Have you ever wished you’d gotten financial advice when you were younger? Do you have older kids that you want to set on the right path to financial freedom?

There is no substitute for professional advice when it comes to achieving your financial goals, but there are 5 things we believe everyone should consider when they start out on their own.

Tip #1: Protect what’s important

When you are in your 20s or 30s, thinking about insurance most likely doesn’t rate highly. However, spending a few minutes at this age putting plans in place to protect your finances can make a huge difference later in life. Getting that first pay cheque is pretty exciting for anyone, but what you may not have considered is that your ability to earn an income is the most important asset you will ever have. Once you start working, it is important to start thinking about how to protect that asset. Over time you will start to build up other assets, and perhaps have loved ones you want to protect too. While most people have insurance for things like cars, homes, or even mobile phones, many haven’t thought about how they protect themselves.

Personal insurance can be complex, with many types available. It pays to learn more about how you can set up the right personal protection plan in place for your situation. After all – the last thing anyone wants is to be a drain on your parents when you are looking forward to becoming financially independent.

Tip #2: Don’t put all your eggs in one basket

More formally known as ‘diversification’, this top tip is all about making sure you are spreading your investments around to help reduce the risk of losing money. It’s your best form of defence against one investment or a single asset class performing poorly, such as if the share market drops or economic conditions heavily impact one sector of the market, as we have seen recently with the impact of Australia closing its borders on sectors such as the travel/tourism sector.

Diversification helps to reduce risk, because when some investments fall in value, others may not be impacted or better still, increase to help balance out the falls. No matter what’s happening in the economy, some sectors and investments are likely to benefit.

There are a few different ways to diversify your investments with the right investment plan. You can put your money in a variety of asset classes, such as shares, property, bonds or keep some in cash. You can also diversify your investments within asset classes by investing in different sectors, different fund managers or even different markets. This might mean buying shares in a range of sectors, such as financial stocks, resources, healthcare or energy for example.

Thinking globally when it comes to investment is also an important consideration – the Australian share market is relatively small compared to the rest of the world, with investment opportunities concentrated across a smaller number of companies. You can potentially lower your risk by investing some of your money overseas – investment in European, Asian or North American share markets may do well in times when the Australian share market is weaker, for example.

Don’t forget that you can achieve the same thing with your super fund – most super funds give you at least some ability to spread your retirement savings across different asset classes, sectors and markets.

Tip #3: Small contributions from an early age make a significant difference

Due to the magic of compound interest, the sooner you start saving, the sooner you could reach your financial goals, because your money is being put to work for longer.

A regular savings plan can really benefit from the impact of compound interest over time. This is because once a profit is earned on your investment, it can be reinvested, potentially earning a profit on the initial profit. To put that in perspective, let’s assume you invested $5,000 and then added an extra $50 every week without skipping. With a compounded monthly return of 5%, you would have $41,880 in your account after 10 years.

Now let’s assume you started with $5,000 at the age of 25 and kept adding $50 every week until you were 65. After 40 years, you could potentially have accumulated a balance of $367,430. That’s quite impressive given the amount you actually deposited into the account at $50 a week over the 40 years adds up to $109,000 whilst the increase due to the compound growth in this scenario is $285,430.

In other words – your future self will thank you if you can make small changes now.

Tip #4: Make sure you spend ‘smart’

When setting yourself up financially, it is important to think about where your money goes, as well as where it comes from. No-one likes the idea of a budget but taking some time to understand where you spend your money can make a big difference to your financial outcomes.

Cash flow management is about tracking your income and expenses to allow you to predict how much money you will have to invest for the future and how much money you will need to cover your costs. You may be surprised by how much you spend on certain things, such as takeaway lunches or coffees. You can then make an informed decision on whether you want to cut back spending in that area or look for a better deal to reduce your costs.

Reviewing your spending habits can quickly identify areas where you can potentially save. Refer to our article on lazy tax, sometimes it feels too hard to review how much we are paying on things, but it is an important process that can lead to significant savings. Think interest rates, health insurance, electricity and gas bills – reviewing these annually may lead to savings by taking up new offers or just renegotiating your current plans. 

Tip #5: Educate yourself and be organised

Educating yourself enables you to understand how your decisions will impact your financial future. This doesn’t mean spending hours studying finance, but it is important you have the financial literacy, knowledge and understanding to manage your money successfully.

Educating yourself means you are more likely to be able to budget appropriately to ensure you can meet your expenses, be better positioned to work out which financial products or services will meet your needs, be able to get and assess appropriate financial advice, and be less likely fall victim to fraudulent practices and scams.

There are many resources out there to brush up on your financial literacy. Reading the financial news, subscribing to newsletters from reputable financial institutions, podcasts and YouTube videos created by reputable money experts can help. Educating our clients is a big part of what we do at Tribel, if you haven’t already, you can subscribe to our newsletter or explore our latest articles.

Learn more about setting up a financial plan for yourself.