Signposts of financial success for those aged 30 to 45

When thinking about the challenges of managing one’s finances, I am reminded of two statistics. According to author Malcolm Gladwell, it takes 10,000 hours of study to become an expert in any given field, and conventional wisdom tells us that it takes just 21 days of repeat behaviour to create a habit.

I take solace from the 21 days it takes to create a habit—clearly you don’t have to be an expert to be financially successful, but you do need to adopt the right habits. In last month’s column I reflected on the habits of financially successful people by considering those in their 20s.

In this column I will focus on the age group 30 to 45. A friend refers to this stage of her life as being, “the ·age of the unfinished sentence”. It is certainly a time when we are being pulled in every direction by competing pressures: family, careers, relationships, community and finances. I believe that the ‘three buckets’ principle, which I discussed in last month’s column, should be a consistent theme throughout one’s life. You may recall that the first ‘bucket’ receives the savings that are required for your spending over the next 12 months, e.g. holidays.

The second bucket was where you may have directed savings for your house deposit, which has now most likely morphed into the mortgage account. The repayment term, interest rate and nature of the contract (fixed or floating) are all considerations. The priority that you place on repaying mortgage debt above spending elsewhere also has a very big impact on your future wealth.

The third bucket is for your long-term savings. KiwiSaver will probably still be the main component, but there could be further savings occurring e.g. capital to buy into a business. Everyone’s savings capacity is different, but one of the time-honoured rules of retirement savings is that, if you can maintain your long-term savings at 10% of your gross income, from the day you start work, then by age 65 you will have saved sufficient capital to retire without noticing a change in lifestyle. So, if you’re in the 30-45 age bracket here are four habits I believe contribute to financial success.

1 Grow your human capital. Educationists encourage us to be lifelong learners. In our ever-changing world I don’t see this as a nicety, I see it as a necessity. Expert know ledge tends to command a premium income. It doesn’t have to be academic study, but do remember that if you want to be an expert, or maintain expert status, you will have to invest the time.

2 Understand the difference between lifestyle assets and investment assets. There are things that we may choose to own that deliver lifestyle satisfaction e.g. a yacht. It is not to say that these assets do not have financial value, but let’s not kid ourselves that they are part of our investment strategy. We shouldn’t expect a financial return from them. This is in contrast to an investment asset where we need to be mindful of the return it is generating and the risk that it exposes us to. The key is getting the right balance between lifestyle and investment assets and not having the ‘toy’ budget exceed the investment budget.

3 Know your numbers. As my accountant friends tell me, “you can’t manage what you can’t measure”. Successful people know their net wealth position (i.e. total assets minus total liabilities) and they track it over time. In your 30s it is likely to be modest, but the important thing is that it should be progressively improving and always being tracked.

4 Invest in your relationship. Let’s be clear, you don’t have to be in a relationship to be financially successful. However, if you are in a relationship you are more likely to be financially successful if you and your partner are philosophically on the same page with regard to money, saving and spending.

In September’s column I identified six character traits that I believe are markers of future financial success. From this column you can see that I am recommending that, in this next phase of your life, you need to add four more. As I said at the start, the good news is that it only takes 21 days to form a new habit - just another challenge to add to the reality of being 30-something!

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 8 October 2018, as 'Signposts of Financial Success for those aged 30 to 45.'