Apparently, I've recently been made aware, a question people seem to ask about me is how I afford my lifestyle.
I've never really considered that people would wonder this, because I don't consider my lifestyle particularly extravagant. In saying that, I live very comfortably, but there are sacrifices in some areas (which are easy to forget when looking at the areas where I don't necessarily sacrifice much, like travel...)
I studied commerce for a while (a while being 4 years worth of papers done in 3 years), and it was a natural strength of mine, which is probably how I ended up in the degree when I wasn't too sure what I was doing at university initially (I gravitate towards things I find naturally easy, and away from things I struggle with). Accounting, management, commercial law all came naturally to me. Finance and economics was okay, but I don't like getting too bogged down in the nitty gritty detail of it all. Luckily, the great news with financial decisions and being financially literate and responsible is that you don't NEED all those nitty gritty details. What you do need is a) a basic understanding of math (everyone bags on math at school, but I still maintain it's a vital subject for life success) and b) a conscious (and somewhat subconscious) awareness of and commitment to giving a damn about your finances.
I'm going to break this down into a part 1 & 2 (honestly who knows how many parts there will end up being) because there's so much to cover. Lets get stuck in
You DON'T have to be a crazy budgeter or even stick to a weekly budget (I don't - lol). What you do need is an idea of all your upcoming costs each year. I make a spreadsheet that I look at maybe once a month or so - I look at it more during times of big money shifts e.g. planning a trip. I make a spreadsheet and on it I put all my expected incoming money (salaries, wages, dividends, gifts, whatever) and separately, all my expected large outgoings (yearly rent, insurances, upcoming credit card payments, travel, etc). This is a super simple snapshot of your situation. The difference between your anticipated incomings and outgoings long term lets you see how much of a gap there is between the two - obviously you want more incoming than outgoing. I separately estimate my weekly living costs and remove this from the picture (I have one bank account for my week to week living, which my stable pay goes into, which I can then ignore in my longer term budgeting). Then, to get into more detail, I start putting dates next to the larger yearly incomings and outgoings. This lets me see when I'm going to need my money. If there's a gap between it coming in and when it's going out - I can invest it in the meantime. Why have it sitting in my account for 3 months? It also comes into play for deciding how to pay for each thing, which will be touched on later down...
You need to know what you're signing up for with your bank accounts, your retirement scheme (kiwisaver in NZ), your credit cards, your loans, all of it. You do NOT need a degree to do this, but you do need some basic math skills and a few helpful tips.
- ALWAYS LOOK AT THE FEES. Financial product helpfulness is basically always determined by the fees. It may look good on paper but be crap behind the scenes by the time all the admin fees get added on. READ the fineprint for this exact reason.
- Choose bank accounts with low fees. Most day to day accounts pay rubbish interest rates so aren't a good way to earn any money - they'll barely cover inflation (this is the amount the cost of things rise each year - so if you gain 1% on your money but everything costs 1% more - you've earnt nothing). Hence, focus on low fees and don't worry about interest on your transaction accounts. Even saving accounts often have rubbish interest but if you're not ready for a term deposit (see below) you could look for a savings account that gives you a good interest rate (often along with the proviso that you don't withdraw any money). If you need to move money in and out of savings (I do - I can't leave money in savings because I shift money around A LOT) then don't bother worrying about a decent savings account and stick with transaction accounts with low/no fees.
- Interest rates are quoted per annum. E.g. 3% p.a. This means in a full 12 months, you get (or pay) 3%. So monthly, divide it by 12. 3% divided by 12 is 0.25% aka peanuts. Inflation is usually around 1.5% in NZ (varies by country - look yours up). As above, this means any quoted interest you will receive on something must be ABOVE this or you're just treading water. When I look at an investment, because I move money around so much, I look at aiming to get 10% per year return, which is 0.833% a month. This is pretty optimistic - but hey, aim high! 7% p.a. is considered decent. (An example - if I put $1000 into some shares, and at 1 month I want the money back, I'd want to sell for $1000*1.00833 = $1008.33). Don't fall into the trap of applying a "per annum" interest rate to 1 month - you must divide by 12, then multiply by the number of months!
- Lets go back to inflation, because it's important. Inflation is the reason that a dollar today is worth less than a dollar 10 years ago. Think of how candy was so cheap when you were a kid, and the same candy now costs "more". This is inflation. A dollar today is worth MORE than a dollar in the future. Knowing your countries average inflation is vital for making financial decisions whereever you are (wikipedia has a list of inflation rates). This is why interest free offers can be great - you're "beating" inflation. I'd rather pay $5000 for a car in a year (but have it now) than pay $5000 for it now - because $5000 will be less money in a years time! (To be precise, at 1.5% inflation, that same car would cost you $5000*1.015 = $5075 in a years time... (it probably won't because it will age and wear, but imagine an equivalent car in the same state etc ok), but you see what I mean, the relative value of the dollar is constantly decreasing over time (in most countries!! Check yours - sometimes it can go in the other direction in less stable economies!)).
- Compounding interest means earning interest on your interest. I.e. leave the interest in the investment. So say at 1 month of 10% return, my $1000 is now $1008.33 and I leave the interest in the investment to compound (this is more common in bank investments). If the next month is also a 10% return, I now get $1008.33 * 1.00833 = $1016.73. I earnt $8.39 in interest instead of $8.33, because my interest was compounding.
- Credit cards are not always bad news, but you need the right credit card for the right situation. If you want to earn airpoints by paying with your credit card but then paying it off every month to avoid interest, think about how much you'll spend on the card per year (e.g. all your usual expenses), and look at the earning rates (different cards earn different numbers of points per $ spent). See which card will earn you the most points but with the most reasonable yearly fees. Tip: The platinum and high earning cards have huge admin fees which are usually only worth it for BIG spenders. You can work out how much the airpoints you would earn are worth, to decide if the admin fee is worth it. (E.g. spend $20,000 on the card and earn $500 equivalent in airpoints, admin fees of $300 = worth it). If you actually need money for large purchases every now and then that you can't afford, and day to day transactions aren't too worrisome, then getting a credit card with an interest free period deal may be the better option. To calculate if it's worth it, we need to consider inflation again and compare that to the fees. E.g. $10,000 on an interest free-deal credit card for 6 months (fully interest free) at 1.5% inflation per year is "saving" you $75 (1.5% divided by 2, as its half a year, times the amount... 0.015/2 * 10000 = 75). If the annual fees are less than that, then boom, saving money. If you need both these scenarios, i.e. day to day airpoints accumulation, plus big purchases that you can't always afford (e.g. travel, a car, university fees....) then you could have both credit cards. Just make sure you're actually saving money by doing this (with the example calculations above showing you how to compare the fees to the savings). I NEVER pay interest on my credit cards, EVER. Because they have some of the worst interest rates around for lending (17% up to 30% or beyond...). I always pay everything off before interest starts, no exceptions.
- Make sure you understand your fees to avoid unnecessary expense. E.g. overseas withdrawal fees, cash advance fees (tip: basically NEVER withdraw cash off a credit card, it's hella expensive, don't do it), default interest rate fees.
After the basics (fees, fees, fees), I think the easiest way to break this up is into getting money, then spending money. I'll start with gettin' money and leave spendin' money for part 2.
1. Know your worth
When you take on a job, think about what you're offering the company. What do you have that the other candidates don't? How much are you worth to them, and why should they pay you a certain amount? This may not come naturally to someone who isn't business minded, because you're not use to "thinking like a business", but you can consciously ask yourself these things. Try to imagine you're the company - what would happen if they lost you? How replaceable are you? What's the advantage in having you over someone else with similar education or experience? Think of things like communication skills, implicit knowledge, customer rapport, long term relationships etc. The value in considering this is that you can decide whether the employment is meeting your needs (financially) or whether you'd get paid more for the value you can offer elsewhere. If you truly think you are worth more - raise this with your manager or employer. Have an objective, calm conversation about it when appropriate. If they don't agree, listen to their reasons why and see if you can add more value to your work to be able to meet the standards in the areas they outline to you. If it's clear there's no further opportunity to be paid any more, consider whether you're willing to stay for the pay you're being offered. An example of this is for any employment law/management consulting work I do, or even any social media or writing work I do. I don't quote people based purely on time alone. Sure, it may take me 2 hours, but if I'm offering them/their business $500 in estimated value, why would I just quote them 2 hours work at a set rate e.g. 2*$50? The hourly rate model does not work in all scenarios. If the value you have can be quantified in another way - use it. There's no law that says your services NEED to be paid for hourly in a consulting space. In an hourly or salary setting, don't be afraid to set your salary expectations where you want them to be. It depends on your skill and qualification mix and private v public sector work, but be confident in your value when you know you have something to offer them, and ask for what you think you're worth. If you're unsure - ask around what similar roles are earning or research online. Confidence is necessary in these talks. If you don't have it yet, try faking it til you make it. But make sure you're correct in your confidence - no one likes an entitled asshole who expects a salary raise just for existing - you have to know what you're actually offering and have the performance to back it up.
2. Career trajectory
One thing young people probably don't do enough of is thinking long term. I know it can be hard to imagine how much you might earn in the future. If you didn't go to university, you're likely earning more now in your early twenties (if you entered the workforce straight away) but your salary is more likely to peak earlier and flatten out at a lower level. If you went to university, you'll be starting out in your early twenties at a lower point, with debt, but your salary will peak later and will peak higher (usually). Most people earn their highest salaries in their 40s. And sometimes into their 50s. This will vary by life situation and industry. Thinking about this now allows you to make better decisions about how much debt you should tolerate. If "future you" cannot handle the debt you take on now, you'll be in trouble. Student debt is basically always a good idea (in my opinion) - even if you don't use your degree specifically (e.g. a math degree) having a degree increases your earning potential. But, ideally, know why you need it and how it's going to help you. University degrees give you many skills that increase your earning potential beyond the subject you actually study - time management, writing skills, communication skills, teamwork skills. So if you want to study something but don't know what job you want, it's not necessarily reason to panic. Just take note of how university helps you develop and think about how you'll sell those skills later on. (Side note: Use specific examples in your CV/cover letter - don't just say "I have good time management" - use an example from university or elsewhere to PROVE you have good time management). If university isn't for you, this doesn't mean you're limited. A driven person who doesn't go to university will likely find their own earning opportunities - it's the drive that will make the difference there. The other thing about career trajectories is that it's becoming more and more normal for people to make their money from multiple sources. Gone are the days of 1 job we commit ourselves entirely to. People have side hustles, property, part time extra work, etc. This has become the new normal. I, myself, have had up to 4 "jobs" at some points throughout my full-time studies. A year ago, while a full time medical student at Waikato Hospital, I was 1) A regional manager for a group of 18 tutors - hiring, training, performance management, etc 2) Accounting/HR for an engineering firm, 3) Accounts clerking for an IT company, 4) Employment law/HR consulting for several local businesses. It sounds like a lot, but the nature of these "side hustles" is that they slowly build up over time and they ebb and flow in workload - some weeks you might do no work at all for some of your "jobs". Open yourself up to extra work and opportunities. If you enjoy it, it won't feel burdensome. If it stresses you out or you hate it, reconsider.
3. Put your money to work
Money should never be sitting around in your accounts idle, above what you need to last you ~1 month and to meet any upcoming payments due. Investing doesn't mean locking money away, and you don't need a lot of money to invest. I utilise term deposits (can be set up for 3-12 months with most banks) when I don't need the money back anytime soon (expect approximately 3-4% p.a. return currently on a short term term deposit in NZ). This is low risk - big banks do these all the time and they hardly ever fall over (like, have they ever?) - probably the least risky kind of investing you could ever do. You can't usually get your money back earlier without losing the interest or without evidence of hardship - so make sure the term you sign up to works for your timeline. There are other ways of putting your money to work that I'll leave for the "spending money" section because they fall in with how I plan my own spending.
Well, there we have part 1. I hope it's given you something to mull over, some thoughts to chew about where you're currently at with your financial literacy and your money that's coming in. Part 2 shouldn't be too far away!