Financial Literacy for Academics
20 Jun 2014
By Sally Huynh
As an academic, you have devoted your life to teaching the next generation, preparing them to take on the world with confidence and success, or you've dedicated your time to the next innovation to help better the lives of people around the world. But have you ever stopped and wondered who is looking after you? Take a moment to consider:
- Is your family on track to achieve what's most important to them?
- Are you maximising your opportunities to secure your future financial position?
- What lifestyle will you be able to afford when you stop work or slow down?
- How much money is enough to do the things you want to do?
The reality is that you're probably too busy to pay much attention to your personal situation and so the above questions are often neglected and left unanswered. But you don't want to find yourself with retirement on the horizon and realise you've missed out on strategies which you could have implemented years ago to help safeguard and build your financial nest egg.
So below are a few pointers to help get you thinking about you and your finances:
Understand your real investment assets
"Investment" assets are assets which can generate income to support your expenditure requirement. This differs from a "lifestyle" asset which is there to provide comfort but no regular income. So, your family home might be in a beautiful suburb but it should be excluded in assessing your financial wellbeing because it does not generate an income to provide for your daily needs.
Your superannuation fund might be growing nicely with your employer contributing 17% a year and you contributing a smaller percentage. But what about the home mortgage, the novated car lease, the personal loan, the credit card debts, the upcoming family holidays, the long awaited home renovations? Although your superannuation account balance might be quite healthy you need to assess your situation taking into consideration all of your outstanding debts. For instance, if you have accumulated say $1 million worth of superannuation assets and you have debts of $400,000 plus the planned home renovations and holidays of $100,000, your real investment assets are only $500,000. Is this enough to ensure your financial security?
Know your financial target
We all know if we don't set a target it's harder to get to where we want to be or, if we do manage to get to our final destination, there might have been a quicker route we could have taken. The same concept applies when it comes to achieving financial security, you must know your financial target. If you decide you need $50,000 a year to live on you would require approximately $1 million in investment assets from age 65. However, in my experience $50,000 for most academics is usually not a sufficient amount and generally the requirement is much higher usually between $80,000 to $100,000 per year. In addition if you want to retire before aged 65 then your target would need to increase accordingly.
It's essential then that you understand how much you need in order to achieve a 'comfortable' lifestyle and put in place practicable steps to help you get there.
Have a clear and practical debt elimination plan
It's important that you have a clear and practical plan to repay any loans or debts you have because, when your last pay cheque comes in, any outstanding amounts will expose you to cash flow constraints.
An effective debt elimination plan requires a good understanding of your cash flow (i.e. how much you're bringing in after tax, how much you're actually spending and what is your real savings capacity).
Pre versus post tax salary sacrifice
Understand the different ways of paying money into superannuation and what will work best for you. Currently, the pre-tax limit (known as concessional contributions) is capped at $30,000 for people under 50 and $35,000 for those over 50. The post-tax limit (known as non-concessional contributions) is capped at $180,000 per financial year or a total of $540,000 over a three year average. If you're in a Defined Benefit Account, there is a different set of calculations which determines your available concessional limit.
Superannuation investment strategy
Most of us want to see our superannuation grow as much as possible but how many of us actually understand what we're invested in? This is money that needs to last the rest of your life when you retire so it is certainly worthwhile making the effort to understand different investment options and then pick the one that best suits you.
Bringing it all together
As someone who values education there's no time like the present for you to learn about how to make the most of your financial situation. So start thinking about you and seek professional guidance from your award winning team at Shadforth. Together we'll help you achieve financial security and peace of mind so richly deserved by you and your family.