Planning for your financial future.

Hi, I’m Bron Lawson from Westpac’s Davidson Institute, and I’m here to talk to you about ‘Planning for your financial future’. This video is one of a series that we have produced in conjunction with Ruby Connection aimed at helping women improve their financial confidence and wellbeing.

Ever wondered why the good things in life seem to come easier for some than others? In most instances it’s not just luck, it’s because they have a plan for life. They know what they want and have actively worked to make it happen. This may be from a career perspective or a personal perspective but needs to be supported by a financial plan as well. This video looks at each stage of your financial journey and explores some of the key elements to help you plan for the financial future you want.

Now before we get into the nuts and bolts, let me just share a few stats with you that reinforce why women should become more financially savvy and independent. Firstly, times are changing; with millennial women now leading the way in home buying and investments – a far cry from the days (only 30 years ago) when women required a male guarantor to borrow money. And these days women are our household CFO’s, managing 80-90% of household finances despite being less financially confident than men.

However, we still have a long way to go. Currently the average annual salary for women in Australia is $44,000 which means that on average women need to work 59 days more than men to earn the same amount. And while the gap is closing, women are still retiring with 47% less super than men, and with a longer life expectancy it needs to last them longer too.

That’s why Ruby Connection and the Davidson Institute have partnered to bring you this series of videos to encourage women to take a more proactive interest in their finances sooner rather than later and work towards their own financial wellbeing.

Our agenda today follows a financial lifecycle. Moving through • Getting started, • Establishing foundations, • Growing wealth, and then • Using that wealth. So, let’s get started by fleshing out a typical financial lifecycle, with all its ups and downs.

In the early years as you’re starting out on your financial journey you’re increasing your income and assets with your first job, buying a car etc. During this time, it’s important to start developing good money habits.

As your working life continues and you start to establish long term relationships and take on long term commitments, your wealth tends to fluctuate depending on career and life events that contribute to or use your cash flow. While you’re getting established and starting to create some long-term wealth, you need to have a focus on saving to ensure your commitments can be met.

The next stage of your financial journey is where you’re building and optimising your wealth as you’re preparing yourself for life after work … more specifically life after you stop earning an income! And during this time there are lots of different events that are going to take place … like putting the children through school, perhaps buying an investment property, there may be changes to the family situation, and then as your children move out of home you may need to help them financially too.

But of course, throughout this time, for your own personal situation it is about maximising your wealth as this is what is going to sustain you during your retirement.

Then of course comes the day when you finish work and life changes significantly. At this point if you want to do all those things that you’ve saved for and built up your wealth for … if you want to travel, or do community work or simply spend more time with the grandkids … you still need to manage your wealth and the income from it to ensure it lasts your lifetime.

So, let’s get into it with Getting Started. This is where you’re starting to experience the freedom of your own money. Up until this point someone else has generally been taking care of you and your money but this is where you start to take on that responsibility for yourself. It’s at this stage that you start to develop money habits that may stay with you for the rest of your life.

As you move through this stage of your financial lifecycle the things you want from life are going to change. But no matter which stage you’re at you’re going to have some personal goals … whether that’s a new car, a home, maybe your own business, or perhaps just some travel or a bit of fun … and your financial plan for life is about having your finances sorted to be able to do all those things as and when you want.

A great starting point to building good financial habits is to keep a money diary. Record every single cent you spend for let’s say one month … whether it’s your daily coffee, the weekly rent, or even treating yourself to a night out … whatever it is write it all down (don’t cheat!) … and this will then give you a very clear picture of where you’re spending your money. It can be any old notebook, or you can download one from the Davidson Institute website.

You can then start to categorise your spending. If it helps, think of a chart that represents every $ of the money you earn. From your spending diary, work out how much you spend on each category.

The chart on the screen is reminiscent of many young adults just starting out with the majority of money being spent on enjoying life. Now there’s nothing wrong with that in the short term however if you have other goals you’re looking to achieve then perhaps you need to re-think and plan for how you want your chart to look.

When deciding how to divvy up your money, the first things you need to consider are any commitments whether that’s loan repayments, phone plans or the like. Then you need to look at how much you need to allocate to ‘live’ … that is, essentials such as housing, transport, food, clothing, and health. Then there will be the expenses you choose to pay to support a certain lifestyle … sport, entertainment, designer clothes, and so on.

This will then show how much you have left over to save up to achieve your dreams and goals, and how long it might take. If this amount isn’t enough, or its going to take too long to save up, then you may need to adjust some of your other spending. By prioritising what’s most important, you’ll then be able to construct a manageable budget for yourself to help get the things you want out of life.

Our ‘My money plan’ video covers budgeting in more detail. Or you might like to check out the Spend Snapshot tool on the Davidson Institute site to see where you spend your money.

Having developed good money habits, the next stage of your financial journey is where you start to consolidate and establish your foundations. Your personal goals will continue to drive your financial decisions however the focus or priority of those goals may change over time.

During this stage of your financial lifecycle some of your goals, or the things you want, start to get larger and more expensive … like a new car, a house, or even children. So, this is where instead of saving up to buy the things you want you’re also going to potentially need to borrow to be able to buy those things.

So, both saving and borrowing, are two different ways of achieving the same goal … getting the thing that you want. The key to determining whether to use your savings or get a loan lies in understanding when the thing you want is needed, and the difference in cost. It may take you some time to save enough money for bigger ticket items, but you may need to have them sooner. If you decide to borrow to make your purchase now, it will cost you more and potentially take longer to pay off.

So, let’s have a look at the example of buying a car. If you wanted to buy a car that cost $25,000 and worked out that you could save $414 a month, it would take you roughly 5 years to save up that $25,000 … but in 5 years’ time is your $25,000 going to purchase the same type of car that it will now?

On the other hand, if you were to borrow to purchase the car now, on an unsecured loan, it would take you roughly 7 years to pay off the loan at the same rate as you’re saving, that is $414 a month. Including interest and fees this would actually use about $34,784 of your money. As I said, deciding whether to save or borrow comes back to when you need the item and whether you’re prepared to pay the additional costs of borrowing. There’s more information in our video on ‘Be credit healthy'.

So, now that you’re spending some serious money on assets, and have some long-term commitments in place, it’s time to think about protecting your assets and your lifestyle.

Insuring your assets is effectively placing the risk of loss or damage of those assets into someone else’s hands – the insurer. Depending on the type of policy, and the incident that has damaged your asset, the insurer assists with repair or replacement of the asset, so these costs don’t need to come out of your savings. Take time to do the research to get a policy that is best going to suit you and your circumstances.

The next thing to think about protecting is your income … after all if you’re not able to work for a period of time then not having an income is going to place some serious stress on your finances. Income insurance, sometimes known as Income Replacement or Salary Continuance, pays a percentage of your fortnightly or monthly income for a specified period of time should you be unable to work due to illness or injury.

The third thing to protect is your health … so you can continue to earn an income. Now this actually starts with a healthy lifestyle but also includes understanding what you’re covered for under the government health scheme Medicare and then considering what other health related expenses might be worth covering through private health insurance.

And finally, you want to help protect your family’s future. If the main income earner unfortunately dies or becomes permanently disabled, how will the family pay off any borrowings, and continue to fund living expenses? This is where life insurance can help.

Once you’ve established a strong foundation for yourself you then need to build on that and ‘Grow your wealth’.

Throughout the ‘Maximising Wealth’ phase of your life there are many things that are going to impact on your ability to do that because of course, life goes on. There are the children to put through school and university, there may be changes to your family situation, you may invest in a property … and while all this goes on, you only have a finite time to prepare yourself for life after work.

One of the key tools you’ll use to build wealth is investing. That is earning more money, whether it’s in the form of capital growth or cash flow, from the things you own. When it comes to investing there is nothing truer than the old adage “It’s time in the market, not timing the market that counts”. In investing, as in life, time is our most valuable asset. One of the best decisions you can make is to start sooner rather than later.

. It doesn’t matter whether you invest in property, shares, or simply cash … time allows for three things to happen.

Firstly, it allows for compounding. Compounding refers to adding the earnings from your investments back into the investment – for example, earning additional interest on the interest reinvested in a deposit. Time also allows us to make additions. Regular additions over time will build up the capital value of the investment, which will increase earnings on the investment too.

And time, gives us time to ride out volatility. Volatility is one of the risks of investing. On any given day investment returns can fluctuate and sometimes even be negative. By spending time in the market, you give yourself the opportunity ride out volatility.

One way to manage volatility is to have a diverse investment portfolio. There are a number of different types of assets that you can invest in, and they all have different levels of risk and return. By spreading your invested dollars across the different asset types, exposure to volatility within any one asset class is reduced.

The first investment type is cash … like the money in a savings account. Cash is a flexible investment. It is considered a low-risk investment but generally doesn’t provide as high a return as some other investment types. The next type of investment is fixed interest. In return for locking your money away for a fixed period of time, fixed interest investments will generally pay a higher return than cash.

Residential property is considered medium to high risk. Partly because it can take longer to sell the property and get your cash back compared to other investments, but also because there is volatility in property prices and the rental yield is not guaranteed. For the increased risk, property in Australia generally gives a better return than cash or fixed interest.

The fourth investment type is shares. Shares also have a medium to high level of risk. The share market is subject to the most volatility of the investment types but generally provides a higher return than cash or fixed interest. Have a look at our ‘Investing’ video for more information on investing.

One of the most important investments we’ll have is our Superannuation or retirement savings. Super is a great place for long-term investing as there may be attractive tax advantages. To encourage people to invest in super (and save for their retirement) legislation allows you to salary sacrifice your contributions, up to a specific amount. This means that not only are you reducing your taxable income, but your concessional contributions are taxed at 15% instead of your marginal tax rate.

Remember though the super is aimed at saving for retirement, so you cannot access your money until you retire. Most people will have a mix of super and other investments that can be accessed pre-retirement.

Having developed good money habits, laid sound foundations and built your wealth, the next phase of your life begins. For some, retirement may happen at 55 but for others it could be much later depending on things like your health, finances, work availability and enjoyment. Whatever age you decide to retire this is when you start using the wealth you’ve accumulated to provide you with an income.

With retirement, comes increased time for yourself, allowing you to achieve new goals. It may be the time for travel or spending time with the grandchildren or volunteering at the local charity or dedicating more time to your favourite hobby. The choice is yours. But what you can and can’t do in retirement will depend heavily on how successful you’ve been with your plan for life, your health and how long you will live for.

So, take the time much earlier in your life to work out your finances for this stage of your life to give yourself every chance of having the retirement you want.

We started out by looking at our dreams and goals and what you want to achieve out of life … then starting a spending diary and budgeting for the things you want. We then established solid foundations by obtaining the assets you need to live, borrowing where necessary and protecting the things that matter most to you. We then started to grow your wealth by investing your money and we finished by briefly looking at retirement and planning out how to spend the wealth you created.

By having a financial plan for life, you put yourself in a much better position to achieve the things you want out of life.

Thanks for watching ‘Planning for your financial future’. We hope you found this video helpful and encourage you to check out the other resources on the Davidson Institute and Ruby Connection websites to help build your financial confidence. Bye for now.