With a culture so heavily focused on living for the moment, our younger generations are increasingly delaying any planning for and investment 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 demonstrate the effects of mishandling money in your 20s and 30s. Being a DIY nation, young New Zealanders tend to learn by way of trial and error and the mistakes of this approach can be hard to remedy. Below are five mistakes to avoid in your 20s and 30s that can have significant impact later in life.
Young New Zealanders are staying in the parental home for increasingly longer periods of time, or moving back home again if they fall on hard times. This is not an issue when the opportunity this presents is recognised, and diligence with cashflow is in place. Where this becomes a problem is where it delays the requirement for monetary responsibility. While living with parents helps keep expenses low, there can be a tendency to spend any surplus cash that results, rather than saving or investing it. This is essentially what we mean by ‘failure to launch’. Without learning monetary responsibility early on, attitudes towards money don’t mature and opportunities are missed.
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, KiwiSaver provider, your contribution rate, and the type of fund you choose can all have massive effects over the long-term. For example, the table below shows the potential balances at retirement for someone who starts contributing at 20 years' old, versus someone who starts contributing at age 30 - assuming both earn a salary of $45,000 per year with 2% raises, contribute 3% of salary matched by their employer, and begin with balances of $0. It also shows the difference between three typical fund choices.
Fund TypeEntry at age 20Entry at age 30Conservative$346,148$217,605Balanced$441,436$262,348Growth$570,276$318,677
This demonstrates the importance of not only enrolling and contributing to KiwiSaver as early as possible, but also how your decisions around the fund type can result in hundreds of thousands of dollars difference at retirement age.
Before getting into this mistake, let’s acknowledge that education does not come cheap. Studying at university is costly, and student loans are a necessity for most New Zealanders. However – 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 $5,840 per year – multiply that by three years, and you’re looking at a minimum of $17,520 in course fees alone. Add on three years’ worth of loans for course-related costs of $1,000 per year and that increases to $20,520. If you then decide to claim living costs and receive the current maximum of just under $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 $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 will 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 absolute necessity.
The minute you have a tertiary account with a bank, most offer you a $500 credit card limit and a $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 will 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 $30,000 car? For $500 per month, you can. Want the latest $1,500 phone? It’s yours for $200 per month. Want to take a $10,000 holiday overseas? Just pay it back at $300 per month. You may look at this and think “All of those things are only going to cost me $1,000 per month – I can afford that!” Sure, that’s $1,000 per month in repayment obligations, but your total debt for those purchases is suddenly $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 future borrowing capacity for things such as your own home, but it also creates the illusion of financial success (especially for some who post pictures of their supposedly affluent lifestyle on social media platforms such as Facebook and Instagram). 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.
As we 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 impact 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.
Ultimately, your 20s and 30s are the time to lay a great foundation for the rest of your life. This is best achieved by avoiding the financial mistakes of:
If you’d like assistance with areas such as what to do when you’ve mastered the areas above, discussions about a KiwiSaver investment, or any other financial matters, then it’d be our pleasure to assist you. Reach out to us.