Get the basics right to be set for life

Wednesday, 11 July 2018

Your first pay cheque from a full-time 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.

* Money tips for the young, from the young

* Study shows it's parents who young people turn to for money wisdom**

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 said the best advice to young people was to do something they loved. 'Particularly in an environment where things are changing so rapidly.'

He said people also needed to understand that if they opted to study, and not work while they did so, that would have financial consequences.

If you start saving young, you can put aside less of your own money and still reach the same goals.

'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 said. 'I'm not saying people should be living a pauper existence nut they should be aware of how long it will take them to pay it back and the trade-offs 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 said.

He said most young people had grown up in an environment of strong consumerist messaging and expected to be able to buy things immediately. 'I'm not saying don't have a new phone but be conscious of the trade-off.

'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 said it was not so much the fact that people spent their money that was the problem that they got into the habit of doing so.

Not having a safety net

You sometimes hear advice that people should have three or six months' worth of their salary saved to cover them for unexpected expenses.

Blair Vernon: Understand the trade-offs that come with your decisions.

Tom Hartmann, personal finance editor at the Commission for Financial Capability, said young people did 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 – 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 third-party cover for your car. 'That keeps you from getting stuck with the bill if you hit a Maserati,' Hartmann said.

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 you could acquire by the time you're 65.

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 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.

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 said.