THREE FINANCIAL RULES TO LIVE BY
Mark Lister, December 2021
I often think about the money tips I wish someone had given me 30 years ago. While there are plenty of good examples, I reckon I can boil most of it down to three key pieces of advice.
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 time. Using borrowed money to invest in a house, a business or an investment (including your own education) is the sensible way to use debt.
Borrowing to buy a new phone, pair of shoes, a gaming console or car is not a smart use of debt.
You end up paying much more than the original sticker price, while the value of your 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 the truth is you simply can’t afford it.
Thirdly, and this is the most important one, start investing as early as you can.
When it comes to investing, there is this nothing more powerful than time.
Consider someone who began investing $20 a week at age 45 and managed to earn a six per cent return per annum (we’ll ignore taxes, inflation and transaction costs, just to keep things simple).
They would have $39,372 when they’re 65 and of that, $18,572 would be purely due to investment returns (the rest being what they had put in each week).
If that same person had started a decade earlier at 35, the grand total jumps to $84,616 with an investment return component of $53,416.
As we bring the start date forward even further, the results increase exponentially, such is the power of compounding returns.
Starting at age 25, that twenty dollars a week is worth a whopping $165,641, with an investment return component of $124,041!
When you’re young, the future benefits of such discipline seem so far away that it’s not even close to becoming a priority.
However, for those that can grasp this concept and commit to some sort of regular savings plan, there are staggering 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 frugality can dig people out of some indebted situations.
Since the advent of KiwiSaver, we talk about these issues much more than we used to, which itself is a big win.
Hopefully, the conversation will drive financial literacy higher, arming young people with a few basic (but important) concepts to make their financial journey a little smoother.
With the holiday period fast approaching, it is a good time to do a stocktake of your financial wellbeing and have a think about whether your approach to money needs fine-tuning ahead of the new year.