The roads leading to Brokesville
The journey to financial security is a long one but many young people take the wrong path straight away, writes
Susan Edmunds.
Your first pay cheque from a fulltime job can feel like winning Lotto. When you’ve spent years studying, borrowing and budgeting to get through, 40 hours’ worth of pay – even at a starting rate – can seem a significant amount of money.
But financial experts say young people entering the workforce are making a number of mistakes that cost them over the remainder of their financial lives.
Studying the wrong thing
Generally, we are told that studying is a good thing that will lead to better outcomes over our working lives.
For many people, that is true and the money they borrowed to pay for their courses turns out to be a good investment.
But what if you’ve paid for an expensive course, then decide it wasn’t what you wanted to do after all, and don’t finish, or find that the job prospects are slim? Even an interest-free loan for money spent on such courses could be hard to live with.
Blair Vernon, managing director of AMP in NZ, says: ‘‘We have to be really cautious of the traditional view that you go to university, get a degree and have the presumption of a greater level of income.
‘‘I’m principally concerned that people who are about to start university or go into an apprenticeship think about whether that’s really what they want to do, what they are passionate about, rather than what they think will make them the most money.’’
He says the best advice to young people is to do something they love. ‘‘Particularly in an environment where things are changing so rapidly.’’
They also need to understand that if they opt to study, and not work while they do so, there will be financial consequences.
‘‘I continue to be surprised by students who went into study and then are surprised by the amount of debt they have got. They should be able to figure that basic maths out.’’
Students should also be wary of taking the full amount of loans available to them, he says. ‘‘I’m not saying people should be living a pauper existence but they should be aware of how long it will take them to pay it back and the tradeoffs involved.’’
Spending it all
It’s tempting to splash out after many years of going without. But it’s easy to get into the habit of spending everything you earn – and that can be very hard to shake.
‘‘One of the greatest challenges that young people have is the moment they have some capacity to earn they spend immediately without thinking about whether it’s a valuable purchase or not,’’ Vernon says.
Most young people have grown up in an environment of strong consumerist messaging and expect to be able to buy things immediately.
‘‘I’m not saying don’t have a new phone but be conscious of the tradeoff.
‘‘Young people frequently spend 100 per cent or more of what they earn. That’s what we run up against, when they’ve had the option to opt out of KiwiSaver and have done so, they say they can’t afford it because they’re spending their money on everything else … if you can’t work out a budget and reel in your costs if you can’t afford them that’s a real challenge.’’
Financial adviser Martin Hawes says the problem is not so much the fact that people spend their money, but that it becomes a habit.
Not having a safety net
You sometimes hear advice that you should have three or six months’ worth of your salary saved in case of unexpected expenses.
Tom Hartmann, personal finance editor at the Commission for Financial Capability, says young people do not have to have so much, but they should still have some sort of buffer. If you have a car, aim to put aside about as much as an expensive repair job would cost – maybe $1000 to $1500.
‘‘If the unexpected happens you won’t have to go into debt.’’
Not having insurance
When you don’t have a lot of stuff it’s tempting not to insure it. But you should have at least basic contents insurance – this is relatively inexpensive – and thirdparty cover for your car. ‘‘That keeps you from getting stuck with the bill if you hit a Maserati,’’ Hartmann says.
Not joining KiwiSaver
Hawes says KiwiSaver is the ‘‘closest thing to a free lunch’’ that young people can get.
Not being a member, or being in the wrong fund, can significantly dent the potential savings.
Young people have time on their side, which makes an enormous difference to their long-term savings outcomes.
When you’re young, the power of compound interest works for you to boost your lifetime returns, so you can put aside a lot less of your own money to achieve the same results.
For example, assuming a 7 per cent per year return, someone who invests $5000 a year between the ages of 25 and 35, a total of $50,000, would end up with about $600,000. Someone who invested $5000 a year between 35 and 65, a total of
$150,000, would end up with
$540,741.
‘‘I continue to be surprised by students who went into study and then are surprised by the amount of debt they have got.’’
Blair Vernon of AMP, right ‘‘The court is not there to rewrite a will. However, significant awards can be made.’’ Thomas Biss of Henderson Reeves
Not having a plan
Work out where you want to be in five, 10 or 20 years and what you need to do to get there.
‘‘Young people in their 20s have so much potential for things they can achieve and they might find ways to achieve them easier and quicker if they have goals and a plan for how to get there,’’ Hartmann says.