Becoming moneywise: a guide to financial planning for Gen Ys

Provided by Mercer. The information in this article does not necessarily reflect the views of the Trustee.

According to Benjamin Franklin, “there are two ways to increase your wealth. Increase your means or decrease your wants. The best is to do both at the same time.” Simply put, it's not just how much money you earn, but also what you do with it that is most important and determines your ultimate wealth.

As with most things worth having in life, building wealth takes time, effort and discipline. But first and foremost, it requires action! Here is an overview of financial planning basics to get you started.

Stay in control - cash flow is king

The vital first step to any financial plan is to understand how you spend your income. The next part of this equation is ensuring you live within your means. When you start tracking your income and cash outflows you may get a bit of a shock. But knowing where your money goes is vital for taking control of your finances.

There are many ways to track your spending. Keeping a record of every transaction you make over a period of time allows you to clearly see your spending habits. There are also many online options available, from sophisticated software to simple budgeting spreadsheets. Once you understand your cash flow, you can identify where you can make changes to live within your means and build your wealth.

Remember, your budget should be dynamic and able to adapt to changes in your situation. Review it regularly and consider your spending patterns over a number of months and make adjustments as you go. Letting an ineffective budget go unchecked can be costly, so take immediate action as soon as you detect an issue. Make sure also that your budget is realistic: it should reflect what you're actually spending not what you think you should be spending.

Ready, set your goals

Before embarking on your financial journey, you must know where you are going. Determining your financial goals, including short term (one to two years), medium (five to ten years) and long term (ten years plus) is the next step in developing a plan. Knowing where you want to finish will guide you in planning how you might get there.

When considering your goals, think more broadly than significant purchases such as a new car, plasma TV or buying a home. Consider the life goals and experiences you may have such as obtaining further qualifications, getting married or having children, travel and adventures which will all need to be planned and paid for.

Be prepared for the unexpected

Unexpected expenses can prove to be a real challenge for any financial plan. It's a common cause for a financial blow out that can lead to increased debt worries, throwing your plan off track. Having an emergency fund that can cover these costs can help to ensure that your finances don't come unstuck. As mundane as it may sound, making the commitment to save for this purpose is well worth the effort.

What would you do if you were ill or injured and couldn't work? An essential part of any financial plan is ensuring you safe guard your cash flow. So consider protecting your income with income protection insurance. Many super funds are able to offer this cover.

Watch out for 'bad debt'

Many stores provide lengthy interest free credit options with detailed terms and conditions. These terms and conditions may include high interest rates applying for the remaining term of a credit contract after the interest free period has expired.

You may wish to obtain advice from a licensed or appropriately authorised financial adviser in relation to understanding the terms and conditions of a credit arrangement or in paying off any outstanding bad debt.

Taking action

The size of your investment is not the critical issue – taking action is. Napoleon Hill, author of 'Think and grow rich', suggests “pay[ing] yourself first”. By this he means taking the money you want to invest as the first “payment” from your salary each pay period. Chances are that if you plan to invest only whats 'left over', there won't be funds remaining. Setting up a salary sacrifice or automatic regular payments towards your investments can be invaluable. Once you are in the habit of not having that money to spend, it becomes easier to budget your remaining cash.

Regular review is essential

Reviewing your budget and financial plan regularly can help you ensure you're on track to reach your goals. For your short- or medium-term goals, a regular review is essential, so put away some time each month to do this. Your longer-term goals require less frequent review but planning to do this at least annually can stand you in good stead over time.

Seek advice

Obtaining advice can be a vital first step towards success. Seeking help from a licensed financial adviser to develop your own financial plan is usually a good investment in itself, as it can guide you to make well-informed decisions based on your individual situation and goals. They can continue to offer advice and guidance as your situation changes or you reach your goals and move to the next.


This information has been prepared by Mercer Outsourcing (Australia) Pty Ltd (MOAPL) ABN 83 068 908 912, Australian Financial Services Licence #411980. Any advice contained in this document is of a general nature only, and does not take into account the personal needs and circumstances of any particular individual. Prior to acting on any information contained in this document, you need to take into account your own financial circumstances, consider the Product Disclosure Statement for any product you are considering, and seek professional advice from a licensed, or appropriately authorised, financial adviser if you are unsure of what action to take. "MERCER" is a registered trademark of Mercer (Australia) Pty Ltd ABN 32 005 315 917. Copyright 2012 Mercer LLC. All rights reserved.

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