Not planning early enough for your financial future can have a knock-on effect, says authorised financial adviser Joseph Darby.
With a culture so heavily focused on living for the moment, young people are increasingly delaying planning and investing into their financial futures.
This has a knock-on effect, with consequences only showing up years later when the negative effects have been multiplied by time.
This makes it very difficult to show the effects of mishandling money in your 20s and 30s.
Being a ‘do-it-yourself’ nation, young New Zealanders tend to learn by trial and error, and the mistakes of this approach can be hard to remedy.
Here are five mistakes to avoid in your 20s and 30s that can have big impact later in your life.
1. Failure to launch
Young New Zealanders are staying in the family home for increasingly longer periods of time.
This isn’t an issue when they recognise the opportunity this presents, and they’re careful with the money they’re saving.
Where this becomes a problem is where it delays the need for being responsible with money.
Living with parents helps keep expenses low, but there can be a tendency to spend any surplus cash that results, rather than saving or investing it. This is what we mean by ‘failure to launch’.
Without learning monetary responsibility early on, young people’s attitudes towards money don’t mature and they miss out on opportunities.
2. Being relaxed about KiwiSaver
So, you’ve got a job, and you’re thinking about whether or not you should enrol into a KiwiSaver scheme? Think it’s as easy as just filling out a form and going into a default fund? Think again.
Your entry age, who you choose to place your KiwiSaver investment with, your contribution rate, and the type of fund you choose can all have massive effects in the long term.
As an example, the table below shows the potential balances at retirement for someone who starts contributing at 20, versus someone who starts contributing at 30, assuming both earn a salary of NZ$45,000 per year, contribute 3 per cent, and start with a $0 balance. It also shows the difference between three typical fund choices.
This shows the importance of not only enrolling and contributing to KiwiSaver as early as possible, but also how your decisions around your fund type can result in hundreds of thousands of dollars’ difference at retirement age.
3. Racking up student debt
Before getting into this mistake, let’s agree that education doesn’t come cheap.
Studying at university is expensive, and student loans are a necessity for most Kiwis.
It may seem of no consequence to claim course-related costs and living costs through Studylink. It all just goes on your student loan, and you just pay it back like tax through mandatory salary deductions, right?
Yes – but claiming those now can result in tens of thousands of dollars extra that you need to pay back, when you may not really need to claim them in the first place.
For example, take a three-year Bachelor of Business degree. Course fees are around NZ$5,840 per year – multiply that by three years, and you’re looking at a minimum of NZ$17,520 in course fees alone.
Add on three years of loans for course-related costs of NZ$1,000 per year and that increases to NZ$20,520.
If you then decide to claim living costs and receive the current maximum of just under NZ$232 per week – say there are only 26 weeks of payment, that adds up to an extra $6,030 per year – bringing your overall three-year total debt to NZ$38,610.
This is more than double what it would’ve been if your student loan was for course fees only. While student loans are interest-free, that’s still a large chunk of debt that you’ll spend years repaying.
The moral of this is to be mindful of what you’re borrowing for university – and don’t add on the extras unless they are an absolute necessity.
4. Being irresponsible with credit cards and finance
The minute you have a tertiary account with a bank, most offer you a NZ$500 credit card limit and a NZ$1,000 overdraft.
As the fees are ‘low’ and the interest rates are ‘low’, it all sounds very appealing. However, all this does is create the habit of you living with consumer debt and spending money you don’t have.
The older you get and more you earn, or the longer you have a history with the bank, the higher the limits they’ll offer you. The more ingrained your habit of spending the bank's money and paying it back later, the more danger you’re in of starting to acquire ‘toys’ on finance such as cars, smartphones, holidays, and so on.
Want to upgrade and buy a NZ$30,000 car? For NZ$500 per month, you can.
Want the latest NZ$1,500 phone? It’s yours for NZ$200 per month.
Want to take a NZ$10,000 holiday overseas? Just pay it back at NZ$300 per month.
You may look at this and think: “All of those things are only going to cost me NZ$1,000 per month – I can afford that!”
Sure, that’s NZ$1,000 per month in repayment obligations, but your total debt for those purchases is suddenly NZ$41,500!
What makes this worse is that this debt is either for depreciating assets – or no assets at all. This level of consumer debt not only hinders your future borrowing capacity for things such as your own home, but it also creates the illusion of financial success.
What many 20- and 30-year-olds don’t realise is that financial success isn’t having the toys and massive loans – financial success is having enough to be secure, having financial freedom, and having a variety of financial choices – including to pay for all the things you want without going into debt.
5. Not seeking advice
As I mentioned earlier, New Zealand is a DIY nation. We tend to just figure things out for ourselves, don’t ask for help, and are particularly cagey when it comes to talking about money.
Fortunately, resources for financial education are growing rapidly, and financial advice is no longer just for the wealthy.
Delaying seeking advice could be the difference between having enough for retirement and not having enough – or owning your assets versus the bank owning “your assets”.
Good advice can help you sustain financial health throughout the course of your life – and seeking it in your 20s and 30s will go a long way to ensuring that health through your 40s, 50s and 60s.
Every decision you make about money in your 20s and 30s can have an impact on the rest of your life.
Don’t presume that you’ll just figure it out ‘later’, because when it comes to finances, ‘later’ is usually far too late.
First published 22 August, 2018.
Story by Joseph Darby.
Joseph Darby is an authorised financial adviser and Chief Executive of Milestone Direct Ltd. The views and opinions expressed in this article are those of Joseph Darby and not necessarily those of Milestone Direct Ltd. A disclosure statement is available on request and free of charge.
JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.