If you are looking at the prospect of a quarter of your life having already passed you by, you are probably starting to think about your future, because there is no denying it anymore – you’re a grown up.
At 25 you are also in the enviable position of still having most of your working life ahead of you, so you have ample opportunity to save, invest, plan and prosper. In your teens and early 20s you probably made the most of life and enjoyed the independence and freedom which came with earning your own income.
However, once you pass over the threshold of 25 it is time to also take on the responsibility which comes with that financial freedom and implement responsible spending and savings habits, including a budget, an investment plan, a plan to pay off any debt and make sure that you can maintain that financial freedom.
To start your financial plans once you reach 25 years old, look at your short, medium and long term goals:
1. Short term goals are around five years away and can include a wedding and honeymoon, a new car or new furniture.
2. Medium term goals are things like owning your own home and paying for your children’s education.
3. Your long term goals are what you want to get out retirement, whether it is travel, a big home, a big boat or a summer house in France.
Now make some estimations of how much you will need to meet each of your goals, and then work out how much you will need to save each month to meet those goals on schedule. You can use a calculator, spreadsheet or online tool or app to help you.
While it may be hard to imagine planning for your retirement when it is at least 40 years away, you have some unique opportunities and unique benefits if you start saving now. For example, workers in their 20s have an overall diminished loyalty to employers and with so many more job changes, you can be looking at a smaller retirement fund contribution and other benefits such as long service leave.
Plus, it is looking less and less likely that retirement benefits will be around in 40 years, and while retirees have trouble living on a pension now, the benefits will be even slimmer in the future.
How to Meet Your Goals
Luckily you have tonnes of time on your side to carve out the life and financial future you want for yourself and your family. Creating a budget and putting away money in your savings for your short, medium and long term goals is a good way to plan for your future.
Just make sure that you have set a budget you can stick to, where you don’t miss out on too many luxuries or entertainment, because falling off the budget wagon can cost you in splurged savings and credit card repayments.
You also need to start looking at what else you can do with your money to make it work harder for you. You may want to start by looking at term deposits, or certificates of deposit where you can invest a certain amount of your savings at a fixed interest rate for a guaranteed return over a set term. Just remember that you won’t be able to access those funds during that term, which could be just the incentive you need to force you to continue saving.
Stock market investments typically outperform every other form of investment in the long term, but you will need to dedicate more time to managing and monitoring your investments, and be prepared for seemingly significant ups and downs along the way.
You can also invest in a dedicated retirement savings account which may be provided by your employer, and which you can make additional contributions. Retirement savings accounts external to your employer can also earn you a high interest rate, and in some cases you can be eligible for government contributions which will match your own deposits up to a capped amount each year.
Financial Plans at 25
While there are still a lot of financial variables between being 25 years old and hitting retirement age, the financial plans you make now can help set you on the right track. At 25 your biggest asset is your ability to earn an income and if you become sick or injured then your income will be affected and so will all of the savings and investment plans you have so carefully put in place.
Therefore, start comparing life insurance and income protection insurance policies which will pay a benefit to your family if you die, and can also continue to pay out a large portion of your income if you become sick or injured and cannot work for an extended period of time. You may also want to consider permanent disability insurance in case you need specialist care and you are unable to return to full time work.
Your first home will also be a big part of your financial plan if you are 25 years old and making the right decisions regarding buying and paying off your home are an important part of your financial plan.
Before you start looking for your first home and you fall in love with a property you can’t afford, speak to a bank or mortgage broker to find out exactly how much you can afford to borrow – not how much you are eligible to borrow, but how much you can afford to borrow while still maintaining your lifestyle and your savings and investment plans, and accounting for any emergencies.
That’s right, even while you are repaying a mortgage on your home you should continue to maintain your savings and investment plans. For a successful financial future and a fruitful retirement you need two things – to own your own home so you’re not paying a mortgage on your pension, and to have a passive income stream from your investment so you don’t have to rely on the pension and have enough funds to fulfil your dreams.
Therefore, you need to take a holistic view of your finances, rather than focussing on just repaying your mortgage and then finding you only have ten years to prepare for your retirement.
Your investments especially can make your money work harder for you as you work hard to build the life you want, because the expenses involved in your investments are tax deductible. For example, the interest and on an investment loan if you buy a property to rent out, or the interest and fees on a margin loan if you borrow to invest in the stock market.
Alban is a regular contributor at http://www.homeloanfinder.com.au. Alban has also written articles for several national and international personal finance blogs.