Today’s Top 10 is by Ryan Johnson. Ryan is a business intelligence analyst and the founder of Money for Young Kiwis - a blog aimed at helping people be more savvy with money.
He shares 10 ways young people in particular can grow their wealth, from investing to saving and spending.
1. The number one way to grow your wealth.
INVEST!
Investing is still seen as a rich old white guy’s game. It’s viewed as incredibly risky, hard and time consuming.
This just isn’t true. It’s never been easier for people with not a lot of money to invest cheaply, easily and effectively.
- Invest in low cost exchange traded funds (ETFs) which track whole economies, such as the NZX50 or the S&P 500. This means you have great diversification (your money isn’t riding on the success of just one company) and you get this at a low price.
- Buy consistently over the long term. Investing $50 a month may seem like slow going, but you will be rewarded for your patience.
- Keep buying regularly for as long as possible, preferably 7+ years. This allows time for stock market returns to even out, so you can ignore the inevitable fluctuations.
Here’s an example of what an amazing thing it is to start investing young:
Say my younger brother Blake starts investing when he’s 18, putting $100 a month into an index fund. He stops investing in 10 years when he’s 28.
The other person starts when they’re 28 and invests $100 a month for the next 30 years. Both get a 7% annual return.
Who would you expect to have more money in this scenario?
Surprise! It’s Blake! He’ll have $17k by the time they’re 28, and even if he never invests another cent, it’ll grow into around $138k by the time he’s 58.
The person who started investing when they’re 28 will only have around $122k when they are 58, even though they invested for three times as long!
If you want to see a personalised version of this, I’ve made a calculator that will estimate what your future investments will be worth. Learn more here.
2. Something that makes a big impact - how do you choose your investment provider?
When you start investing, one of the big decisions you have to make is which provider to invest with. Generally they all seem pretty similar.
This can often cause “analysis paralysis” for new investors. They get too tied up ranking different providers and can’t make a decision.
Ultimately, the best investment provider for you will depend on a few factors;
- How much money you have to invest
- How “hands on” you want to be
- Your investing time frame and your goals
Alpha Leung from The Smart and Lazy Blog has some of the best and most exhaustive content on this. Check him out here.
3. If you haven’t done this yet, do it right now!
Did you know you could end up paying tens of thousands of dollars in KiwiSaver fees in your lifetime?
A lot of people don’t have any idea of the true cost of KiwiSaver fees. In general, high fee providers won’t make enough in returns to justify their high fees.
Make the switch to a low fee provider that offers passively managed funds. These will return more money than most of the high cost funds in the long run.
Sorted.org.nz has some awesome KiwiSaver related tools which you can check out here.
4. Isn’t property investment the best way to get rich?
The short answer is, nope. It’s not.
The long answer? The social narrative in New Zealand says that you need to buy a house as soon as possible or else all you’re doing is paying somebody else’s mortgage.
If you’re going to buy a house, buy one because it’s the best decision for you, not because of social pressure.
Of course, deciding to buy a house is far more than a financial decision. People can end up so desperate to buy a house, they ignore or just aren’t aware of the many financially draining aspects of owning a home.
It’s not worth it if you’re stretching yourself to breaking point to make that monthly mortgage payment; that’s not even taking into account rates, insurance, having to fix the washing machine yourself when it breaks and so on.
Renting out that house can also be incredibly expensive.
Yes, it kind of sucks if you’re a renter in New Zealand right now. However, you can often rent cheaper (all things considered), which means you can save more of what you earn and invest the difference.
5. How to save smartly.
We’re probably all sick of hearing about how millennials fritter their money away on coffees, avocados and iPhones. It’s stupid and not true (but maybe spending $2000 on a phone could be considered excessive).
The key is to analyse where your money goes and think about where you can cut down spending, without cutting down your enjoyment or utility.
- Are you paying $20 a week for a gym membership when you could get 90% of the value from a $7 a week plan? What does the fancy gym offer other than hair straighteners in the changing rooms?
- When was the last time you shopped around with your utility providers to see who had a better deal? It might be annoying getting telemarketing type calls, but quite often they do have really good deals on offer. Just be sure to check out the fine print!
- Are you paying for any subscription apps or services that you aren’t getting value from? I used to pay for a sleep quality app that would tell me how well I slept. Thing is, I could find that out for free by just seeing if I woke up furious at life or not.
- Are you spending $10 on lunch every day when you could be cooking big batches of food that will feed you all week? Meal prep may be a bit boring and finding all those Tupperware lids is no joke, but it’s actually kind of great.
Questions like this will allow you to trim your expenditure without sacrificing the things that you actually enjoy in life. There’s no point growing wealth if at the same time you’re miserable, antisocial and caffeine-deprived.
6. How to spend smartly.
I’m outrageously careful with money in some aspects of my life (for the whole of 2016 I bought no new clothes and I wasn’t even doing a challenge), because spending in some areas brings no joy to either me or my savings. However, I’m happy to splurge if I know I’ll get heaps of enjoyment out of it.
Something to consider when you’re looking at getting something new is cost per use/wear. Yes that puffer jacket is expensive, but you’ll probably have it for the next 10 years, so it all works out.
Think also in of terms of how many hours you had to work to buy something. Are these new Nike millennial pink shoes really worth half a week’s salary?
Every six months or so, I take a hard look through my expenses the previous month and think about where I didn’t get value from my spending. This is different for everyone and just comes down to what makes you really happy.
7. The good plan you’ll follow is better than the perfect plan you won’t.
If you counted every calorie, never touched McDonalds apple pie and worked out two hours a day, you’d almost certainly lose weight. The problem with this is that almost no-one will be able to stick to that kind of plan.
It’s the same with your finances. Don’t set yourself up with a rigorous budget that gives yourself absolutely no wiggle room for fun or unexpected costs. You’ll invariably fail and feel terrible about yourself.
The key is to come up with an achievable plan and then automate so you can’t fail. Set up automatic payments for things that remain static, like your rent and a certain amount of savings (or investments) each week. Once your bills are paid, you’re free to spend the rest in ways that give you real happiness.
When it comes to setting an amount to save; it’s totally okay to take baby steps. You probably won’t be able to go from saving 0% of your income to 50% of your income, but you’ll definitely be able to go from 0% to 10% and work your way up.
8. Credit cards - basically free money or literally the worst thing ever?
Ah, credit cards - the world’s most divisive piece of thin plastic. To some people they are a tool of the devil and will bestow financial ruin upon anyone that uses them. To others, they’re a great way of deferring payment and getting those sweet, sweet rewards.
In order to use a credit card successfully (actually get benefits above and beyond deferred payment), you need to:
- Pay it off in full every month to avoid incurring any interest.
- Use it enough that you earn more from the rewards than you would pay in fees. It’s always worth reading the fine print when you sign up as often you can get hit by other little fees if you start to miss payments.
The rewards (air points and FlyBuys) offered can seem fantastic. But be aware the rewards are usually tiered depending on how much you pay in fees per year for the card.
Having the ability to buy now pay later just isn’t worth the stress if you can’t stay on top of things.
9. Which first? Choosing between saving, investing or paying off debt.
The easy first answer is that, of course, it’s best to get rid of your pricey consumer debt (credit cards and the like) before you even think about investing.
Student loans are interest-free. For this one (assuming you're planning to stay in NZ), you can pretty much sit back and relax and never think about it; just watch as it trickles quietly out of your wages.
Mortgages are where this conundrum gets tricky. It might be tempting to start investing instead of paying off your mortgage, especially when interest rates are low.
It’s important, though, to consider the fact that every dollar you pay off your mortgage, is a dollar that won’t incur interest throughout the life of your mortgage.
Because of this, paying off your mortgage provides a great, risk-free return. Yes, you might be able to get better returns by investing in the sharemarket instead but generally paying off a house is much less risky.
10. What’s the point of growing your wealth at all?
To me, growing my wealth is buying back time. The more you can save and invest, the less you’ll have to work in your life, and the more time you’ll be able to spend with your family and doing the things that you want.
How much do you think you’d need today to never have to work again? $2 million, $5 million, $10 million?
The answer is probably much less than that. There’s a super simple way you can work out how much you would need to never need to work again.
Take your yearly expenses and multiply them by 25.
For example, if it costs you $40,000 a year to live, you could retire today with only $1 million (this assumes you can withdraw 4% of your money yearly).
If you keep your money in a balanced portfolio, it’ll generally grow at a rate higher than 4% over the long-run, so your money will never run out. For more on early retirement, check out this post by world-famous finance blogger Mr Money Mustache.
Retirement doesn’t need to mean just never working again and lazing around with your geraniums, either. If you can retire early, it just means you have the freedom from needing to work your 9 to 5. You have the ability to work on what you really want to do. It might earn you money or not, but the point is that you won’t need it either way. Financial freedom at its best!
As always, we welcome your additions in the comments below. If you're interested in contributing a Top 10 yourself, contact gareth.vaughan@interest.co.nz. See all previous Top 10s here.
25 Comments
I do understand borrowing can be part of business, but I have trouble with the word 'investing' to describe that. to me 'Investing' is devoting capital you already have as part of some enterprise which produces a return.
Seems to me the description of people as 'investors' is often used to conceal what they often really are, which is borrow and hope house speculators.
The stock market over long periods has a total real return 7% (dividends reinvested and after inflation). This has been true even incorporating the Great Depression, 87 crash, Dotcom bust and GFC. Many cheap ETFs (fees from 0.2%) are available to easily track this performance
Here's a link to the performance of the S&P/500 over 80ish years with dividends reinvested and before tax. You can see over a long enough time frame a 7% return is very feasible.
http://financeandinvestments.blogspot.co.nz/2014/02/historical-annual-r…
From 1900 to 2017, the S&P500 returned 6.52% after inflation with dividends re-invested. you can have a look here http://thume.ca/indexView/ and change the dropdown to Real S&P500 (with Dividends) and play with the start and end years too.
25 Times monthly expenses ignores things like , quarterly rates, capital replacements, car etc, house mtce and holidays to mention a few.A simple rule of thumb might be to multiply your current income by 25 and leave expense reduction from Mortgage payments to pay for the missed stuff above.
25 time annual expenses gives you the retirement number. Note that this is you annual expenses at the time of retirement so if your mortgage is not included if it will be paid off by then. If you use your current salary, you are likely going to oversave and end up working far longer than necessary as salary = expenses + saving and saving is no longer needed in retirement.
One of the behavioral phenomenons about bull economies (what we're really talking about is "bubble economies" for which there is no historical precedent) is that you will be subject to patronizing attitudes and ridicule if you're not part of the critical mass. That will come from opinion leaders like the Hosk and those suburban bullies eager for some recognition. Much of what these people will say is based on the old "common sense" and has little to do with probability and and the fragility of markets. They will lack the basic skills to do some form of probabilistic forecasting and their proclamations will be largely based on their narrow range of experience and what they want to believe.
Yes Taleb is important reading. Don't pay much attention to him anymore. Of course, 'The Black Swan' is crucial reading, whether you're a student or even John Key, who probably would have had a few issues with the themes. A stellar trading career is not just based on competencies. It's also based on luck.
Far better and safer returns? It is a piece of cake to invest in funds that return a solid 2% to 6% per annum (depending on your risk appetite) in interest or dividends. Plus you get tidy capital gains (usually 5% to 20% per annum for various growth funds) for no additional effort. Depending on your broker/platform they're usually held in third party custody which enables the shareholder to retain ownership if the broker goes under. Not to mention shares incur no additional costs outside yearly admin/custodian/management/platform fees unlike property.
Your "shares can be wiped off the face of the earth" attitude is incorrect and 30 years out of date. It's all too typical of people who bought into the 1987 hype (Enron etc) and got burnt. If you know about equities the norm is now ETFs and index funds allowing easy access to diversification across multiple industries, economies and countries to reduce risk. Any savvy share investor wouldn't put all their capital into a small amount of companies. Good luck waiting for the FTSE, NYSE or NZX to disappear.
One great but unmentioned thing about investing in shares is that if automation makes everyone redundant, you will have an ownership stake in the, presumably, very profitable corporations that have no labour costs. Why bang on about a universal income when you can take an insurance policy against AI domination by buying shares?
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