Learning financial ABC as early as possible
The study focusses on the financial literacy of approximately 230 New Zealanders born between 1990 and 1994. It started in 2012 and it plans to interview the same participants every five years until 2032. The second series of interviews occurred last year and it is revealing some interesting trends.
The participants are now aged 24 to 28. The good news is that, contra to the stereotype of ‘Gen Y’, the group is making financial progress. Their level of participation in KiwiSaver is 89%, on average they have a healthy disrespect for debt and just over half of the participants had reported taking steps over the last 12 months to improve their money management skills.
What I found most interesting from the results is that 47% of the group continue to rely on their parents for financial advice. This approach does carry some risks. If parents are not financially knowledgeable themselves, then they may be providing incorrect advice and guidance to their children.
Perhaps not surprisingly, just as the ‘Dunedin Study’ demonstrated with health outcomes, the family environment also appears to have a significant influence on financial literacy.
The Study also highlighted the dilemma of delayed gratification — to what degree are you prepared to enjoy life less now for the sake of enjoying a better life tomorrow? This also has some interesting parallels with the Dunedin Study where self-control was identified as one of the early markers of better health and life outcomes.
So, if I could sit down with the participants of the Fin-Ed study what financial knowledge would I pass on to them? Well, I would start by encouraging them to read a blog by an American adviser, Ben Carlson3. Ben writes well about the natural tension between living for today and saving for tomorrow. He acknowledges that there is no perfect way to figure out how much to save, versus how much to spend, but he provides the following pointers.
Get the big things right and don’t worry about minor purchases. How you plan for the big purchases in your life (transportation, housing, etc.) will have a much larger impact on your finances than how much you spend on coffee.
Treat savings like a monthly bill. Automating your finances is probably one of the best things you can do to increase savings. Treat contributions to your savings programme as essential expenditure not just what is left after other expenses have been paid. In other words, pay yourself first.
The missing link in personal finance advice is making more money. Personal finance experts are constantly preaching the benefits of cutting back and saving more money. Very few ever discuss how important it is to improve your career prospects to increase your income.
Spending priorities change over time. Before we started a family my wife and I travelled as much as we could. When the children were young we travelled less, we focused on experiences and activities for the kids. Now the children are independent our interest in travel has resumed. Be flexible.
Your partner’s views about money make a huge difference. If you’re not on the same page as your partner philosophically in terms of money, saving, and spending it will be very difficult to get your financial house in order.
Guilt-free spending helps. Automating your savings allows you to avoid having to use willpower to force yourself to save. This also allows you to spend more on things that make you happy and cut back on things that aren’t a huge priority.
Save & enjoy. My strategy whenever I earn extra income or a bonus has been to save a decent chunk but also spend some of it now in an enjoyable way. Look after your current and future self.
The Fin-Ed study has been running for just ten years and it’s in its early days compared with the Dunedin Study which is in its 46th year. The Dunedin Study clearly shows that a good start and positive lessons learned early in life are literally life changing. I suspect that over time the Fin-Ed study will demonstrate the same phenomena with regard to financial security.
1. Insights from 2012-2032 Longitudinal Study – Stage Two, Westpac Massey Fin-Ed Centre.
2. Dunedin Multidisciplinary Health and Development Study.
3. Now & Then, Ben Carson.
2. Dunedin Multidisciplinary Health and Development Study.
3. Now & Then, Ben Carson.
Peter Ashworth is a Principal of New Zealand Funds Management Limited, and is an Authorised Financial Adviser based in Dunedin. The opinions expressed in this column are his own and not necessarily those of NZ Funds. His disclosure statements are available on request and free of charge.
First published in the Otago Daily Times on 9 April 2018.
