Finance shouldn’t be a barrier to starting out in life as an independent young adult, with a range of new experiences awaiting — from buying your first car and going to university, to moving out of the home and getting your first job. And of course, your first bill…
With all of these transitions into adult life comes hopes, dreams and goals — often without thought for a safety net if things go wrong.
Things can, however, go wrong — be it the all-too-easy getting into debt from living beyond your means to buying the dream car that ends up being a lemon, to not being paid what you’re worth, simply because it’s your first job and you may not be fully aware of your options.
This financial guide can help you navigate through your brand new world. It’s here to help you treat life as an adventure, without becoming financially lost.
Buying a car
Buying a car is likely to be the first major purchase you make, most likely giving your first taste of real freedom. As car prices continue to become more attractive and the range of cars on offer increase, temptation can be high — but there’s also a lot more to take into account when buying a car besides its make and model.
A great way to begin is by setting a budget with a maximum price you can afford — that not only includes the purchase price of the car but also all of the extras and on-road costs involved with car ownership.
For example, while it’s common to include the costs for petrol, registration and a regular service into your budget when planning to buy a car, it’s also a common rookie mistake to have minimal cash left in your budget for reasonable car insurance.
while it’s common to include the costs for petrol, registration and a regular service into your budget when planning to buy a car, it’s also a common rookie mistake to have minimal cash left in your budget for reasonable car insurance.
It’s the ol’ “It will never happen to me” scenario, yet you’re new to the road and accidents are statistically more likely, which is why buying insurance in the under 25 demographic is generally more expensive.
Comprehensive car insurance can therefore often be an afterthought, not only because you may well feel covered enough by compulsory third party insurance, but also because you may feel it’s beyond your budget.
However, it’s well worth including comprehensive car insurance into your overall budget before you commit to buying the car. Reason being, compulsory third party insurance only covers personal injuries incurred in an accident and not damage to property or other cars. So, for example, if you stall at an intersection and the driver in the car behind — also limited by compulsory third party insurance — rear-ends you, the damage caused to your car is in no way covered.
The simplest of errors, by you or another driver, can lead to thousands of dollars of damage, even your car being written off, and the potential for a mountain of debt.
Other common rookie errors when purchasing your first car include:
- Rushing straight into your first purchase: The car looks great, sounds great and it’s the right price — and it’s still worth taking your time to look at other options. The next car you see may be even better.
- Not checking the car’s history: This is an especially critical part of the car buying process if you’re buying privately. Even if you have a good rapport with the seller, you still may not receive full information on the car’s history. Getting a road safety check is the best favour you can do for yourself.
- Buying on finance: It’s all too easy to have an idea of what your first car will be and then be side-tracked by what you were eventually aiming for. Suddenly your long-term goal is now, now, now! Buying on finance can end up in a seemingly bottomless pit of interest and your car becomes even more of a liability, taking the fun out of your first major purchase and equally taking away your sense of freedom. The bottom line is that a car is functional and your first car should be well within the parameters of what you can afford.
- Modifying cars: Pimping your ride is a way to individualise your car and certainly get attention — but at what cost? It’s quite often the case that sub-standard cars are purchased in order to have the money to make modifications. However, many of these modifications are purely aesthetic and can ignore the car’s functionality — leading to hefty repair bills down the track. Souped-up cars are also notoriously difficult to insure.
Student loans are a necessary evil for most of us as we traverse the terrain of tertiary education. Going to university is an investment — and so when it comes to student finance, it’s important to know how it all works.
While student loans afford educational opportunities and possibilities for career advancement, they can also cast a shadow on your enjoyment and successes of study life and feel like a financial ball and chain as you begin your successful career.
You’re likely to be in an interesting financial point in your life, in the midst of paying off your past, saving for your future and getting what you need and want now. If a financial education isn’t factored into your tertiary curriculum, just how do you begin to navigate the basics of a student loan and how to repay such a mammoth debt?
The main student loan available in Australia is the Higher Education Loan Programme (HELP), which lends the cost of tertiary education fees and requires you to repay the loan on an income-contingent basis (even if you’re still studying).
You’re likely to be in an interesting financial point in your life, in the midst of paying off your past, saving for your future and getting what you need and want now.
The compulsory repayment threshold for the 2016-2017 income year is $54,869 and if you’re earning this or more — even if you are still studying — you are then required to start making payments, proportionate to your earnings. So if you’re below the threshold, you’re not expected to pay; if you’re on the threshold it’s 4% and the percentage of repayment requirements increases by about 0.5% for every $10,000 you earn from there, with a cap of 8% per annum.
You also have the option of making higher repayments and paying your loan off in full, should an optimal financial situation arise. However, it’s worth considering that student loan rates and terms are generally better than commercial loans and therefore paying off your loan over a longer period of time, based on what you can afford, can be a healthy option, as a lack of cash flow can lead to secondary, commercially-based interest debt.
First Job, First Pay
Getting your first full-time job after university or high school is an empowering moment in life, and to make sure you get as much out of your new job as you put into it, there are a few key measures to ensure your financial well being from the start.
All Australian residents have to pay tax on the money they earn. So begin by getting a tax file number (TFN) and provide this to your employer along with your bank account details. This will make sure you’re paid — and paid the correct amount.
If you do not provide a TFN, you will be taxed at the maximum rate, which is currently a whopping 47%.
Currently, employees do not pay tax on the first $18,200 you earn in a financial year, which runs from 01 July to 30 June. You will then be taxed on any payments you receive above this amount.
At the end of the financial year, your employer should send you a summary of how much you earned and how much tax you paid during that period.
If you are earning about the minimum threshold of $18,200, you are required to submit a tax return to the Australian Tax Office (ATO) by 31 October. If you do not submit by this time, you may face a penalty.
You can find out about submitting a tax return at the ATO website.
Check your payslips regularly
It’s worth checking every payslip to consolidate your hours worked against money in the bank, as well as confirming:
- How much you were paid for each hour of work, making sure you’ve been paid overtime or penalty rates, where due.
- You have been taxed correctly from gross pay to the deposited net pay in your bank account.
- Your superannuation has been paid into your chosen fund.
- How much is being contributed to your superannuation?
- It’s an important combination that confirms you’re being paid in accordance with your contract and allows you to plan and budget accurately.
If you encounter a pay issue, it is usually a simple mistake made on behalf of your employer and is usually easily and readily rectified. However, knowledge is power, as they say, and if you feel you are not making headway by discussing your pay issues directly with your boss — or feel uncomfortable doing so — it’s well within your rights to lodge a complaint with the Fair Work Ombudsman.
Superannuation, also known as Super, is a way to save for your retirement. The money comes from contributions paid by your employer, in addition to your salary, and where possible from your own money, into a super account of your choice.
There are 2 types of contributions:
- After-tax including spouse, after-tax employee and non-deductible personal contributions. These are also called ‘non-concessional’ contributions and are made from your after-tax, take-home pay.
- Before-tax including Superannuation Guarantee (SG), before-tax employee (salary sacrifice), extra employer and tax-deductible personal contributions. These are also called ‘concessional’ contributions because you only pay 15% tax on the contribution, generally lower than the tax on your take-home pay.
The current minimum employer contribution is 9.5% of your gross salary or wage.
Your super fund is like tunnel vision towards your long-term future and it’s well worth keeping in mind that small and regular self-contributions to your super fund – above your employer contributions – can have dramatic results come retirement.
Retirement can seem so far away, especially with student loan repayments waking you up at 3 am. What’s interesting, however, is that you’re currently at the absolute pinnacle of maximising your super contributions. The sooner you start saving, the more you’ll save — and when it comes to super, it snowballs.
In the first instance:
- Be sure to check that you’re firstly entitled to super in your job, and then that the right amount is being paid into your super account.
- Make sure that your super fund has your tax file number, otherwise you’ll be paying a lot more in tax.
- Always check your payslip to make sure super contributions by your employer have been paid.
- Make it a regular exercise to check your super balance, as well as your annual statement from your super fund (most super funds have a website).
There are limits or caps to what you and your employer can contribute to super before the contributions are treated as excess contributions and taxed accordingly. As such it’s wise to seek professional advice if you’re considering adding contributions to your Super.
If you are concerned that you are not being paid super or not being paid the right amount of super, contact the Australian Tax Office on 13 10 20.
With your first job secured and money in the bank, did you know you can protect what you earn? Income protection insurance can replace a large portion of your salary if you suffer a serious illness or injury and cannot work — so you can still pay to continue to pay your bills on time while you recover.
For most of us, around 50 per cent of our salary or wages is allocated to fixed living expenses such as a mortgage or rent, food and utilities. So it’s worth considering just how long you’d be able to make your payments if you were suddenly unable to work. Here’s an interesting tool to find out how long your savings would last.
With income protection cover, up to three-quarters of your earned income is replaced, typically by a monthly benefit until you are well enough to return to work again, or your cover ends.
Creating a financial plan is the simplest way to get out of debt — and a great way to keep out of it.
It’s important, to be honest with yourself here so that it’s realistic about what you can and cannot afford. As we’re increasingly living in a consumer society based on having what we want now, for the most part it’s a financial recipe riddled with hidden consequences.
Sitting down and writing it all down is a great way to start. Here are some tips for creating a simple, yet effective, budget:
- Record your spending for the length of your pay cycle — everything from the ‘fixed expenses’ of mortgage or rent, utilities and groceries, to your ‘variable expenses,’ such as entertainment and morning espresso.
- Subtract the cost of your fixed and variable expenses from your income, and convert the remaining money into repaying your debts or savings. Eliminate as many variable expenses as possible to increase savings and/or reduce debt.
- Prioritise paying off debt with higher interest rates first, also keeping regular payments with other debts.
- And if you can, try to put aside some money each month to build up a fund for emergencies — they do happen!
If you have debts, one of the most important principles in personal financial management is to clear your debts as soon as you can. By making regular payments, you can minimise the additional charges such as interest, as well as taking a major step towards financial security.
Debt can be overwhelming and there are financial professionals to guide you. While ‘a problem shared is a problem halved’ doesn’t quite equate to half of your debt instantly disappearing, you’ll be surprised what a guiding hand can help you achieve.
Credit and Debt — and Bad Debt
Speaking of debt, most of us face it at some time in our lives — if not most of our lives. And while the majority of us know the perils of bad debt, there is also such a thing as good debt.
Student loans, for example, are an example of good debt; typically very low in interest rate and where your investment into that debt will most likely generate long-term profitable outcome.
A mortgage is another example of good — or at least better — debt, and while the ideal situation is to have your home increase in value over time to essentially clear interest payments and make profit upon selling, a mortgage also brings equity over time and allows you to use your house as collateral with your bank for planned, or unplanned, expenses.
Bad debt, on the other hand, well, is generally best avoid. Bad debts carry high interest rates, like credit cards, for purchases that quickly lose their value, like most consumer goods such as electronics, and do not generate long-term income. It’s the kind of debt you don’t want. Bad debt can become a slippery slope of impulse purchases gathering high interest rates with no reciprocity.
When it comes to debt, avoid doing nothing.
Mobile phones are also a potential financial minefield and it’s important to know how much you can afford to spend on a mobile phone, that you understand the contract, how the use of your mobile phone affects the cost, and what to do when you encounter problems with mobile phone bills — all so that you don’t blindly create a mountain of debt.
When it comes to debt, avoid doing nothing.
The optimal strategy is to pay off debt — and quickly. The ultimate tip is to act and act quickly, seeking help along the way. There are as many financial institutions offering advice on how to clear your debt as there are offering ways to enter debt.
Moving out of home
As well as work and study, moving out of home is a massive milestone in this part of life — and it can be as overwhelming financially as it is socially. The major and most obvious cost is accommodation and for the majority of us, the first move is renting in a share house. The initial financial outlays are significant, including bond, and a few weeks rent in advance, as well as planning for how you’ll cover rent both short and long term.
It’s also worth considering contents insurance to make sure your belongings are protected. It’s not at all uncommon for renters to assume that belongings brought into their new home are covered by their landlord, however, this is as far from the truth as you can get.
It’s also worth considering contents insurance to make sure your belongings are protected.
As a renter, you’re financially responsible for all of your personal belongings if they are stolen, lost or damaged – everything from clothing and jewellery to the appliances and furniture you bring into your new home. What’s also perhaps not clear is that you’re responsible for inflicted damage to fixtures within the building.
Buying contents insurance can become a minimal part of your overall budget and cover you for accidental breakage to glass, ceramic and sanitary fixtures in your home, as well as for natural disasters such as storm, rainwater and flooding damage, fire and explosion. Contents insurance even covers theft, attempted theft and malicious damage. For more information, check out our Renters Insurance.
Looking ahead to the future
Saving for goals
With all the financial pressures of moving out of home, securing your first job, creating and trying to stick to a budget, as well as clearing your debts, wouldn’t it be nice to save for some goals?
It can be difficult to look ahead to the holiday, new car or latest gadget you want when your everyday expenses seem to whittle away your hard-earned cash.
However, with this calculator, designed to help you save on the things you don’t need so you can afford what you really want, it’s possible to make your dreams a reality a lot sooner than you think. This tool could be useful for planning your savings.
Start by creating a specific goal that is measurable and timely, to help you not only plan better but sets you up for successful outcomes. Put up an image of your goal to keep you motivated.
While contents insurance allows you to live in the now, knowing your hard-earned possessions are protected, life insurance really is about looking ahead. In a time of your life that involves so many firsts — first job, first pay, first apartment — it can be a good time to look at your first life insurance policy.
It may seem a strange thing to consider when you are single and have no dependents and feel invincible. However, life insurance not only covers you in the event of your death — you can also set up a living benefit if you were to become seriously ill or have a major accident.
If you were no longer able to meet your financial obligations due to major illness or injury, having a comprehensive life insurance policy with added living benefits of trauma and total and permanent disability cover can protect you and your loved ones financially, allowing you to focus on your recovery.
There are also benefits to getting life insurance when you’re young and healthy. Apart from affordable premiums it means you can usually lock in an amount of insurance cover that may not be available as you age and develop health issues.