I’m no Warren Buffet, so you don’t need to take financial advice from me. But I wrote this article because, as Kiwis, we are reluctant to have conversations about money. It’s a taboo subject.
There is so much we can learn from each other’s discoveries and mistakes. I’ve sure made some hash-ups along the way. I’ve written this post so you can learn from my experiences and to start a conversation about money, which could help us all make better decisions.
If only I could go back and have a little ‘heart to heart‘ with my 18-year-old self, here is what I would teach that young man about money and how the world works.
Please note: I am not a qualified financial adviser and my suggestions may not fit your personal situation. Always seek professional advice before making a large financial decision or commitment.
1. Don’t be in a rush to go to university.
Why not start with a contentious issue, right? For many 17/18-year-olds, it’s the biggest question you face when you leave school. In my family, there was certainly an expectation that you went to University and got a degree. Personally, I was neither mentally nor emotionally ready to self-motivate my way through 3 years of study when I left College. I should have taken a year off to study, work, or just hang out with my mates. In reality, I ended up leaving uni after only 1 year, with a boatload of debt and nothing to show for it.
2. Don’t chase quick money
I left uni and started working. My Dad very kindly gave me a job in the family IT business. Earning a decent wage wasn’t enough for me though. I wanted to be rich! Being the know-it-all that I was, I decided to import a Mazda RX7 Batmobile. I was going to sell it for twice what I bought it for and everything was going to come up Milhouse.
In the end, I crashed it and destroyed the radiator the first week I owned it. Then the engine blew and I ended up selling it for $14k less than what it cost me to import. I was left with a large personal loan on a hefty 16% interest rate, and again, nothing to show for it.
3. Pay off the highest interest rate debt first
Somewhere in that period, I was given a Robert Kiyosaki book to read: “Cashflow Quadrant”. It’s by no means the best financial book I have ever read but at the time, it was a game-changer. I realised I had been going about things all wrong and I needed to get rid of any bad debt as quickly as possible. Starting with credit cards, personal loans, police fines for driving on a restricted licence. You name it, I owed it.
4. Pay cash for anything that isn’t an appreciating asset
It’s a simple lesson but probably the most important one on this entire list. If you need to borrow money to buy something that isn’t a property or a business, then you probably can’t afford it and you probably shouldn’t buy it. Simple as that. It’s tempting to use credit to buy the things you want now, especially when you are young. If only I could speak to that 18-year-old me I would tell him, “Material goods won’t make you happy!”.
5. Pay yourself first
Speaking of material goods. This world is designed to part you from your hard-earned money. Everywhere you look is another spending option. The only way to stop living paycheque to paycheque is to put money aside as soon as you get paid. If I was starting again I would enrol with Sharesies, Smartshares, Investnow or a similar provider and put 20% of my income into index funds right from day dot.
Weirdly, paying off the personal loan I took out to buy the RX7 taught me how to save. The key is not taking on more debt once you pay off the first lot though. Start a savings plan with the same regular amount you were using to make debt payments instead.
6. Get a job that means you have to work on Sundays
After I paid off the Batmobile, I decided I wasn’t done with taking risks by any means, so I got into real estate. I was 22 years old, full of energy and ready to do whatever it took to succeed.
Throughout the next decade, I worked nearly every Sunday running open homes and meeting homeowners. While I missed out on some fun nights out, which is upsetting, I also saved a heck of a lot of money, avoided a few late-night encounters which could have ended badly and generally kept myself out of trouble (for the most part). I doubt that would have happened if I didn’t have to put on a suit every Sunday morning.
7. Have an abundance mentality
Opportunity is out there if you smile, treat people nicely, take interest in others and are prepared to work hard. No one wants to spend time with a sad-sack. Having a positive, optimistic attitude is the key to nearly everything in life in my opinion.
8. The first home you buy doesn’t have to be the one you live in
I feel for young couples trying to get on the property ladder in Wellington and Auckland. If you want to take advantage of the welcome home loan, or KiwiSaver Homestart grant, then you need to buy a home under $500k in Wellington, or under $600k in Auckland. At last check (8th April 2018), there were only 55 properties that come up in Wellington City in a search for non-apartments under $500k. Even then, many of those will actually sell for more than $500k once offers actually start coming in.
When I bought my first home in 2009 we snagged a 3 bedroom character home in central Johnsonville for $416k with a 5% deposit ($20k). I realise now how ridiculously lucky I am to have been in that position.
If I was starting again today I would look a little further out and buy an investment property instead of a home to live in. You would miss out on the first home buyer grant ($5k each on existing homes) but you are taking on self-servicing debt rather than a personal mortgage and if you buy the right property, you will maintain the freedom to travel, move to different jobs or take time off to study. Areas I would consider include: Palmerston North, Whangarei, Dunedin, Invercargill, Whanganui where you can find solid, standalone homes for $200 – 400k that achieve 5-8% yields.
9. Be wary of insurance
A friend of mine recently described ‘being wealthy’ as:
“Getting to the point where you can ‘self-insure’.”
I love that. I know insurance can be a lifesaver but I also believe many of us are way over-insured. Go up the sky tower in Auckland, look out on the City below and tell me who owns the naming rights to nearly every skyscraper you can see? That’s right, insurance companies.
Our family no longer owns any car that requires more than 3rd party insurance. Instead of paying for health insurance we put the money into a smartshares regular savings plan. For any kind of insurance we do have (house, contents, car, business), we go for the highest excess we can get away with to minimise the premiums.
I’m not saying this strategy is for everyone and it may come back to bite us, but I sleep better at night not having a massive insurance bill to pay each month.
Being a child of 1984 I was heavily influenced by the words of the great Chris Rock on insurance.
10. Wealth is not how much money you have.
It is how many weeks you could survive without a job. If you stopped working tomorrow, how many weeks could you survive with just what you have saved up right now? When calculating this you could also include money you might gain by selling possessions you don’t need. How many weeks do you think it would be? 1 week? 1 month? 6 months? True wealth is having enough passive income so that you never have to work another day in your life if you don’t want to.
What is your magic number? Could you live happily on $50k per year? For some people that magic number will be higher than for others. For some it might be as low as $25k a year, for others, it might be $150k per year. What’s your number? Once you figure this out you can decide what you are aiming for. Need $50k? $500k invested at a 10% return will give you that. $1million giving a 5% return (eg 2 Wellington properties rented out) would provide you with the same amount. That might seem crazy to some people but it gets easier once you make a start. The key part is figuring out what your magic number is.
11. Donate more
Last but by no means least, I would tell my younger self to start donating earlier. Pay yourself first and donate first, before you spend money on anything else. Even if you aren’t earning a huge amount, it’s a good habit to build. Chasing the Capitalism dream can leave you with an empty feeling after a while but doing some good with your money can help you find meaning in an otherwise confusing world.
The key with donating I have found is to make sure your dollar is actually getting to the people that need it. Don’t fall into the trap of giving to those people who knock on your door at 7pm at night wearing a sash of whichever organisation is paying them a commission that day. Most of the money doesn’t go to the actual charities in those cases.
Instead, I use:
One Percent Collective (for local causes)
Givewell (for international causes) and
Coolearth (for the environment) when deciding where to donate.
And make no mistake, they need your money. If in doubt, here is an eye-opening calculator which shows you how much good your money can do.