THE WEALTH BUILDER: I’m 26, earn $75k, and don’t have the Bank of Mum and Dad to help me buy a property. What’s the best way to get ahead?

James Wrigley, chief financial advisor at First Financial, answers questions about money every Wednesday.

Hello James,

I am 26, single and work in the public service. I earn €75,000 per year. This can ultimately amount to about $100,000 per year, but that is about the maximum.

I live in Melbourne and don’t have a mom and pop bank to help me get on the property ladder.

After rent, bills, clothes, food, entertainment, etc., I currently have about $400 per month left to invest.

I’m pretty much at peace with the fact that I will never own a home due to high housing prices.

Nevertheless, I still want to secure my financial future as best as possible with the income I earn.

What do you think I should do with the extra money I have? Should I invest in shares?

Thank you,

Lucy.

Hello Lucy,

It’s fantastic that you’re thinking about this at such a young age. Saving a small amount over a long period of time is much easier to do than saving a larger amount over a short period of time. Let the magic of compounding work for you.

The first thing I’d like to see you do is secure your short-term financial future. Before you invest, I’d like to see that you have at least three months of your living expenses in a high-interest savings account. This is money you DO NOT touch unless it is for an emergency. A trip to Bali with your friends is not an emergency, your car breaks down or you have to pay your deductible for the insurance.

Once you start investing, you don’t want to be forced to sell your investments to fund emergency needs; that’s what the emergency fund is for.

If you earn $75,000 per year, that means your monthly take-home pay will be about $5,000. If you can save $400 per month, that means you’ll spend $4,600 per month. You should have an emergency fund savings goal of $14,000.

Once you’ve achieved that goal, you can start looking at investing. A low-cost index-style ETF is a good place to start. There are many micro-investing platforms available that give you easy access to investing in the stock market at a low cost. If you put $400 a month into a compound growth calculator with a profit rate of 8 percent per year, you should build up about $73,000 in the first ten years, after twenty years that’s more like $235,000, and after 30 years it’s almost $ 600,000.

The last piece I would like to see you work on is increasing your income. There is only so much you can do to save on your expenses; you have to pay for food, shelter and clothing – all of which will cost you something. But there is theoretically no limit to how much someone can earn. Certain professions pay more than others. You mention that your current role could amount to around $100,000. I would really like to see you do everything you can to get your income to that level as quickly as possible.

Shadow someone older, ask to take on more tasks, get training if necessary (especially if your employer is willing to pay for it).

Keeping everything else the same, increasing your income to $100,000 means your take-home pay increases to $6,430 per month. Your savings rate would increase to €1,830 per month (from your current €400). Those investment portfolios then become approximately $335,000 in 10 years, $1,078,000 in 20 years and $2.7 million in 30 years!

That is a secure financial future.

I hope this helps.

James.

Send your questions to James thewealthbuilder@dailymail.com.au

James Wrigley is a representative of First Financial PTY LTD ABN 15 167 177 817 AFSL 481098

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