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Would you like a peek into the future?
If you could hop into a time machine and travel forwards 10-20 years, how much confidence would it give you in the decisions you make today?
At the tender age of 24, I completed university and entered the real world. With significant student debt and awareness that I was well behind most of my school friends, who had entered the workforce after school or graduation 3 years earlier.
I was about to get my first big “doctor paycheque”. In truth, it wasn’t that big. Even Australian 1st-year doctors earn around $70,000, and I was working for the NHS.
Like most trusts of the time, we were working significant unpaid hours. But we were provided free accommodation within hospital grounds that year. In comparison with what I had been living on as a student for years, I was absolutely loaded.
Despite my vague good intentions, I burnt through most of my income that year. I didn’t buy a car or a house. I treated family and friends to lots of meals out and indulged in shopping and evenings out. Most of the money sort of just vanished.
I remember wishing there was a book that told me what to do with that first paycheque. It would have taken some pretty simple advise to get me on a better path.
In 2021 it’s even easier to get a good start to your financial life. But there are also even more temptations. With ever-increasing ways to “buy now, pay later” spending more than you earn seems to be a societal norm.
What advice would I give to that 24-year-old graduate today?
Congratulations from Your Future Self- You Should Celebrate
Look how far you have come! If you have just graduated, and are entering the workforce for the first time, take the time to celebrate.
Don’t underplay your incredible achievements to date. I’m sure there were many times you didn’t think you would complete your qualifications. But you’ve done it!
Attend that graduation ball, party or special meal with family and friends. Plan a modest graduation gift with that first paycheque.
Life is for living. Your future self wants those awesome memories to look back on.
Just don’t get carried away, and make sure you move on quickly to the next step.
Now Get to Work – Assess the Debt Situation
Time to face up to all your debt. I know you would probably rather dig your head in the sand. It’s better you face reality and start dealing with it.
Your financial future depends on it.
List all of your debts along with the interest rate and minimum payments.
You can read more about good, bad and tolerable debt here. You will need to pay all your minimum repayments, and if you have any debt apart from student loans or a mortgage, you will probably want to pay them off as fast as possible, from highest interest to lowest is the cheapest way.
Be ready after you have paid off the consumer dent to redirect those savings to your next goal. Savings account for a home deposit? Your first investment?
Don’t beat yourself up too much if you have managed to collect consumer debt. Most people have made financial mistakes at some point. The important thing is to pay if off, and avoid making the same error again.
From this moment, commit yourself to pay for things with cash. If you don’t have the money, you can’t afford it.
I wouldn’t get a credit card until you have learned to manage your money without it. Only people who don’t need a credit card should have one. The credit card companies trick millions of people into paying them interest every month. Don’t get fooled too.
Credit cards are a tool that can be used by those who are used to spending less than they earn. They must be paid off every month automatically without fail. Then you can start to utilise the little perks that come with credit, taking advantage of the credit company and not getting sucked in.
Minimise Your Expenses
At the beginning of your financial journey is not the time to rent that fancy apartment. You will also need some time earning a regular income before you will be considered for a mortgage.
Assuming you have some debt or financial goals to work towards, now is not the time for living lavishly.
Housing, transport and groceries tend to be the three largest expense categories. Minimize these for maximal gains.
Try not to take on recurring expenses. It’s so easy to start collecting paid subscriptions. If you take one on, try and cancel another. After signing up for a recurring subscription, most people forget about it. It’s why many companies use this business model. Even if they aren’t getting any value from the subscription, customers will often continue paying because they either forget about it or don’t get around to cancelling it.
If you need a car, you will get the best value from a second-hand reliable car, serviced regularly and kept for as long as you can. Cars literally eat money. If you are a car enthusiast, this is an expensive hobby! Buy the model version for now until you have your investments on track to meet your goals.
Most importantly, separate some of your income to put towards savings and/or investments. 20% of your post-tax income is a common rule of thumb but start with anything you can.
Even 5%, you can increase over time. It’s the commitment, automation and review every 6 months or so to increase a little that matters.
Commit to Learning About Investing – Little and Often
Whether you find finance and investing interesting or not, it’s in your best interest to commit to lifelong learning in this area. Get over the fear of investing with knowledge. Even if you’re a finance nerd, it’s best to automate this. Life will inevitably get busy, and it’s easy to neglect your finances for months and then years.
Don’t See a Financial Advisor Until You Know What You are Doing
Seems like the grown-up thing to do, seeing a financial advisor, right? Unfortunately, in order to select a trustworthy financial advisor and screen their advice for red flags, you need significant financial knowledge yourself.
Completely outsourcing your financials to a professional is often the road to getting ripped off. Plenty of intelligent professionals, particularly doctors, get scammed.
Sort out your Super & Salary Sacrifice for your Future Self
Yes, I know it’s a confusing PITA. If you have chosen a high-income profession, you will pay a LOT OF TAX. If you’ve ever interacted with a government agency, you will know it is not always used as efficiently as it could. Paying lots of tax means you are making lots of money, but there really is no need to pay more than you need to.
By minimising taxation you can invest more for the future with no lifestyle reduction. The ultimate WIN-WIN.
Go to your salary sacrifice company website. Download the forms. Do not leave until you have completed and returned. I know I’m being a little forceful, but it’s so easy to put off.
You are literally throwing cash away by not getting this done today.
Don’t Overspend on Housing – For your Future Self
Buying your first home should not be a purely emotional decision. This is a huge part of your financial strategy. The game plan will vary depending on where you want to live, future planned income variations and planned career moves.
Spending money on an area that has good long-term historical growth can be a good strategy. Many choose to buy a wonderful home to enjoy the home itself and take advantage of the capital gains exemption of a principal place of residence. But these homes tend to be very expensive, so can compromise your lifestyle just to meet the mortgage payments each month.
If you are wrong about the future price growth of your home, you have used up most of your borrowing power and will probably struggle to pay the debt down quickly.
Not every home value doubles in 7-10 years, as often quoted. Some home values stay flat for a decade or decrease in value. If you are planning to live in an area without good capital growth potential, consider rent-vesting or buying reasonably cheap.
There is a large opportunity cost to tying up your money and borrowing capacity in a non-performing asset.
“Seriously. Stop Worrying about What Others Think” – Your Future Self
It’s human nature to try and fit in with the cool crowd. Belonging is a basic human instinct.
Going against the grain feels uncomfortable.
Most of us worry about others’ opinions of us too much.
But too much approval-seeking will cause havoc.
The cool kids in high school REALLY don’t look so cool 20 years on.
Do you want to be in the same financial position in another 20 years as your peers that are spending every dollar they earn to show off?
I’m not sure who coined this phrase, but I have found it a really useful way to reframe my worries about what other people think.
“What other people in the world think of you is really none of your business”Unknown
You certainly can’t pay the bills with other’s opinions.
This does get easier as you get older and develop more of a sense of self.
“Tread You Own Path”Scott Pape
Set Annual Written Financial Goals for Your Future Self
I’m certainly not the first to write about the power of writing down goals. Make it a habit each year, to write down goals for the year ahead, and ideally review them mid-year.
The simple act of setting goals, and having them written down results in more success. Plus it’s a lot of fun crossing them off when you reach them (and in fact looking back to goals written 10+ years ago).
A regular routine for goal setting and reviewing also limits the time you spend in “Drift”. Drift is a term used to describe the state most adults are in most of the time. Going to work, paying the bills, doing the things and getting to bed. It’s easy to get so busy with life, we forget to plan the life we want.
Start Investing As Soon as High Interest Debt is Gone
I think there is value in investing before you can afford it.
Nowadays, you can invest tiny amounts in micro-investment accounts. Everyone needs to learn a little about the stock market. Your superannuation, after all, is invested in it.
Hopefully, you have subscribed to a little regular education through a blog, podcast or magazine. That may help you to stay calm during a market crash and keep investing whilst stocks are on sale. Even if you panic and sell as I did in my first foray into investing before I knew what the stock market was, your crystalized loss will be tiny. You will watch the market recover and hopefully know better for next time when you have more cash invested.
Going from saving to investing is another point that can lead to enormous procrastination.
Women, on average, tend to shy away from the stock market. Yet when they do invest, they perform better than men! Give the finger to imposter syndrome, educate yourself and take the plunge. Learn what women do that everyone can learn from to improve returns.
Life is Going to Get Busy – Automate Everything
Everyone thinks they’re busy. I bet life will get busier.
I have started automating everything. From direct debiting bills to google calender reminders for dental check-ups, I’m always on the lookout for ways to make my life easier.
The biggest barrier to creating wealth is you.
Despite planning to invest a certain amount each month, quarter or year, there will always be a more urgent way to use that cash. Direct your savings/investment money automatically each pay into your savings account or investment. Most people’s spending expands to the cash available, consistent with Parkinson’s law.
So whether you choose an investment property or shares, try and automate your investments with direct debits. Take your brain out of the process, your future self will thank you.
Check out my review of Pearler – the new online broker offering automated low cost investing, and sign up for the Aussie Doc Freedom newsletter below to keep up to date with finance investing automatically.
It’s free, what have you got to lose?
Aussie Doc Freedom is not a financial adviser and does need offer any advice. Information on this website is purely a description of my experiences and learning. Please check with your independent financial adviser or accountant before making any changes.