Last week I had the privilege - and challenge - of addressing a group of university students; how could I fit the key financial information they need for the rest of their lives into only 40 minutes?
I started off by pointing out that high income does not necessarily mean financial security - it's a matter of making the right choices.
The first choice is to spend less than you earn. Just doing that will put you in the top 20 per cent - as George Clason wrote in his wonderful book The Richest Man in Babylon, "a part of all you earn is yours to keep."
The challenge is that the rest of the world has one goal: to part you from your hard-earned money.
That's why there are buy-now-pay-later schemes, credit cards, and of course a never-ending stream of sales.
I showed two slides to the young graduates: one was a picture of a credit card labelled "your worst enemy" and the other was a debit card labelled "your best friend". They work the same way when you wave your card, the difference is that a credit card lets you buy things now and pay later, whereas the debit card takes money from your bank account at the time the transaction is made.
Once you change from paying for things now to paying for them in the future, you are mortgaging your future income to pay today's expenses. That's a slippery slope, which quickly gets steeper as time flies by and interest mounts up.
It's best to stay away from temptation. If you have a debit card, you can never spend more than you have in the bank, which is a compulsory form of spending control. I told them the average person's "budget" boils down to "get paid, spend up on the fun things, and then scratch around to find money for the essentials" - items such as rent, or mortgage payments.
Of course, this leaves nothing for investment. The only solution is to make investing the first spending you do. The best way to do this is by direct debit to investment apps such as RAIZ.
It's a reality of life that we don't miss what we don't see. In 1987, when I first wrote Making Money Made Simple, I suggested making mortgage payments fortnightly and not monthly to save a huge amount of interest. The banks all scoffed - they had not twigged that if you pay $2000 a month, then move to paying $1000 a fortnight, the annual payments are $26,000 instead of $24,000. And it's a painless strategy: because the money is taken automatically from your bank account, you never miss it.
I stressed the importance of compounding, and the massive difference the rate of return makes over time to your superannuation when you retire. I presented a graph showing the average superannuation return for capital stable funds over 10 years was 4.5 per cent per annum - but for growth funds, it was 8.5 per cent. As a general principle, young people should invest in growth funds, while they have time to weather volatility.
Then I showed an example using the super contributions calculator on my website. Jack and Jill are both aged 25 with $15,000 in super, and earning $50,000 a year. Jack is disinterested in super and left his money in the capital stable option, retiring with $1 million at age 65. However, Jill opted for growth, and retired with close to $3 million. That's another $2 million, just for ticking the right box.
If you're 20 years old now, there's bound to be many changes in the financial world in the next 60 years. What doesn't change is the basic principles: stick with them and you won't go wrong.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: email@example.com
- This advice is general in nature and readers should seek their own professional advice before making any financial decisions.