Three simple rules for financial success
This coming week is “Money Week”, an annual public awareness campaign run by Te Ara Ahunga Ora. Also known as the Retirement Commission, Te Ara Ahunga Ora is the government-funded organisation behind the Sorted website, a great resource dedicated to helping New Zealanders get ahead financially. Money Week is about encouraging people to talk more openly about money, to help us all improve our financial wellbeing.
Financial literacy isn’t great here in New Zealand, so any initiative that gets us talking about it deserves a plug.
When I think about the money tips I wish someone had given me 30 years ago, there are plenty of examples I can think of. However, I reckon I can boil most of it down to three key pieces of advice. 1
Spend less than you earn
That sounds simple, and it is, but plenty of people manage to get it wrong.
Whether you’re a company, a government or an individual, it’s difficult to get into too much trouble if you spend less than what you’re bringing in.
If you find yourself reliant on your overdraft or credit card balance each month, revisit your outgoings and ruthlessly cut some expenses you can live without.
2
Never borrow money to buy depreciating assets
Debt can be a great slingshot to wealth, but only when it’s used for things that will rise in value.
Using borrowed money for a house, business or an investment (including your education) is the sensible use of debt.
Borrowing to buy a new phone, TV or pair of shoes is not a smart use of debt.
You end up paying much more than the sticker price, while the value of your purchase is in constant decline from the moment you swipe your credit card.
In just about every case, if you have to borrow money for it, then you can’t afford it.
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 the age of 45 and earned an average return of 7 per cent per annum. They would have a little more than
$45,000 two decades later at 65, more than half of which would be purely due to the investment returns they’d earned.
However, if they had
3
started a decade earlier at 35, the grand total jumps to $106,000 with the investment returns representing more than $75,000 (or 71 per cent) of that.
As we bring the start date forward even further, the results increase exponentially, such is the extraordinary power of compounding returns.
Starting at age 25, that $20 a week would be worth $229,000 at age 65, with the investment return component (of over $187,000) accounting for 82 per cent of the nest egg.
Saving for retirement isn’t a priority for most young people. However, for those that grasp the concept early and commit to a regular investment plan, there are some staggering benefits to be enjoyed down the track.
Not everyone has the luxury of being able to follow this sort of advice, and 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.
Money Week is a great excuse to talk about all these issues and opportunities, not that we should need one.
Hopefully, the ongoing 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.
Mark Lister is Investment Director at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.