Teaching Your Kids About Money - Part II

2nd Jul by Joe Byrne

Teaching Your Kids About Money - Part II

Introduction

My last article was written about teaching your ‘young’ kids about money and that was well received by our readers so I thought I would continue down the financial education path and focus on what we need to teach our ‘young adults’ about money.

I have always found having check lists helpful so hopefully this will help those young adults heading on their OE, graduating and leaving home and possibly also for the parents or grandparents who are helping coach these young New Zealanders from the side-lines.

Top 10 Financial List for Young Adults (in no particular order)

1. Live within your means
2. Sign up to online banking
3. Tackle your debt
4. Open a KiwiSaver account
5. Prepare for the unexpected
6. Get the right insurances
7. Start saving
8. Plan for retirement
9. Learn to invest
10. Set your goals

1. Living within your means

It is very exciting to receive your first pay-check and ponder the possibilities! But unfortunately, it has its limitations. You must realise it is a balancing act between what you need vs. what you want. It is a good idea to use one of the online budgeting tools (www.sorted.co.nz) and have a go at establishing your budget. Then use this as your spending rule. The more disciplined you are the better.

2. Sign up to online banking

A good start is to have your salary deposited into your bank account and then set up regular payments for your regular outgoings. Your credit card account will also be able to be listed which will allow you to monitor your spending. Remember, you are in control.

3. Tackle your debt

Whether it be a student loan or car loan, you have to get on top of paying down your debt. This must be a priority when you first get started. Once your debt starts to decrease and you have the ability to save, you will be able to start investing and building your wealth.

4. Open a KiwiSaver account

You should do this as soon as you can but is done automatically when you start your first job. It is easy to open but requires you to do a little homework to make sure the settings are correct such as your tax rate and which fund you invest in. You should fill out a risk tolerance questionnaire to see what your appetite for risk is and then find the appropriate fund to invest in. Young adults have a very long investment horizon so should consider investing in either a Balanced or Growth Fund. Consider contributing at the maximum contribution rate. Take time to understand how the Government annual contribution works, then take full advantage of $521 on offer each year. You should speak to a financial adviser if you have any questions or concerns on this and / or if you are considering using your KiwiSaver account to help you purchase your first home.

Once you have tackled your debt and are able to save on a regular basis, establishing an emergency fund is a great next step.  

5. Prepare for the unexpected

You never know what can happen around the corner, so it is a good idea to set up an emergency fund. Once you have tackled your debt and are able to save on a regular basis, establishing an emergency fund is a great next step. The emergency fund can help fund a large car repair as opposed to having to pay the bill on your credit card. Once up and running and a budget established, an emergency fund typically would cover between three- and six-months’ worth of your regular expenses.

6. Get the right insurances

Insurance is an important cornerstone of any financial plan. As a young adult there tends to be a feeling of being bullet-proof but because the income and savings tends to be quite low in the beginning, it is a smart choice to insure your assets such as your car and flat contents insurance is a must. When you are young, insurance options tend to be affordable and it is unlikely that you will be denied certain cover due to health issues. As the years go by and life happens, other insurances such as home, life and income protection insurances all become very important. In the beginning of one’s career, your future earnings potential is quite often your greatest asset. Doesn’t it make sense to insure your greatest asset?

7. Start saving

There is no time like the present to get started with your savings programme. Compound interest (interest on your money and then interest on your interest) is often called one of the wonders of this world, so why not take advantage of that. When you live within your means, you will be able to save. Once you save, you will be able to open many doors. Savings equals options.

8. Plan for retirement

As a young adult, this step does not need to be very complex and can be as simple as modelling the future value of your KiwiSaver account at the time of retirement. This can be done of various website, such as www.sorted.co.nz. As time goes by, you can build on this

simple model and add more to your retirement plan as your life starts to become more complex.

9. Learn to invest

Investing is a good way to build your wealth. As with saving, but to a larger extent, investing takes advantage of compound interest. Investing makes your money work for you. There are many investment sites online but as stated above, the sorted website can help the beginner investor better understand the basics.

10. Set your goals

This is the fun part. Setting your goals makes budgeting and retirement planning worth all the work. Most people will not think budgeting is very fun but riding in a new car or enjoying a well-earned overseas holiday is. It is a very distracting world out there and having goals helps us stay focused and on course.

Good luck.

As always, if you have any questions on this or any financial matter, please contact your financial adviser.

 

Article by Joe Byrne, BA, AFA - Read More

Disclaimer: This article has been prepared for the purpose of providing general information, without taking into consideration any particular investor’s objectives, financial situation or needs.  Any opinions contained in it are held as at the report date and are subject to change without notice.  This document is solely for the use of the party to whom it is provided.

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