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New grads: avoid this common financial mistake

A group of students walking up staircase; image used for HSBC Australia New grads: avoid this common financial mistake.
Finishing school this year? Graduation is a rite of passage into adulthood. But it also marks the moment when you face huge decisions about money and investment.

The financial options can seem overwhelming. With seemingly endless advice coming from family, friends or other sources. So it's understandable why a lot of people delay their financial planning decisions and instead focus on just enjoying the fruits of their labour.

But waiting until your 30s to make money decisions can increase risk, and can make you miss out on some potential gains.

It's okay to take your time to figure out how you want to use your money. But there is one simple and powerful thing that you can do to build a nest egg that grows exponentially.

Get in the habit of saving

The median starting salary for bachelor degree graduates under 25 years, is around $54,000 for a full-time job. Income tax will reduce this amount by almost $10,000. For most, there's a big temptation to spend the remainder.

Many people, especially graduates working for the first time, make the mistake of spending now and saving later. This can become a pattern that is difficult to change. Delaying saving can also have a significant impact on your future wealth as you are forfeiting potential gains from the power of compounding interest.

But when you're first starting out in your career, it makes sense to be aggressive with your investing. This doesn't mean you have to jump into the stock market: simply start with a commitment to put away money each month for long-term savings.

It is important to invest those long-term savings across a range of different asset classes, according to your risk tolerance. At the same time, you need to also minimise any costs associated with those investments, including fees and taxes.

The incredible power of compounding

It is critical to start a savings habit as soon as possible. Simply putting aside regular savings in a high-interest savings account, and reinvesting the interest, is the top thing that graduates can do once they start working.

Doing this lets you benefit from the power of compound interest. This is where you earn interest on the money you deposit, and on the interest you have already earned. In effect, you earn interest on interest.

As an example, if you saved $500 each month in a savings account that earns 4.0% interest, and re-invested all the interest, your money would grow to over $257,000 after 25 years (excluding any taxes or fees). Of that, more than $100,000 would be from interest. And here's a bonus tip: that number would be even more if you saved on a weekly, rather than a monthly basis.

Sticking with that 25-year example, if you postponed your savings habit by five years, the final amount would drop by almost a third to around $183,000. If you postponed saving for 10 years, the amount drops to around $123,000.

Postponing your savings may be one of the biggest financial mistakes you can make. You may wake up one day, having worked hard and long, but with very little or nothing to show for it.

It is important to have a comfortable lifestyle. But it is just as important to begin the savings habit from the day your start working. Even starting small, and saving $10 or $20 each week, can make a real difference to your future earnings.

Looking to get the most interest out of your money?


This article doesn't take into account your objectives, financial situation or needs. You should consult appropriate professionals or experts before making any financial decisions. This article's content or any copy of it cannot be altered in any way, transmitted, copied or distributed to any other party, without the prior written permission from HSBC. Issued by HSBC Bank Australia Limited ABN 48 006 434 162 AFSL 232595.