A millennial’s guide to financial freedom

OPINION:  As millennials, there’s often a gap between what we think will make us financially free versus what actually does. My story is testament to that.

By 23, I was working full-time running a business, studying full-time at university, and proudly took out a loan for my first home in a bid to grow my wealth and ultimately gain financial freedom. 

That’s what you are supposed to do, isn’t it?  Get a degree, get a whopping great mortgage and work 60+ hours per week to get ahead, right?  Well, sort of.

At age 35, I have a somewhat different definition of what it means to be financially free. As a financial adviser who originally went back to study to improve my financial literacy, I can see now that I spent most of my twenties too busy working instead of spending enough time looking after my money. My mortgage was poorly structured, my KiwiSaver was obsolete, my insurances minimal, and this had a severe knock-on effect on the capital I had available to grow. 

The biggest wake-up for our generation is to recognize there are no guarantees for a comfortable retirement.

And this actually is a blessing: we need to take personal responsibility for our financial wellbeing. We shouldn’t be passing these decisions off to governments or parents who have their own retirements to take care of. We need to be squarely in the driver’s seat.

Research shows millennials are putting off prioritising our financial wellbeing as a generation, with often only KiwiSaver in place to fund our future retirement lifestyle. According to a recently released Financial Services Council report on young New Zealanders, we are yearning for financial freedom but uncertain how to achieve it.

There are quite a few opportunities for millennials who want to take steps to create a brighter financial future. We are the highest earning and most educated generation yet; it’s time to use this to our advantage. Here are eight ways millennials can consider improving their finances.

Home loans – don’t overextend yourself

If home ownership is important to you, a common mistake people make is wanting to buy too big or too flash a home and, essentially, investing in your lifestyle. When you over-capitalise on your home, you’re in effect increasing your living expenses – and your home can then be seen as a liability rather than an asset.  What may seem at the time small differences in lending can make a considerable difference to the number of years we’re paying a mortgage. Housing is often seen as a magic bullet to wealth, but it’s important to live within your means and not spend the next 30 years paying off the bank.   

Consider using an expert home loan adviser to assist with structuring your home mortgage package so that you’ll be in a better position to pay the mortgage off quicker and start investing to become financially free.

University - consider the full costs

When considering tertiary education, investigate the value of the degree or diploma you’re planning to pay for in the marketplace. This is hard considering the growing disruption by technology to long-standing industries. What is commonplace now may not be so in five years’ time.

Keep in mind that student debt can be debilitating and so it’s vital to price the cost of your qualification against the income you’re likely to earn and choose courses accordingly. For example, studying arts because you enjoy it when you end up becoming a financial adviser makes very little financial sense. If you are unsure the career path you want to take, consider taking a step back, taking a breath, joining the workforce and gaining valuable work experience. Tertiary education will always be there.

Don’t be swayed by Instagram’s “fake news”

How many of us have friends flaunting their lifestyle on Facebook, SnapChat or Instagram?  New cars, big OEs, flashy homes – it’s a party lifestyle and it all seems fabulous, but where’s the money coming from? A lot of the time, credit. 

An Instagram lifestyle can not only be addictive but extremely costly. Don’t mortgage your future for instant gratification. Sure, take a trip, upgrade the car, but do so within your means rather than relying on credit. The debt remains well after the thrill of the purchase or experience has long passed and that Moroccan sunset is all but a distant memory.

Beware of fads

Bitcoin, Zipcoin, Kanyecoin - we have all heard about the digital currency/asset craze that swept the globe. Remember, all that glitters isn’t gold and if it’s too good to be true, it usually is. The higher the return promised, the higher the risk - there’s no free lunch and the next big thing can quickly turn into the next big bust! In my experience, appropriate investments are often considered to be boring.

Seek advice from professionals

Although our friends and family are well intended, are they really best placed to give you sound advice?  Sure, we all have experiences and opinions around money, but would you go to your mechanic to get a flu jab? Do online forums or Reddit articles offer you the most sound and well-considered financial advice? Probably not – so be discerning when it comes to accepting unreliable sources of information. Talk to financial industry professionals such as financial advisers and make sure to ask the tough questions.

Take a long-term view

We look at university education as a three to seven-year plan (depending on the degree), so why is it often so difficult to transpose that to our finances? Have a financial plan that’s realistic and flexible, and stick to it. Just remember, slow and steady wins the race. Whether that is a university degree, a learned trade, your first home or your eventual retirement, anything worthwhile in life doesn’t come without effort. 

A pay-yourself-first-savings technique is a vital step to financial independence. Rearrange your budgeting around this. It’s cliché, but do you really need that purchased coffee once a day or a $20 avocado on toast? Probably not. Make the retailer really earn your dollar.

Maximise your KiwiSaver

Research shows millennials do see the benefit of saving using a KiwiSaver facility – but are we saving enough through our selected fund? To get the most benefit from KiwiSaver, opt (if budget allows) for the maximum saving of eight per cent – and encourage your employer to match it as a retention tool or performance incentive. While you may have to give up instant gratification in the short-term you will benefit in the long run.

It’s important to match your goals, risk tolerance and investment time frame with an appropriate fund. KiwiSaver is not one size fits all, it’s seasoned to taste. Being in the correct fund can be the difference between shaving years off your mortgage or adding years to your retirement.

Find ways to lower your risks

New Zealand is the third most uninsured country in the OECD.* We’re more likely to insure our car and household items than we are our income. It sucks to talk about insurance, but it is vital to protect our lifestyle and loved ones.

Insurance is the glue that holds together any well-formed financial plan.

It’s a good idea to get insurance as early as possible. The older you get, the greater your propensity for contracting health conditions that may increase the cost of cover. 

Article by Matt Wenborn - Meet Matt

Matt Wenborn is a Lifetime financial adviser based in Christchurch. He is passionate about helping his clients work towards achieving the future they desire.

* 2016 New Zealand Institute of Economic Research (NZIER) study