By Jonathon Tainsh

In a world where financial stability is increasingly linked to personal freedom and security, getting financially organised at a young age is more important than ever. Whether you’re just starting your career or looking to start a family, the financial decisions you make now will have a profound impact on your future. The earlier you take control of your finances, the more opportunities you will have to build wealth, minimise stress, and achieve your long-term goals.

But where do you begin? For many, the idea of financial organisation can feel overwhelming, especially when juggling new responsibilities and the everyday expenses of life. The good news is that you don’t need to be a financial expert to get started. All it takes is a little planning, discipline, and a willingness to learn.

In this guide, we’ll walk you through the essential steps to becoming financially organised, from understanding where you stand today to setting goals and building habits that will serve you for years to come. By taking control of your finances early on, you’ll set yourself on a path to financial independence and the freedom to make choices that align with your dreams and aspirations.

So, let’s dive in and explore the practical strategies that can help you take charge of your financial future.

1. Know Where You Stand

To build wealth and achieve financial independence, start by understanding your spending and cash flow. Knowing where your money goes helps you find ways to save and invest more effectively.

Begin by downloading your credit and debit transactions for the past 12 months from all your bank accounts, including credit cards. Use a spreadsheet or budgeting tool to organise this data. Categorise your spending into:

• Essential Living Expenses: Non-negotiable costs like rent, groceries, insurance, and utilities.
• Discretionary Spending: Variable costs you can adjust, such as dining out and entertainment.

Update your data with any new expenses or income. Then, assess your yearly spending to see if you’re saving enough or if you need to cut back or boost your income. Look at your spending month by month or week by week to spot any peak times and adjust your budget accordingly.

The goal is to see how much you spend on essentials, what’s left for discretionary spending, and how much you have available to save and invest. This insight will help you manage your finances better and build wealth.

2. Set Goals

To set effective financial goals, I like to work backwards. Start by envisioning where you want to be in 7 to 10 years, then break it down into what you need to achieve in the next year, three years, and 12 months. Here’s a simplified approach:

By setting clear goals and a structured plan, you can better manage your finances and work towards achieving your long-term aspirations. 

3. Get organised

Getting financially organised starts with managing your expenses. There are various methods, so choose one that fits your style and stick with it. Here’s what works for me:

I use three personal accounts:

Having separate accounts helps us clearly divide our spending into Essential Living, Discretionary, and Savings. This separation not only adds discipline but also makes it easier to track and manage your finances.

Review your accounts periodically to ensure you’re saving and investing enough to meet your financial goals. Reassess your essential expenses, such as insurance and utilities, and adjust discretionary spending if needed. 

4. Be aware of behaviour bias

Being aware of behavioural biases is crucial for making sound financial decisions. Recognising and addressing common biases can help you stay on track with your financial goals.

A structured investment approach, where you consistently invest according to a well-defined plan and stick to your target asset allocation, can help mitigate these biases. It’s generally best to focus on long-term investing and avoid getting swayed by short-term market noise.

5. Understand the role of financial advice

Personal financial management is surprisingly absent from formal education, despite the increasing complexity of tax, superannuation regulations, and the vast range of investment and financial strategy options available. Most people, no matter how well educated in their profession, may not fully understand personal finance and its nuances.

A financial advisor is much more than just an investment expert. They act as a guide and coach to help you define your life goals, create a financial plan to achieve them, and stay on track. An advisor can balance differing financial perspectives, such as one partner’s optimism and the other’s conservatism, leading to a more disciplined, long-term strategy.

Moreover, a financial advisor brings logic to your decisions and helps you avoid impulsive choices driven by market fluctuations or well-meaning but misguided advice from friends at social events. Their expertise ensures you make informed decisions and stay focused on your financial objectives.

6. Be brave with your questions and answers

If you’re into the financial world by all means stay informed about markets and economic trends, read books, go to seminars, take courses, and seek advice.

If that’s not your thing, then remember you still have a life that needs to be financially supported. By default, you’ll be making financial decisions, even when you’re not making them.

Regardless of your level of interest, it’s crucial to have a financial advisor who is independent of your financial, life, and family circumstances. They can provide logical, balanced, and experienced input.

Recognise that this may not be your area of expertise, and don’t be afraid to ask ‘dumb’ questions. Be persistent in understanding the answers to ensure you fully grasp the financial and life choices you’re making.

If you are a self-educated financial expert, be open to accepting alternative points of view. 

7. Minimise bad debt

Focus on avoiding or minimising non-deductible, high-interest debt, such as credit card debt. If you already have high interest debt explore options for lower interest rates such as debt consolidation or shopping for an alternative finance product.

If you have a credit card, the best habit to get into is to repay down the card each month so you’re not paying fees and interest.  That means not spending beyond your capacity to make the full monthly repayment. 

8. Embrace the power of compounding

Understanding compounding is crucial—arguably the most important financial concept you can grasp. Compounding allows your money to grow exponentially over time without additional effort on your part, as your earnings begin to generate their own earnings.

The sooner you start investing, the better. As illustrated in the chart, starting to invest $5,000 annually at age 25, instead of waiting until age 35, can lead to a significant difference. By age 65, the difference in the value of your investment could be around $300,000.

Reinvesting earnings is another critical aspect of compound growth. The chart highlights the impact of reinvesting versus not reinvesting earnings. A one-off $5,000 investment in Australian shares in 1984 shows how reinvesting dividends can lead to a substantial difference. By 2024, the investment could be worth about $250,000 more with dividends reinvested compared to not reinvesting them.

The takeaway? Practicing even a modest level of delayed gratification can result in significant long-term financial rewards.

9. Consider more aggressive asset allocation early on

When it comes to investing, there’s a general rule of thumb: higher-risk investments tend to offer the potential for higher returns, while lower-risk investments are likely to yield lower returns. As people approach retirement, they typically shift towards lower-risk investments, since they will soon rely on these assets for their livelihood.

However, when you’re younger and have many years of earning potential ahead of you, you can afford to take on more risk in your investment strategy to maximise potential returns. But it’s crucial to consider the time frame for each investment. For example, money set aside for a house deposit in 18 months might require a more conservative approach due to the short time horizon. In contrast, superannuation funds that can’t be accessed for 3-4 decades can generally tolerate a more aggressive asset allocation.

This doesn’t mean being reckless; it’s about making informed decisions based on your risk tolerance and investment horizon. Higher risk requires careful consideration and a thorough understanding of what you’re getting into.

10. Be aware of the benefits of super

Superannuation is compulsory for all Australian employees, with a few limited exceptions. Government tax incentives make superannuation an attractive long-term savings and investment mechanism for retirement.

There are options for making additional contributions to super to take advantage of these tax benefits. It’s worth understanding how additional contributions can benefit you, but there are two key points to keep in mind:

There are rules about how much you can contribute to gain the tax benefits from super.

When you contribute to super, the funds are locked in until you retire. This creates great discipline for retirement planning but comes at the expense of short- to medium-term financial flexibility.

For younger clients, there are also other tax-effective investment strategies that don’t have the issue of being inaccessible for decades. In many cases, we will use a combination of strategies to balance the benefits of tax efficiency with the need for financial flexibility.

11. Understand and manage tax

There are millions in unclaimed tax deductions by taxpayers every year. My colleague Tatum West covers this in another article. Referring back to the compounding graphs above, if you’re not claiming legitimate deductions, you’re missing out on funds that could be invested and compounded over the long term.

With tax it’s always better to be ahead of the game so you can plan for the most tax effective choices.  If you’re looking at entering the property market, investing, or going into self-employment then it’s essential you get tax advice before you plunge in.

12. Understand gearing

Leveraging (gearing) investments can potentially offer higher overall returns, but it’s crucial to understand the risks involved. The most common form of gearing is buying property, where you contribute a portion of the funds and borrow the rest from a bank. However, it’s also possible to borrow to invest in other asset classes, such as shares or managed funds.

Let’s say you put in 20% of the property’s value and borrow the remaining 80%. As seen in our earlier compounding graph, the compound growth applies to 100% of the property’s value, not just your 20% contribution. This can lead to significant growth over the long term. However, this potential growth must be weighed against several factors, including borrowing costs, the possibility of magnifying both gains and losses, and exposure to interest rate risk.

While gearing can amplify returns, it also increases exposure to risk. The value of your investment could decrease, leading to larger losses, particularly if you are unable to service the debt or if market conditions change unfavourably. Whether gearing is appropriate for you depends on your financial position, goals, objectives, and your comfort level with taking on investment risk. Therefore, it’s essential to seek professional advice before considering gearing strategies. 

13. Protect your income and assets

I usually tell clients that it’s crucial for you and your household to be adequately protected in the event of death, temporary or permanent disability, and critical illness. While having an emergency fund is sound advice, it’s even more important to have sufficient insurance coverage. Consider scenarios such as needing medical treatment that could cost tens or even hundreds of thousands of dollars, or the impact of being unable to work for 12 months or longer—or even ever again.

For someone just starting their career, your most important and valuable asset is generally your future earning capacity over the next 30 to 40 years. Protecting this asset against anything that could affect your income, whether in the short term or long term, is essential. While an emergency fund can help you manage minor setbacks, it’s insurance that provides the robust protection needed for more significant risks.

Various insurance products are available to safeguard your income and financial well-being. The shorter the period your emergency fund can cover, the more critical insurance becomes. It’s advisable to discuss income protection with one of our insurance advisors to ensure you have the right coverage.

Additionally, don’t forget to properly insure significant assets, such as your home or investment property. A major catastrophe affecting these could have a profound impact on both your life and your financial situation.

14. Diversify investments

One of the most fundamental financial risk management strategies is to diversify your investments. The concept is simple: if you invest in 10 different places and one of those investments takes a dive, you still have the other nine to fall back on. However, if you had invested everything in the one that failed, you could lose it all. No investment is without risk, which is why it’s crucial to understand what constitutes an effectively diversified investment portfolio.

15. Have a will and power of attorney

I get it. You’re young, and death feels like a distant concern. But if you own assets, and especially if you have a partner or kids, having a will may be essential.

One of the most important reasons to have a will is to prevent the chaos that can ensue if you die without one. Not only can the administration of your estate become a nightmare for those you leave behind, but you also risk your partner being embroiled in disputes over your estate. Even more critically, you don’t want your children caught in the middle of a custody battle between in-laws. A recent article on the ABC highlights why even young people should have a will, as the consequences of dying without one can be significant [Young adults dying without wills can leave family to sort through superannuation, cryptocurrency and the future of pets – ABC News].

Additionally, if you’re injured or too sick to make legal or financial decisions, who will look out for you? It’s crucial to designate someone with the authority to make decisions on your behalf. This is where a Power of Attorney comes in. It ensures that someone you trust has the legal power to act in your best interest. Another recent ABC article exemplifies why having a Power of Attorney is so important, especially in challenging circumstances [Queensland’s Public Trustee said complaints were ‘not substantiated’. Refunds tell a different story – ABC News].

Consider speaking with a lawyer who specialises in estate planning to ensure you have these essential documents in place. It’s a straightforward process that can save you and your loved ones a great deal of stress and uncertainty.

 A final word of advice

Your circumstances, goals, and challenges are unique to you, and while general advice can provide a solid foundation, the most effective financial strategies are those tailored to your specific situation.

A conversation with a financial advisor can make a world of difference. The return on investment from working with a financial advisor can be substantial. Not only can they help you grow your wealth, but they can also provide peace of mind by ensuring that your financial decisions are informed and strategic.

Disclaimer

People & Partners Wealth Management Pty Ltd ABN 67 127 250 613 is a corporate authorised representative of Fortnum Private Wealth Ltd ABN 54 139 889 535, holder of Australian Financial Services Licence (AFSL) No. 357 306. The content of this article is for general informational purposes only and does not constitute personal financial advice. It does not take into account your individual objectives, financial situation, or needs. Any advice we provide will be detailed in a formal advice document. The opinions expressed in this article are those of the authors at the time of writing and should not be taken as a recommendation to act. To the extent permitted by law, Fortnum Private Wealth Ltd and its associates accept no liability for any loss or damage incurred as a result of reliance on this communication.