Published in ifa 24 April 2017.
Starting early is a well-known truism when it comes to managing money, and one of the best strategies for financial planning.
While it’s never too late, it’s true that the earlier your start, the more opportunity there is to maximise a person's money.
Being part of the financial advice industry for over 15 years myself, I believe there is an obligation to share our knowledge to help others.
There is an opportunity for advisers to teach good money habits with their children, and also through intergenerational advice, by helping the children of your clients.
Here are some tips for helping young people and the next generation to get started in planning their financial future.
My five top tips for helping young people start early and start well:
- Spend less than you earn;
- Practice delayed gratification;
- Learn the magic of compound interest;
- Pay yourself first; and
- Know that credit is essentially buying money.
1. Spend less than you earn
This one sounds like a no-brainer. Say you earn $200, this means and you should spend less than $200. While it’s a simple concept, the reality is often quite different.
Clearly not everyone manages to live within their means. This is perhaps one reason why credit cards are so popular and why it’s common for people to spend more than they earn.
In fact, Australia has a combined credit card debt of $32 billion, which shows a willingness to put things on plastic, than to save for it ourselves.
I’m not suggesting don’t use credit cards – if you must use a credit card you should only use it for short-term borrowing.
If you are using it for long-term borrowing, you will always be playing catch up and it will be much harder to get ahead.
Try to be mindful of all your expenses – including mobile phones, transport and entertainment. Any of these can get out of hand if you’re not careful.
2. Delayed gratification
Do you remember the excitement you felt as a child when you had Christmas to look forward to the bike you wanted, or the dollhouse, or the iPad? Basically, delayed gratification works the same way. If you can’t afford it today – don’t buy it today.
While it seems simple logic, not everyone shares this money habit. While credit has a long history in our current economy, it was only more recently that credit cards have become more popular. If you get into the mindset that you can wait until you have the money then you can start enjoying the idea of whatever it is you are saving for – knowing that once you’ve got it, it’s paid for and you will be able to enjoy it guilt free, knowing it’s completely yours and there will be no debt accruing.
3. The magic of compound interest
The best thing about investing is the idea that one day your money starts working on its own and you just sit back and reap the rewards.
When you start saving you have the opportunity to make your money work for you. If you put your money into a bank account where you are earning interest your money will start to grow on its own. And once your money has been earning interest for a year – if you keep the money saved it will start to earn interest on the interest and will grow exponentially.
4. Pay yourself first
It’s important to always put something you earn today away for tomorrow. If you spend all you earn each week or month, then you are not progressing towards having your money work for you instead of the other way around.
If you intend to put money aside from each pay, but are waiting to see what is left at the end of your pay cycle you are likely to have nothing left. Most people tend to live up to their means and spend nearly most, if not all of what they earn.
If you pay yourself first you guarantee that the money you plan to set aside will actually be set aside. Pay yourself first and if possible, make the money transfer automatically from your pay into a designated savings account of your choice.
5. Credit is essentially buying money
If you borrow money, whether it is for a home, property, car or anything else you buy on credit – you are using money you don’t have and are being charged for the privilege.
There is a cost to “buying” the money and you should consider whether buying something on credit is worth the extra money you will end up paying for it.
If you are buying a car that costs $20,000 and the interest rate on that purchase is $2,000, at the end of the first year you will owe $22,000 minus any payments you have made.
Each year you will be paying the amount you still owe plus interest on that amount. You should calculate what you will owe each year and make sure that you think that the car is worth not only the kind of money you are paying upfront but also the cost of the money you have borrowed.