giving you some structure to put you on the path to achieving it. An adviser will look at all the issues and work with you to ensure your financial focus is in the right place.
Please share your thoughts and comments by leaving a reply below. We’d love to learn from your experience and help in any way that we can. If you have learnt a financial lesson through experience, please share it so others can also learn from your experience.