Money mistakes to avoid at every step of your life
Are you making common money mistakes that get in the way of your financial success? Richard Hall, a financial planner, said this week that there were five big money mistakes people made pre-retirement, such as taking on extra debt, or even buying timeshares.
But advisers said there were other hurdles that could trip people up at every stage of life.
Financial trainer Hannah McQueen said too many people put too much emphasis on financial literacy and not enough on strategy, mindset and behaviour.
‘‘Knowing what to do, and failing to do it, still means you have failed. It’s about taking specific action at specific points in time and not eroding progress in between. Which is easier said than done.’’
Here are some things to watch out for, no matter how old you are.
20s and 30s
Some people fall behind before they even begin, by taking out student loans for courses they never finish, or they decide not to work in the industry they have trained for.
You can try to avoid this by getting as solid an understanding as you can of any course and the resulting career opportunities before getting into debt to fund it.
Some people also spend too much time thinking short-term in this stage of their lives.
Young people have time on their side, which is a huge asset for financial planning. If you can start a savings or investing habit early in your working life, you can use the power of compounding returns to get to your goals much more quickly and easily than if you started later.
Financial commentator Janine Starks said that some people became too myopic if they became a one-income family when they had kids, ‘‘and let that ride for too long’’.
‘‘The lost savings from the second income is catastrophic. Letting a career slip and taking low-paid jobs then exposes one partner to being a financial dependent and having no financial resilience in a divorce.
‘‘The real cancer in this mistake is a couple having one retirement portfolio or KiwiSaver instead of two.’’
30s and 40s
When you’ve bought your first home, it can be tempting to keep putting more money into the property market – doing up your own home, leveraging equity in it to buy an investment (if the market is on your side), or upgrading to more expensive homes.
Starks said this sort of property addiction could be a major problem.
‘‘Ballooning the size of your house instead of paying down debt and saving. Using equity in the house like a free bank for travel, cars and renovations. Property is a trap that acts as a financial handbrake in life. Downsizing later is the biggest sham people use to kid themselves it’s workable. The reality is it’s wiping a decade off your savings.’’
Financial adviser Liz Koh agreed it was vital to remain focused.
‘‘You need to finish your working life with a debt-free home and some savings – the more the better. The biggest mistake is not buying a house at all. Next comes not paying off the mortgage quickly enough. After that, the most common mistake is to have too much money tied up in the house in retirement and not enough left over to enjoy life.’’
McQueen said people often didn’t make the progress they needed to. ‘‘[They] weirdly conclude that it will be okay in the end, assuming that this happens by default.’’
40s and 50s
Provided a marriage split or career u-turn doesn’t knock you off course, your 40s and 50s can be a time of peak earning and getting ahead.
Many people pay off their home loans in their 50s, which enables them to start putting a lot more money into saving and investing.
Starks said people should be careful not to overcommit themselves to helping their children.
Giving adult children money for house deposits was the biggest risk to retirement, she said.
‘‘Your loss is roughly triple the value you gave away over 20 years of lost returns. Giving two children $50,000 each is a $300,000 hit to a portfolio. So few couples can actually afford what they think they can afford. It’s a massive lifestyle setback and young couples have little perspective on what they are taking.’’
50s and 60s
Don’t fall into the trap of thinking you’re sorted for retirement and don’t need to worry about it.
Starks said this age group needed to stay in turbo-savings mode in the lead-up to the end of their working lives.
‘‘It’s the highest-earning years of your life and the only chance you are going to get to prevent the time bomb of retirement poverty. Debtfree, child-free and saving all of one salary is a necessity.’’
Don’t take on any extra debt that you’ll then have to service for years. If you think you’ll need to downsize your home, start that process before it becomes urgent.
Retirement
Some people become too riskaverse in retirement, moving all their money out of things such as shares and sticking it in the bank.
But with interest rates so low, that could be a mistake.
Typically, someone retiring at
65 will still have 20 years of retirement or more to fund, and some exposure to growth assets helps stay ahead of inflation.
KiwiSaver is now available for
over-65s to join and move between funds, and there are no restrictions on withdrawing money once you hit the pension age. You may find that having your money in a KiwiSaver fund gives you cheap access to financial advice on how to make it last.
‘‘Giving two children
$50,000 each is a
$300,000 hit to a portfolio.’’ Janine Starks