This blog post has been republished in celebration of Money Week (14 – 20 August 2017). For more information on Money Week please visit https://sorted.org.nz/moneyweek
I often think about the money tips I wish someone had given me twenty years ago. While there are plenty of good examples of these, I reckon I can boil most of it down to three key pieces of advice, which I will do my best to drum into my own children.
Firstly, spend less than you earn.
That sounds fairly simple, and it is, but plenty of people (and even a few governments around the world) still manage to get it wrong.
Whether you’re a company, a country or an individual, it’s difficult to get into too much trouble if you spend less than what you’re bringing in.
If you need to rely on your overdraft or credit card balance each month, revisit your outgoings and ruthlessly cut some expenses you can live without.
Secondly, never borrow money to buy depreciating assets.
Debt can work in your favour, but only when you use it for things that tend to rise in value over a reasonable period of time. Using borrowed money to invest in a house, a business or an investment (which includes your education) is the sensible use of debt.
Borrowing to buy a new phone, pair of shoes, TV, or car is not a smart use of debt.
You end up paying much more than the original sticker price, while the value of what you’ve purchased is in constant decline from the moment you swipe your credit card, which is a terrible combination for your personal balance sheet.
In just about every case, if you have to borrow money for it, then you simply can’t afford it.
Thirdly, start saving or investing as early as you can.
When it comes to investing, there are few things more powerful than time.
Consider someone who began saving $20 a week at age 45 and managed to earn a 7 per cent return per annum (ignoring inflation, for simplicity).
They would have $44,082 when they’re 65 and of that, $23,282 would be purely due to investment returns (in addition to the sum of what they had put in each week all added up).
If they had started a decade earlier at 35, the grand total jumps to $101,573 with an investment return component of $70,373. As we bring the start date forward even further, the results increase exponentially, such is the power of compounding returns.
Starting at age 25, the twenty dollars a week is worth a whopping $229,312, with an investment return component of $173,066.
When you’re young, the future benefits of such discipline seem so far away that it’s not even close to being a priority.
However, for those that can grasp the concept and commit to some sort of regular savings plan, there are genuine benefits down the track.
Not everyone has the luxury of being able to follow this sort of advice.
There are all kinds of reasons why people end up in unfortunate financial situations.
Things can spiral out of control quickly, and sometimes no amount of being frugal can dig people out of some indebted situations.
Despite all of the fiddling we’ve seen over the last few years with regard to KiwiSaver, at least we’re talking about these sorts of issues now.
Hopefully, the conversation will help drive financial literacy higher, arming young people with a few basic (but important) concepts to make their financial journey a little smoother.
This article was originally published in the New Zealand Herald on Saturday 13 June 2015.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. His disclosure statement is available free of charge under his profile on www.craigsip.com. This column is general in nature and should not be regarded as specific investment advice.
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