What To Do With Your First Pay Cheque

By Troy MacMillan

You’ve graduated from high school or university, navigated the often-treacherous waters of your first job search and have now arrived at that day you’ve been waiting for – your first payday. Now what? Before you head to the nearest shopping centre to ‘invest’ in all the things that have been financially out of reach but desperately wanted for years, there are a few things you should consider first. Here are my six tips to help you enjoy your first pay cheque – and a comfortable and financially secure future:

1.     Payslip. Take some time to understand your payslip, what net and gross income are, whether your package is inclusive of super or salary plus super, what amount of tax you are paying. All of these things will have an impact on the amount of money you will actually have left to spend, and you don’t want to receive a rude surprise when you look in your bank account.

2.     Budget. For first-time wage earners, their newfound wealth often seems to indicate the end of financial concerns forever! Unfortunately, without a personal budget, you will quickly find your outgoings matching and even exceeding your income. By implementing a budget, you will learn to manage your income, allow for your expenses and even set aside some money for saving. A budget will also teach you an awareness of your spending habits. You may be surprised just how quickly seemingly small expenses can add up when they are made on a daily basis (the average Australian spends upwards of $70 a week on eating out[1] – which is a common trap for new members of the workforce).

3.     Insurance. As a minor, you will have been covered by your parents’ insurance policy (assuming they have insurance) as a dependant. A dependant is normally defined as being unmarried and under eighteen; however you may be assessed as a dependant up until the age of twenty four if certain provisions are met, so you will need to clarify your standing with your parents and their insurer. If you are no longer an eligible dependant, it is important to consider your insurance needs, such as injury, property and loss of income. While insurance premiums can add up over time, and you may decide to cut costs, it is worth noting the government’s Lifetime Health Cover initiative, designed to encourage Australians to have private health cover before they are 30. If you purchase cover after turning 30, you will pay a 2% loading for every year you are over that age (starting at age 40 will incur a 20% loading on your premiums)[2].

4.     Superannuation. Your employer may have a fund that they pay into on your behalf, but you are free to choose another provider if you wish. Take some time to look and different funds to assess which one may provide the greatest benefits for you, rather than the greatest benefits and most convenience for your employer. Depending on your career, you may have access to industry funds that will give superior benefits, while other funds may provide more flexibility. You may also be able to join a family SMSF if one is in place. In addition to choice of provider, you can also choose to make additional contributions to boost your super. Unless you already have experience or a trusted family member who is experienced, it is worth speaking to an expert in this field, as the options can be overwhelming.

5.     Investments. In addition to your superannuation, you may want to look at investing in other areas, most commonly property or the stock market. This is another area where you want to ensure you have trusted, experienced advice before investing your hard-earned cash. While many providers will offer to organise your entire investing experience, you should look at engaging independent advisers, as convenience can often lead to sub-standard results when you are relying on supposedly impartial advice from a party with a vested interest in your decision.

6.     Cash flow. While investing in your future is a very important process, and the sooner you do invest, the greater your long-term benefits. You need to ensure that your current lifestyle will not be adversely affected by your long-term goals. It is very difficult to access your superannuation before you reach your preservation age, which is currently 60 for people born after June 30, 1964[3] and you will normally have to show proof of extreme hardship or serious illness to access the funds early. In addition, the Age Pension eligibility age is increasing from 65 to 67 in stages between now and 2013, and there have been recommendations within the Treasury Department to link preservation age to the age pension age[4]. While investments are more flexible, there will most likely be costs associated with any early withdrawals (exit fees on fixed rate mortgages, selling at less than ideal rates for shares) of investment funds, so before tying up income in investments, make sure you won’t need it any time soon.

If you think that retirement is some dim and distant future that you don’t need to be concerned with, think again. Current estimates indicate that a couple hoping to enjoy a comfortable retirement will need $57,665 a year - even a single person happy to live a modest lifestyle will need $23,175 a year[5]! Average life expectancy in Australia is presently 81.85 years[6] (slightly above that for women, slightly below that for men) and has increased by almost 5 years over the last 20 years. If that rate continues, you will be looking at 20+ years of retirement even if you only reach the average life expectancy (morbid I know, but vital to an accurate estimate of your needs!). As a couple then, you are looking at needing $1,153,300 to enjoy 20 years of comfort – and that is using the current income estimate, which is only going to increase with cost of living increases. Following these tips should put you in a strong financial position early in life, allowing your investments to grow with time to the point where you can reasonably expect a comfortable lifestyle in retirement