Episode 3: Three money tips the grandkids will thank you for, and why they work
Live within your means, start saving early, and put extra money aside for retirement.
Those are the three key pieces of financial wisdom Starts at 60’s readers want their kids and grandkids to understand.
“There’s no prize for keeping up with the Jones,” one reader told our recent survey. “Watch the pennies and the pounds will look after themselves,” another noted.
Aussie grandparents have, in fact, nailed three of the key tenets to financial success. And we’ve got the sums to prove it.
So, share this story with your young relatives and friends, because when it comes to handling your money, it demonstrates that grandma and grandad really do know best.
Live within your means
A reader advises: “Try not to want the best of everything immediately. Only buy what you can afford, and buy wisely, looking for value for money, not the cheapest price”.
Why it’s smart advice: Avoiding credit cards for unnecessary purchases, or using them sparingly and paying off your bill in full every month, thus avoiding heavy interest charges, can represent a surprisingly large saving over the long term.
The proof: If you have an outstanding credit card debt of $3,000 on a card that charges 18 per cent interest, making the minimum repayment of $61 a month means you’ll take 25 years to pay off the debt – and end up paying $6,521 in interest.
Upping repayments to $300 a month would wipe out the $3,000 debt in just 11 months and keep interest charges at $222. That’s a saving of $6,299!
Act on it: St. George recommends using online and mobile banking tools that make it easier track your spending – it’ll quickly become clear if you’re doing too much impulse buying of items you can’t really afford.
Credit cards are handy for unexpected expenses and online purchases, but make sure you have the best possible credit card deal, particularly if you have a balance to transfer. Canstar provides unbiased ratings on a wide array of credit cards for you to compare.
For bigger purchases that you need to buy on credit, work out how much you need to pay back each month to avoid extra interest charges. Ask if your bank offers a repayment plan to help you do the calculations.
Start saving early in life
A reader advises: “If you try to put aside 10 per cent of your income from the time you commence work and are successful at doing so, you should be able to cope financially.”
Why it’s smart advice: Many readers advise saving 10 per cent of each wage from the very beginning of working life, for two reasons: compound interest has a snowball effect that turns small deposits into a meaningful sum over time, and regular saving, even of small amounts, creates a ‘habit’ that’s key when it comes to putting aside money for life’s big purchases, such as a property.
The proof: A person on a salary of $55,000 can save more than $50,000 over 10 years, just by putting 10 per cent of their take-home pay – or $372 a month – into a savings account that pays 3 per cent interest.
Kick-starting the savings account with a $500 deposit, then contributing $372 a month, and making no withdrawals, will see the nest egg grow to $52,658 after 10 years, including a healthy $7,518 in interest.
Delaying the saving program by five years, however, would mean ending up with a final amount of just $24,629 – showing why starting off small as soon as possible pays off.
Act on it: St. George says the most important step for anyone who’s keen to save money is to make a budget – one that includes all income, bills, and other regular expenses. This is the best way to figure out how much money is available for saving.
Decide how often you need to access your savings, then choose either a savings account if you need regular access, or a term deposit account if you can keep your cash locked up for a while. Canstar can help you compare the rates and terms on savings and term deposit accounts.
Set achievable savings goals, even if they’re small, and give yourself a little reward when you hit them, St. George recommends.
“Find a friend or family member who wants to save as well – there’s nothing like friendly rivalry to help boost your motivation,” the bank says.
Put money aside for retirement
A reader advises: “Save for retirement by salary sacrificing. Even a few dollars a month adds up in superannuation”.
Why it’s smart advice: Salary sacrificing means making additional contributions to your super account, which are taxed at a concessional rate of 15 per cent. This can decrease your tax bill, as well as boosting your retirement savings by a life-changing amount.
The proof: A person on a $55,000 salary could retire with almost $70,000 more in their super by salary sacrificing just $150 a month on top of their employer’s 9.5 per cent compulsory contribution of $5,225 a year.
Assuming an existing super balance of $5,000 at the age of 25, contributing an extra $150 a month would result in a healthy balance $311,562 at age 65. (The calculation assumes the fund charges $50 a year in fees and indirect costs of 0.6 per cent, and achieves an investment return of 4.8 per cent.)
Skipping the small salary sacrifice amount each month would result in a balance of $243,177 – a huge $68,385 less to enjoy in retirement.
Act on it: Tim Howard, from BT Financial Group’s financial literacy and advocacy team recommends doing some research on the basics of investment and super, to build a better understanding on what your money is invested in and the outcome that may have. Then, work out if you can afford to contribute a small amount extra, he says.
The government’s Moneysmart website is a good place to start.
“Get advice from people you trust or work with a financial adviser,” Howard says. “And remember that when making additional contributions to super, you generally can’t access the money until you reach your preservation age and then retire.”
Do you agree with these tips? What other financial advice would you share with loved ones?