Certain money habits common to financially successful people

As a financial adviser it has been my privilege to work with clients who have built significant wealth. This has taught me that there are many different paths to financial independence. When I look back on almost 30 years of helping people with their finances there are some striking similarities between those that have been successful.

I have concluded that life is a balancing act between, enjoying the life you have now while at the same time building the future. As we pass through our earning years; early adulthood (20 to 30), mature adulthood (30 to 45) and middle aged, say (45 to 65) I believe that there are various ‘markers’ or lessons that can be helpful when charting our financial progress.

As a series of column topics I thought it might be interesting to examine each phase to identify the issues that financially successful people learn early.

So let’s start at the beginning - the 20 to 30 year old age group. If you get the foundational behaviours right here then the future looks much brighter. When you’re 20, a year feels like a long time so lectures about retirement savings are likely to fall on deaf ears. I believe the greatest benefit is often just to provide the mental framework to help this group think about how to use money.

For young adults I believe that there are 6 simple lessons that are the initial markers of financial success.

1 Learn to live within your means and balance your finances - easy to say but harder to do. However, if it is not mastered in your 20’s then it only gets harder as you age, not easier as you might think.

2 Start with short term planning and grow from there. I encourage you to think about always trying to fill three ‘buckets’ (or accounts) with money.

(a) The first account is the immediate ‘me’ bucket - these savings will be consumed in the next 12 months by such things as travel, clothing and technology purchases.

(b) The second bucket relates to the things you want to achieve in the next 2 to 5 years. This account should be used to accumulate capital for such things as the repayment of a student loan, car purchase and building a house deposit fund.

(c) The third bucket is for long term savings. For most young people this will initially be limited to KiwiSaver alone, but do make sure that the mix of the investments is consistent with your risk profile, timeframe and objective. As Einstein is reputed to have said “compounding returns are the eighth wonder of the world”.

The reality is that there will be times when you might not be able to save into all three accounts at once. For some people their KiwiSaver may become their house deposit fund. The key learning is that mentally compartmentalising your savings in this way increases your probability of success and adds to your mastery of your money.

3 Manage the Debt Monster. Entering into debt to purchase assets that generate income or appreciate in value (e.g. a student loan or a property mortgage) makes sense. Debt relating to consumer goods does not make sense. It is just like eating junk food - it may feel good in the short term, but it is damaging to your financial health. Avoiding unnecessary debt and prioritising the repayment of necessary debt is a critical marker of success.

4 If you love your parents, get a Will. I have assisted clients whose adult children have died intestate (without a will). It is a difficult and emotionally charged process. Establishing a will is a statement about being a responsible independent adult.

5 Learn about the role of insurance. Successful people make sure that they understand insurance. This allows them to make informed decisions about the risks they are prepared to accept and those that they want to transfer to an insurance company.

6 Do some voluntary work. This one may surprise some people. Many of my most successful clients have a history of doing something for nothing, or more accurately doing something for people who have less than them. I suspect that it tends to ‘inoculate’ them against the corrosive effects of envy which can distort decision making. Perhaps this is even more important in a world driven by social media.

So, if you are in your twenties and reading this article how did you go? Perhaps you’ve got a few things to work on? I know I did at your age!

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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 10 September 2018, as 'Certain money habits common to financial successful people.'