If I Was 25 Again... I Would Love Budgeting
If I was 25 again... I wouldn’t be scared of the ‘B word’ – budgeting. In fact, I’d make a bit of a game of it, tracking where my money was coming from and cracking the mystery of where it was going. There might not be much I could do about my income, so I’d focus on the spending side; working out how much I had to spend and what was ‘discretionary. Chances are I’d be shocked by what I discovered – spending on things I really didn’t need or particularly want, and not spending on things that are important to me.
I would also set some short-term goals such as saving for overseas travel, a home deposit or supporting a good cause, while leaving room for fun in the here and now. Without being too rigid my goals would help me to prioritise my discretionary spending, support a considered savings plan, and help me get more, not less, enjoyment out of life.
Though the gift I wish I was given at a younger age is the gift of compounding.
The Magic of Compounding for every age...
If I was 25 again... I would have loved to have known about compounding.
It seems the first lesson most children learn about money is what they can spend it on – games, the latest toy, their own iPad - but it’s a parent’s obligation to also teach them about managing their money, and I wish my parents had introduced me to compounding.
Compounding can be the road to riches and anyone can do it. All you need is perseverance to stay on the savings path and the intelligence to understand what is happening.
Compounding is earning interest on your interest. The more money you accumulate the larger the return each year.
There are two catches. First, it involves sacrifice. You can’t spend it and still save it. And second, it sounds boring. At least it is until the balance starts growing and then it becomes downright fascinating!
Let’s look at an example.
Brent began a savings program at age 17 and starting with a $100 deposit he put away $1,500 each year for 13 years into a fund that earned an average 7% a year. From age 30 he didn’t add any more to his savings fund. By that time the balance of his fund was $30,450.
Brent’s twin sister Charlotte was having too much fun at 17 spending every dollar she earned and delaying the start of a savings plan until she reached age 30 – just when Brent stopped. Starting with $100 Charlotte deposited $1,500 per year and maintained that amount every year until she reached age 65. Her fund also averaged 7% p.a. and Charlotte ended up with $208,423. Amazingly through the power of compounding, Brent, who hadn’t added anything to his fund for the last 35 years has $325,123 in his account – over $116,000 more!
The 13 years that Brent saved were worth more than all of the 35 years that Charlotte saved.
You’re probably asking, “Where would someone under 20 find $1,500?” We have a suggestion. If your adult child is working – even for a small wage – they will probably qualify for the federal government’s co-contribution scheme. As well as teaching your children about compounding, you could gift them a $1,000 superannuation contribution and the government would add up to another $500 to their fund account.
This suggestion applies to superannuation which they won’t be able to access until later in life. However, the principle is the same if the money is invested outside super where they can use it to buy or invest in something much earlier.
There are investment strategies for people of all ages to suit individual needs. If you would like to speak some more about what strategies could work for you or your adult children, contact us and we can set up a meeting.