How millennials can become millionaires

How millennials can become millionaires

The media is full of stories about how millennials are doomed to live poverty-stricken lives.

But it doesn’t have to be that way.

If you’re a millennial, you can become a millionaire by following this three-step formula:

  • Minimise your expenditure
  • Maximise your earnings
  • Invest the difference

Sorry if you were expecting a get-rich-quick scheme. This is actually a get-rich-slowly scheme. And time isn’t the only requirement – hard work and discipline are also needed. But if you’re prepared to work hard and stay disciplined for years rather than months, you really can become a millionaire.

Minimise your expenditure

Here are 10 simple things you can do to reduce your spending:

  1. Cook your own meals rather than eating out
  2. Exercise outdoors rather than at the gym
  3. More public transport, less Uber
  4. More library, less Amazon
  5. Make your own coffee
  6. Buy less ‘stuff’
  7. When you do buy stuff, wait for sales
  8. Quit smoking
  9. Party less
  10. Stop paying credit card interest – either pay off your card in full each month or cut up your card

Imagine you saved $5,000 per year by using some or all of these ideas. That would add up to $150,000 over 30 years.

If you were to invest that $5,000 each year and generate an annual return of 3 per cent, you’d finish with $250,013 over 30 years. A 5 per cent return would give you $353,804. A 7 per cent return would give you $510,365. No wonder Einstein called compound interest the eighth wonder of the world.

Maximise your earnings

Here are five simple things you can do to increase your income:

  1. Ask for a raise
  2. Do more overtime or work more shifts
  3. Get a higher-paying job
  4. Get a second job or do some freelancing
  5. Make money through the sharing economy – Uber, Airbnb, Spacer, Car Next Door, Parkhound, DogVacay

Let’s say you managed to increase your income by $5,000 over the next 12 months and that your income then held steady for the 29 years after that. Well, based on the figures above, you’d accumulate an extra $150,000 to $510,365 over the next three decades.

Invest the difference

The final part of the three-step millionaire formula is to invest your extra money – provided this fits in with your specific financial position and goals. Of course, you should always seek professional advice, because investing carries risk.

There’s an old debate about whether it’s better to invest in property or shares. But people often overlook a third asset class, one that can produce impressive long-term returns.

It’s superannuation.

We’re not talking about the superannuation your employer pays you – we’re talking about additional pre-tax contributions, known as salary-sacrificing.

“This is typically a tax-effective strategy if you earn more than $37,000 a year,” as ASIC explains. That’s because salary-sacrificed contributions are taxed at just 15 per cent.

If your annual salary is $65,000 and you salary-sacrifice $10,000, your income tax will fall from $12,672 to $10,922, for a saving of $1,750. Free money! Plus, your super fund will have an extra $10,000 to invest on your behalf.

If you’re looking for low-risk investments outside super, you might want to consider savings accounts, term deposits or bonds. Another possible investment strategy would be to adopt a mix of lower-risk and higher-risk options.

Again, whatever your preference, seek professional advice before you invest.

Believe in yourself

So if you’re a millennial, don’t believe the naysayers who claim you can’t become a millionaire.

You can, provided you take control of how you spend money, earn money and invest money.

Building wealth is a marathon not a sprint. The sooner you start, the sooner you’ll finish. Good luck!

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Learn more about superannuation

How much is superannuation?

Superannuation is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How does superannuation work?

Superannuation is paid by employers to employees, at least once every three months. The ‘superannuation guarantee’ is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary. The guarantee is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Superannuation is generally taxed at 15 per cent. However, if you earn less than $37,000, you will be automatically reimbursed up to $500 of the tax you paid. Also, if your income plus concessional superannuation contributions exceed $250,000, you will also be charged Division 293 tax. This is an extra 15 per cent tax on your concessional contributions or the amount above $250,000 – whichever is lesser.

You can withdraw your superannuation when you meet the ‘conditions of release’. The conditions of release say you can claim your super when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

 

How much is superannuation in Australia?

Superannuation in Australia is currently 9.5 per cent – which means that your employer must pay you superannuation equivalent to 9.5 per cent of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

What are concessional contributions?

Concessional contributions are pre-tax payments into your superannuation account. The payments made by your employer are concessional payments. You can also make concessional contributions with a salary sacrifice.

How does superannuation affect the age pension?

Most Australians who are of retirement age can qualify for the age pension. However, depending on the size of your assets and post-retirement income, you might be entitled to only a reduced pension. In some instances, you might not be entitled to any pension payments.

Can my employer use money from my superannuation account?

No, your employer can’t touch the money that is paid into your superannuation account.

What fees do superannuation funds charge?

Superannuation funds can charge a range of fees, including:

  • Activity-based fees – for specific, irregular services, such as splitting an account after a divorce
  • Administration fees – to cover the cost of managing your account
  • Advice fees – for personal investment advice
  • Buy/sell spread fees – when you make contributions, switches and withdrawals
  • Exit fees – when you close your account
  • Investment fees – to cover the cost of managing your investments
  • Switching fees – when you choose a new investment option within the same fund

What superannuation details do I give to my employer?

When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You should also provide your tax file number – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

How do you calculate superannuation?

Superannuation is calculated at the rate of 9.5 per cent of your gross salary and wages. So if you had a salary of $50,000, your superannuation would be 9.5 per cent of that, or $4,750. This would be paid on top of your salary.

The ‘superannuation guarantee’, as it is known, has been at 9.5 per cent since the 2014-15 financial year. It is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

How do you pay superannuation?

Superannuation is paid by employers to employees. Employers are required to pay superannuation to all their staff if the staff are:

  • Over 18 and earn more than $450 before tax in a calendar month
  • Under 18, work more than 30 hours per week and earn more than $450 before tax in a calendar month

This applies even if the staff are casual employees, part-time employees, contractors (provided the contract is mainly for their labour) or temporary residents.

Currently, the superannuation rate is currently 9.5 per cent of an employee’s ordinary time earnings. This is scheduled to rise to 10.0 per cent in 2021-22, 10.5 per cent in 2022-23, 11.0 per cent in 2023-24, 11.5 per cent in 2024-25 and 12.0 per cent in 2025-26.

Employers must pay superannuation at least four times per year. The due dates are 28 January, 28 April, 28 July and 28 October.

What compliance obligations does an SMSF have?

SMSFs must maintain comprehensive records and submit to annual audits.

How can I keep track of my superannuation?

Most funds will allow you to access your superannuation account online. Another option is to manage your superannuation through myGov, which is a government portal through which you can access a range of services, including Medicare, Centrelink, aged care and child support.

When did superannuation start in Australia?

Australia’s modern superannuation system – in which employers make compulsory contributions to their employees – started in 1992. However, before that, there were various restricted superannuation schemes applying to certain employees in certain industries. The very first superannuation scheme was introduced in the 19th century.

Is superannuation paid on unused annual leave?

If your employment is terminated, superannuation will not be paid on unused annual leave.