Building Successful Financial Habits: Mastering Money Basics for a Bright Future

At 5 pm every second Tuesday, the alarm in my mind never fails to go off to remind me that it is payday. I’m sure you’ll agree that there are few things better than the feeling of seeing fresh money enter your bank account (I will admit that going toe-to-toe with The Chaser in front of the family is a close second). When payday swings around, I often find that there are two mindsets people have:

• Group 1: “I can’t wait to spend this.”
• Group 2: “I can’t wait to save this.”

Personally, I’m in the Group 2 camp. I have always been someone that lives on the frugal side; being intentional with how I spend my money and preferring to save/invest rather than willingly spend it. My money personality could be described as an Enterpriser[1]. Group 1 on the other hand is that friend that constantly has packages delivered to the door from Shein or Kmart because “it was on sale, and I had to buy it”. For them, worrying about bills is a future-them problem, if their card doesn’t decline, life will go on. Their money personality could be described as the Contemporary[2].

There’s nothing inherently wrong with the Group 1 mindset, after all, money is made to be spent. The problem arises when you aren’t financially prepared for when an unexpected bill occurs e.g. major car repairs, an expensive specialist appointment, or worse; losing your income. Only 53% of Kiwis could access $5,000 within a week in a time of emergency, that’s dropped six percentage points from 2022’s results[3]. Knowing this, it’s unsurprising to see how easy it is to fall into a spiral of debt and financial anxiety.

Getting on top of your finances at an early stage is going to be the foundation to set you up for a rich life, having savings set aside is only one piece of the puzzle. The points below dive a little further into the essential money basics. I would recommend everyone consider these to help steer their financial journey in the right direction.

Build an Emergency Fund

What is an Emergency Fund?

Arguably, an emergency fund is the most important box to tick off before thinking about your spending and investing. An Emergency Fund is a lump sum of readily accessible cash set aside for the purpose of saving you when “sh*t hits the fan.” This is for when unplanned expenses or financial emergencies arise such as your car breaking down or unexpected travel costs due to a family emergency. Readily accessible means an on-call bank account rather than tied up in Term Deposits, Notice Saver accounts or as my friends would have it; sitting in the TAB account that they “know they could withdraw from if they needed to”.

Remember, the focus of this fund is not to earn a high return but provide you with the confidence that you can withdraw from it with minimal notice if required.

How much should you have saved up?

There is no perfect answer to this question, and it will vary from person-to-person depending on which amount in their bank account will help them sleep peacefully at night. My advice would be to start small by getting into the routine of setting money aside each payday before you do your day-to-day spending.

Working towards $1,000 is a fantastic first milestone, it’s a sign that you are disciplined enough to get into a habit. After this, building up at least 3-6 months’ worth of expenses will put you in good stead for the future. This means you’re covered for major bills as well as potential job/income loss with these funds allowing you to survive and figure out a plan over the next 6 months.

Pay Off Any Interest-bearing Debt

Short and simple. Pay off your debts that are costing you money. Buy Now Pay Later Schemes (BNPL), Credit Cards, and Personal Loans are a slippery slope. It is a good idea to cut these off before they impede your quality of life.

Two common debt repayment strategies are a Debt Snowball or a Debt Avalanche.

• Debt Snowball: Starting with the smallest debt, clearing it, then moving onto the next smallest etc.
• Debt Avalanche: Starting with the debt that costs you the most in interest, then move to the debt with the next highest rate.

For Example:
Assume you have:

• $15,000 Jetski loan at 9.95%
• $7,000 Credit Card owing at 19.95%
• Both repayments are $200 per month

At this current rate it would take you 6 years and 10 months to pay off these debts with a total interest paid of $10,420.

Now, let’s assume you have an extra $60 per month to spare:

Debt Snowball Method

Putting this extra $60 per month to chip away at the Jetski loan (because it has a lower interest rate) means you would be debt free in 5 years and 7 months. Saving an extra $1,665 in interest costs.

Debt Avalanche Method

Putting this extra $60 per month to chip away at the Credit Card (because it has the higher interest rate) would result in you being debt-free in 5 years and 6 months. Saving $2,485 in interest costs.

There is no right or wrong approach. Financial decisions can be based on more than just fact and logic, factoring in your attitude towards your money will align your actions to your own personal values too.

How Do I Save? Easy! Spend Less Than You Make

Track Your Money

Spend less than you make to save money sounds pretty synonymous with eat less than you burn to lose weight i.e. it can sound easier than it actually is. The only way to get on top of this is to face your financial beast head-on. Take time out to sit down and write out your fortnightly income, the fortnightly payments you have e.g. rent, power, Wi-Fi, groceries and determining what amount of money you should have left over. Compare this to the number you have left over each pay cycle and that discrepancy is what should be investigated to help reduce frivolous spending.

You want to see the specific hard numbers of spending and capacity to save. This gives you a snapshot of where you are right now and what levers you can pull to financially course-correct to get your money to start working in your favour.

There are several resources available to help you plan and manage your money:

• Sorted’s Budget Tool – It’s a simple and free tool that lets you enter your current financial situation and how much money you are putting towards your expenses.
• Mybudgetpal – Booster’s budgeting tool makes budgeting and saving goals a breeze. It’s perfect for Kiwis on the move, giving you clear and user-friendly information to assist you throughout your financial journey.

Insurance, Investing and Intentions

Insurance

Is this something you need? Well, you might not need it but you’re going to be in a much better position if something bad occurs and you have some cover in place. If you’re a young professional early into your career or even a seasoned veteran, it can be difficult to determine what insurance should be on your radar. The truth is, it isn’t a one-size fits all, what a 47yr old with a partner and 2 kids has in place isn’t exactly going to work for a single, no dependents 26yr old.

What does tend to suit many is protecting your greatest asset, your ability to earn an income. Without an income, all points before this fall apart; no savings, racking up debts and you’ll certainly fall into the 53% statistic.

• For example, a 25yr old earning $55,000p.a. between now and retirement, their earning potential is at least $2.2 million. Protecting this income in the event you cannot work due to injury or illness will at least ensure you have a steady stream of money during the worst of times.

Investing

$496 per week is the current rate of the New Zealand Super. This amount wouldn’t exactly provide you with the most lavish retirement if you ask me. Fortunately, in New Zealand we have KiwiSaver which is a locked-in compulsory savings scheme designed to set you up to have at least some level of extra money to have for retirement. There are three tips here I would say to anyone about their KiwiSaver:

1. Get that free $521 from the government each year. You put in $1042, they’ll put in a maximum of $521 ($0.50c for every $1 you put in), this one of the only ways you will ever be guaranteed a 50% return on your investment despite what your Facebook Ads might tell you.
2.  If you are someone that wants to make serious progress but struggles with stashing money away, increase your KiwiSaver contributions. It’s simple, straightforward and takes away the decision-making on your end on whether you should save or spend each week.
   • Assuming a $55,000 salary, moving from a 3% contribution rate to a 4% contribution rate reduces your fortnightly income by only $21.
3. Make sure your KiwiSaver fund suits your situation. This decision is more than just picking last year’s top-performing fund because there’s no guarantee it’ll remain the same in the future. What are some things you should look at?
   • Find your fund type e.g. Conservative, Balanced or Growth. This depends on how long you plan to invest and your attitude towards risk.
   • Compare the service/support: If I’m paying a provider to manage and invest my money, I want to know I’m compensated with a top-tier service.
   • Keep an eye on your fees: The more fees you pay, the less that will come back to you. It may be worthwhile paying more but be aware of the value you are getting out of it too.

If you feel overwhelmed or don’t even know where to begin, it may be a good idea to reach out to a Financial Adviser to seek advice regarding how best to make use of your KiwiSaver for your situation.

Intentions

To be honest, this should read goals but that wouldn’t work well for the alliteration. So, we’ve got the Emergency Fund set-up, we’ve cleared our debts, we’re saving regularly, now what? It’s probably time to focus on the bigger picture, as both money and time are finite resources. It’s crucial to take time to think about your goals, your dreams, and your values. Otherwise, you run the risk of spending your previous money and time in a manner that isn’t serving your best interests.

Some big picture questions to think about:

• If you didn’t have to work anymore, what would you do?
• It’s 10:00 AM on Wednesday morning. You’re 65 years old. What are you doing?
• Ideally, where would you like to be when you are 45? 55? 65? 75?
• What would you like your investments to achieve?
• If you’re sitting down in three years’ time from today, what would have happened to make you happy?
• What are your quality of life desires? (Houses, travel, boats, cars?)

At Lifetime, we aren’t here to give you an investment product and then wave you goodbye, we’re here for you throughout all life’s stages. That means we are here to talk to you about your goals, aspirations and have those audacious what-if conversations. We have access to world-class financial modelling software and maybe with the right plan we can be closer to achieving your goals than you may have initially thought possible.

Click here to book an obligation-free chat with one of our financial advisers.

Article by Stefan Offen

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular person's objectives, financial situation or needs. Any opinions contained in it are held by the author as at the report date and are subject to change without notice.

References:

[1] https://sorted.org.nz/tools/money-personality-quiz/the-enterpriser

[2] https://sorted.org.nz/tools/money-personality-quiz/the-contemporary

[3] https://blog.fsc.org.nz/cost-of-living-crisis-impacting-wellbeing