Blog

Financial Mistakes to Avoid in Your Twenties and Thirties

Finance

|

3.2.21 |

Joseph Darby

Six financial mistakes to avoid in your twenties and thirties

Your twenties and thirties are transformative years filled with opportunities and challenges. Managing your finances might be one of the most significant challenges you'll face during this time.

Given our national inclination toward a do-it-yourself approach, young New Zealanders often learn through trial and error, so let’s explore ways you can avoid common financial pitfalls during these critical years.

Or, if you don’t fit into this age bracket, see the corresponding article: Financial mistakes to avoid in your forties, fifties, and sixties

1. Careless Spending Habits

In our culture, there seems to be an increasing emphasis on living in the present. This might be driven by a desire to keep up with the (sometimes carefully curated) lifestyles of peers, colleagues, and family members on social media. If you spend too long on social media, it might seem everyone is travelling, fine dining, spending up on luxury goods, and so forth. This imagery has been called having an Instagram-worthy life, which might also mean having a picture-perfect family. As a result of this, and other external forces, you might find yourself putting off planning and investing in your future and instead steadily slip into lifestyle creep. Millennials spend more on restaurants and clothes than previous generations. The repercussions of these choices will become apparent much later in life, as the negative impacts accumulate over time just like compound interest.

Be Realistic

Nobody wants to be told to “set up a budget”, so instead maybe it’s best to think about paying yourself first. This might be thought of as paying your future self-first by putting funds towards the things in life that really motivate you, perhaps owning your own home or launching your own business. Maybe even an early retirement.

Utilise online budgeting tools or apps to simplify the process. These tools can help you track your spending and stay within your limits, so your funds can be dedicated to what you are really aiming for. Adjust your budget regularly as your income and expenses evolve.

Because social media is such an integral part of our everyday lives, social pressures are unlikely to go away entirely. But it’s how we deal with it in a healthy and positive way that matters. Remember a lot of what goes onto social media profiles is just a curated highlight reel. It's essential to recognise that people often share the best parts of their lives on social media, creating an unrealistic portrayal. To foster a healthier relationship with social media, consider moderating your usage by setting specific time limits or designated screen-free periods. Additionally, cultivate a mindset that separates online content from real-life experiences. Focus on your own journey and accomplishments, rather than comparing yourself to others. Engaging in activities that promote well-being, such as exercising, reading, or spending quality time with loved ones, can provide a more balanced perspective. Remember, the key is not to eliminate social media entirely, but rather to use it consciously and positively in a way that enhances, rather than diminishes, your overall well-being.

There are plenty of practical ways to save too.

‍Learn more:

2. Failure to Launch

Young New Zealanders are staying in the parental home for increasingly longer periods of time, or moving back home again if they fall on hard times. This is not an issue when the opportunity this presents is recognised, and diligence with cashflow is in place. Where this becomes a problem is where it delays the requirement for monetary responsibility. While living with parents helps keep expenses low, there can be a tendency to spend any surplus cash that results, rather than saving or investing it. This is essentially what we mean by ‘failure to launch’. Without learning monetary responsibility early on, attitudes towards money don’t mature and opportunities are missed.

Be a Grown Up

Spread your wings and leave the nest, and you’ll be better off for it. This isn’t just about your finances either. Psychologists have identified the positive impacts on mental health of moving away from home.

3. Missing the Opportunity to Build Wealth

Failing to set financial goals can leave you wandering financially. To avoid this pitfall, take time to define clear and achievable objectives. Whether it's saving for retirement, buying a home, or starting a business, having goals gives your financial journey direction.

A great way to start investing is with KiwiSaver. Your entry age, choice of KiwiSaver provider, contribution rate, and fund type can all significantly affect your financial well-being. So, it's best to get started early. Let's illustrate this with an example:

Imagine two individuals, one who starts contributing to KiwiSaver at 20 years old and the other who waits until age 30 to start. They both earn a salary of $55,000 with 2% annual raises. They each contribute 3% of their salary, matched by 3% from their employer, and receive the annual tax credit. The potential balances at age 65 for these two individuals can vary significantly, as shown below. It also highlights the differences between three typical fund choices:

Age 20 start, aggressive, $890,000
Age 20 start, growth, $681,000
Age 20 start, balanced, $528,000
Age 30 start, aggressive, $465,000
Age 30 start, growth, $380,000
Age 30 start, balanced, $313,000

Rates of return used to determine these figures are in accordance with mandated projections for KiwiSaver Schemes annual member statements.

The choice of fund and the timing of your KiwiSaver contributions can significantly impact your retirement savings. Therefore, making informed decisions and considering these factors carefully is essential to secure a better financial future.

Invest Early to Maximise Returns

The longer your money has to grow, the bigger your wealth can become. As you can see from the figures above, you can take advantage of compound interest by starting to save and invest early, then also do even better through wise fund choice. Consider consulting a financial adviser to ensure your investment choices and overall strategy aligns with your goals. You can also:

Set clear and achievable financial goals.
Explore different investment options like stocks, managed funds, or real estate.
Diversify your investments to manage risk and increase wealth potential.
Regularly review and adjust your investment strategy based on your financial goals, situation, and risk tolerance.

4. Avoid Getting Stuck in a Debt Trap

Bad debt is the opposite of an investment. With bad debt, you lose money while putting money into someone else’s back pocket. To avoid getting stuck with bad debts, use credit cards and buy-now-pay-later (“BNPL”) responsibly and avoid unnecessary loans, especially for non-essential purchases.

Although a shiny car might seem like an investment, it’s likely a depreciating asset, losing value over time. Instead, invest in assets that grow over time, such as stocks (shares) or real estate. These investments can grow your wealth and set you up for financial success.

Only Take On Debt When It Offers a Return

If you've already taken on bad debts, create and implement a debt reduction plan. If you have a home loan, you might be able to borrow money against your house to sooner pay off high interest debt or transfer your credit card debt to another bank to get a lower interest rate. Consider debt consolidation to simplify payments and potentially reduce interest rates.

Focus on building an emergency fund, long-term savings, and investments.

Invest in assets that grow over time, such as stocks or real estate, instead of accumulating debt for assets that decrease in value.

5. Racking Up Student Debt

In New Zealand, despite taxpayer subsidies for universities, higher education can still come with a hefty price tag for the individual student. This is where student loans come in. Student loans help cover the costs of course-related expenses and living costs, making education more accessible. However, a common pitfall is borrowing as much from Studylink as possible.

You might wonder, "What's the harm in claiming all these costs if they are covered by the loan and repaid gradually through salary deductions?" The answer lies in the long-term financial burden it can create. Let's break it down with an example.

Consider a typical New Zealand three-year Bachelor of Commerce. The course fees alone total around $7,105 per year, resulting in a minimum of $21,315 for three years. Now, add course-related costs, which are $1,000 per year, increasing the debt to $24,315. If you decide to claim living costs and receive the current maximum of $302 per week (let's assume 26 weeks of payment per year), this adds an extra $7,852 annually. Consequently, your total three-year debt skyrockets to $47,871!

That's more than double the debt you'd carry if your loan only covered course fees. While it's important to note that New Zealand student loans are interest-free, this is still a substantial amount of debt that you'll spend years repaying.

Treat A Student Loan Like an Investment

A student loan is a debt like any other. If you had $40,000 in your pocket, you wouldn’t buy shares in a company that wasn’t going to make a return. The key takeaway is to think about what you borrow when you study. Only claim the extras when they are an absolute necessity, as it can significantly impact your financial well-being in the long run. Planning your student loan wisely today can pave the way for a debt-free future.

Seek out scholarships and grants to help cover your education costs. These are often offered based on academic achievements, extracurricular involvement, or other criteria. Applying for these financial aids can significantly reduce the amount you need to borrow.
Work part-time while studying. Earning income during your education can help cover living expenses and reduce the need for loans. Look for flexible job opportunities that won't overwhelm your study schedule.
If you’re not sure what you want to study or don’t know what career you’re going into, don’t take on a massive student loan.

Consider University Alternatives

The business model of universities is being disrupted. The maturing of the internet means universities are no longer the sole hubs of knowledge they once were. Even worse, it sometimes seems much of the discourse at universities has strayed from areas with practical benefits to society including the hard sciences, medicine, law, and economics or business to instead centre upon polarising “social sciences” and political correctness.

For university graduates, the possession of a degree is no longer a guarantee of a stable career. It is little wonder the total university enrolments in New Zealand have been falling for several years, despite taxpayer-funded incentives. The world’s wealthiest man, Elon Musk, describes the overall situation as:

“You don’t need college [university] to learn stuff. Everything is available basically for free. You can learn anything you want for free. It is not a question of learning. I think colleges are basically for fun and to prove you can do your chores. But they’re not for learning."

Except for a few select areas such as engineering or medicine, you don’t need a formal education. Instead, to develop valuable skills and knowledge for the rest of your life you can; learn online, listen to podcasts, read, take micro courses, learn on the job, and so on. The world is changing so quickly, the reality is you’ll be best to accept continual learning and development as a routine part of life.

6. Avoid Starting a Family Before Building a Financial Foundation

If you want to start a family, the best thing you can do is start with a strong foundation. Splurging on a lavish wedding can strain your finances, especially when you're already dealing with student loans or other debt.

Focus on The Big Picture

Avoid the pressure to create a picture-perfect wedding by focusing on what truly matters.

Instead of breaking the bank for your big day, consider budget-friendly wedding alternatives, like a small, intimate celebration, a destination wedding, or a backyard event. Prioritise creating meaningful memories over extravagant expenses.

Discuss financial goals openly with your partner. Understand each other's spending habits, savings priorities, and long-term objectives. Collaborate on creating a financial plan that aligns with your shared vision.

When starting a family, it's crucial to plan for maternity and paternity leave, childcare expenses, and education costs. Allocate a portion of your budget to cover these future expenses and consider starting a college savings fund for your child's education.

The Bottomline: Set Yourself Up For Life

In your twenties and thirties, the choices you make will probably decide your future, including what form your finances will take. You can lay a strong financial foundation for a good life by avoiding the common financial pitfalls listed above and instead adopt prudent financial practices.

Whether you want to build wealth, start a family, or something else, your financial journey begins now.

If you’d like assistance with areas such as what to do when you’ve mastered the areas above, or any other financial matters, then it’d be our pleasure to assist. Get in touch today.