Shani recently ran a financial literacy course for investors. Mark and Shani discuss the life changing tips that she gave them.

The tips are centred around those that are pre-accumulation and getting the foundations and mindset right. From avoiding buy now, pay later traps to building an emergency fund, harnessing compound interest, investing beyond cash, and tuning out financial influencers.

It is a good reminder for seasoned investors, but also a podcast episode that can be shared with those in your life who have been thinking about getting into investing.

You can find the full article here.

You can find the transcript for the episode below:

Shani Jayamanne: Mark and I have had very different lives. Mark had his first investment before the age of 10. I started investing after I started full-time work. Our lives, financial goals and experiences have meant that we have very different investment strategies.

Mark LaMonica: We do have a few things in common though. The first is that we’ve spoken to hundreds of investors about their journeys and understand what is most helpful for them.

Jayamanne: The second is that we both work at Morningstar because we’re able to do this with independence. We don’t have to recommend a particular product or asset class. Our only vested interest is in helping you achieve your outcomes.

LaMonica: The last is that although we have vastly different life experiences and differing investment strategies, the fundamentals and the underlying principles that we follow are the same. And it’s these principles that we take a deep dive into in our book, Invest Your Way.

Jayamanne: Invest Your Way is a guide to successful investing with actionable insights and practical applications. It focuses on the investor instead of the investments. You’re able to purchase a book and audio book through the links in the episode notes, through major bookstores or request a copy through your local library.

Welcome to another episode of Investing Compass. Before we begin, a quick note that the information contained in this podcast is general in nature. It does not take into consideration your personal situations, circumstances or needs.

LaMonica: We’re going to start this episode with a little bit of a plug for Morningstar. So HR should thank us, if they listen to this and hopefully, frankly, they don’t. But one of the things that you do get at Morningstar is you get volunteer days. And so you can take those days each year and focus on something that you care about.

Jayamanne: We do and we’re both very passionate about financial literacy. So we try and further that cause with our volunteer days.

LaMonica: We’re going to talk about you and what you did this year with your volunteer days, Shani. So let everybody know.

Jayamanne: Sure. So this year I went to a high school in the Inner West of Sydney and I spoke to a group of young students and I will admit it was pretty challenging for a few reasons. But the main reason is that you have such limited time with them and financial literacy and personal finance is such a broad topic. It’s really hard to know what to focus on.

LaMonica: So what did you do? You obviously did this despite the challenge. So what did you focus on?

Jayamanne: Yes. I mean, a little bit of context here is that all of the students who attended the sessions were about to sit their high school certificate or HSC and that determined where they would attend university. And many of the students were the first in their families to apply for university. Few of the students grew up in households where investing was a conversation. And they attended the session during a free afternoon where they actually had the opportunity to go home. So they willingly attended at a time when students with ambitions to go to university are spending most of their spare moments studying for upcoming exams. You’re laughing at me.

LaMonica: Just because you keep saying willingly attended.

Jayamanne: I know. It’s very surprising.

LaMonica: You’re a draw. People would rather spend time with you than do whatever is they do at home. Or maybe that’s a reflection of their home life.

Jayamanne: Maybe.

LaMonica: We will see. But, you know, we can see from that, I think how important getting ahead is because obviously they did this instead of studying, instead of doing anything else that they wanted. And, I think what you talked about when you came back from this is, you really got a sense that they wanted to change that narrative that they grew up with and that was reinforced in their house, which is always great to hear. But I think the challenge is that a lot of the things that we write about, a lot of things we discuss on this podcast, really isn’t relevant probably for high school students. So, they’re about to go off to university or a TAFE and maybe they have part-time jobs that help with expenses. They probably don’t have a lot of disposable income left over to invest.

Jayamanne: Yeah, exactly right. And that was definitely the position that I was in. So I wanted to focus on giving them information that would help them now. And I wanted to help them get set up and ensure that they weren’t on the back foot when they did start investing. So to do this, I gave them what I called life-changing tips. And these are tips to help with decisions that will impact their ability to create and sustain wealth and quality of life in the future. So some are based on personal experience, but all are based on research and data.

LaMonica: So your first tip was to stay away from buy now, pay later and be really careful with credit cards. And, that’s obviously a good tip for Australians. Aussies do love debt. So we have some stats here. So ASIC estimated that 7 million Australians used buy now, pay later in 2022 with one in five of those customers reporting they cut back on essentials like food to make repayment. The average Aussie holds almost $25,000 in consumer debt. That is excluding student loans and home loans. And $2,800 of that is carried on credit cards, which obviously have very high interest rates. So the issue is that debt is so easy to access these days. And it can, of course, significantly alter the quality of life for people who don’t have either the discipline or the means to pay it back.

Jayamanne: And I see this quite a lot. I have a few people in my life who started out with getting a credit card or a personal loan earlier on in life. And friends who might have purchased a car or spent a lot of money on their credit card and the debt has just snowballed and they aren’t able to get themselves into the positive even after a decade.

LaMonica: And when you do the math and you see how this compounding of debt, we always talk about compounding of interest, but debt compounds as well. So when you do that math, you can really see how easily it is for that to happen. So for example, if you have a $3,000 credit card balance with an interest rate of 20% per annum and only make the minimum payments per month, you end up paying $14,168 for that initial purchase. And it’s really important. I know something that you stress a lot is thinking about the type of person you are and whether an open line of credit is going to be too tempting. The instant gratification of the purchase will almost never match up with that opportunity cost of what you could have spent and could have done or saved or invested with all of those additional interest costs.

Jayamanne: And I think only use credit cards if you’re in a healthy place financially where you’re able to pay off the balance each month. Many of the students also asked me about credit card points and I love playing the points game. I know, Mark, you were really into it when you were a consultant and you were flying around everywhere.

LaMonica: That’s because I was spending other people’s money, which did make it a lot of fun.

Jayamanne: Yes. And getting a credit card can be a good way to get points, but the value of the points is not worth any interest expenses that you would incur if you kept an open balance. All right. So the next tip is to build and maintain your emergency fund.

LaMonica: And, Shani, you love emergency funds.

Jayamanne: I do. Who doesn’t love pot of cash, you know?

LaMonica: Yeah.

Jayamanne: You can’t touch.

LaMonica: Exactly. I mean, exactly. But one of the things I know you talk about a lot and I know you talked about in this presentation, some of the research that Morningstar has done on financial well-being. And what that basically means is how your finances impact your happiness. And the top of the list of things you should do to improve your happiness is to have an emergency fund. So, of course, an emergency fund provides peace of mind. And in this Morningstar study, we found that high net worth individuals still don’t have an adequate emergency fund, which is pretty surprising. So 51% of Australians do not have enough savings to cover a $1,000 emergency without borrowing funds. And so that, of course, leaves many people vulnerable to this cycle of debt, which is really difficult to escape as, of course, we went through.

Jayamanne: Yeah. And research from Beyond Blue shows that financial stress is one of the leading contributors to anxiety in Australians. And to back this up, data from the Australian Psychological Society shows that financial stress is the leading cause of divorce. And an emergency fund can give you peace of mind and also ensure that you’re not going backwards if the unexpected happens. General guidance says to work on saving three to six months of expenses and one year of expenses for self-employed individuals.

LaMonica: We’re moving on to your next tip, Shani, and that is to harness the power of compounding. So this is particularly important for students, of course, because the earlier you learn the impact, the earlier you can actually harness it. And of course, they are all very young. So the supercharger with compounding is time. So Shani is reaching these students at the right time in their life. They may not be able to act on the information yet, but they will be able to. And that can really set themselves up, set that foundation so they can get to the point where they can take advantage of all the time they have ahead of them in their lives.

Jayamanne: That’s it. So a good way to get the attention of high school students is to talk about becoming a millionaire. So I showed them a chart that I use in a lot of my articles and we talk about a lot and it represents the monthly savings needed for an investor if they earn 7% per annum. And this is just a model so it doesn’t take into account the realities of investing like inflation or fees, transaction costs, taxes, et cetera.

LaMonica: And Shani put this chart into the article that she wrote on. So there is a link in the episode notes for people that want to see that chart. But basically what the chart points out is that this is not some sort of linear progression. So the older you are when you start investing, the more you need to save to reach the same end goal. When you start saving at 25, your capital contributions to that $1 million is $194,211. The market and the compounding are doing the rest of that hard work for you. And that is a very big part of that $million that’s coming from the market and compounding. So contrast that if you start at 55, you need to contribute $701,000. So the marketing compounding of course add the rest but it’s a lot lower percentage. So understanding the power of compounding early can change your life.

Jayamanne: And in my portfolio, I prioritize savings. This is a hard lesson to learn without experience but I was fortunate to work early in my career at a fund manager where I could see the history of individual accounts and this drove home the importance of contributions and compounding to build wealth. And I worked in client services where I saw transaction histories and account balances all day and some of these accounts were individuals who were only contributing $50 to $100 a week but over a long time they were able to build wealth. And going into this job I really did believe that investing was for the wealthy and had no exposure to it growing up and it’s important to me to make sure that these young people do know that it is for them and to understand that it’s not as inaccessible as some of them may think.

LaMonica: Okay. We talked about compounding, we talked about emergency funds, building those foundations but also one of your other tips, the next tip is to invest in more than cash. And Australians and especially women love to keep savings in cash. So research shows that women tend to stick to cash and fixed interest options for their savings and this is often not the best option for their future. So of course everybody’s trying to stretch their savings further and further. Life expectancy is rising and retirement is often almost as long as your working life. So effectively for every year that somebody needs to earn a salary they need to provide for two years of savings. And of course inflation that we’ve experienced since COVID adds to this whole issue as well.

Jayamanne: So we’re going to talk about milk prices Mark. Do you consume a lot of milk? Do you know how much it costs?

LaMonica: Cow or other.

Jayamanne: Any.

LaMonica: I make a shake in the morning and I do put milk in there.

Jayamanne: What kind of milk?

LaMonica: Well you told me to stop drinking soy milk and start drinking almond milk.

Jayamanne: Okay.

LaMonica: In some sort of hope that I will become less fat.

Jayamanne: Well.

LaMonica: That was the advice that you gave me. But I don’t know how much it costs. I will say that.

Jayamanne: The ABS has said that milk consumption, cow milk consumption is reducing and there’s a derogatory term for men who live in metro areas who waiver from traditional depictions of masculinity. It’s called a soy boy. So do you identify Mark?

LaMonica: Do you believe that I waiver from traditional depictions of masculinity?

Jayamanne: No comments.

LaMonica: Wow. Okay. Well anyway. Why don’t I talk about milk prices? Because well I don’t know what they are. You told me how much they are. So in 1970, $0.19 a liter for milk. 1980, $0.63. In 1999, it was $1.40 and in 2025, $1.60. Do you know the milk pricing in the US with George H.W. Bush?

Jayamanne: I do, yeah.

LaMonica: He didn’t know the prices of milk. And apparently people got upset at this. And said they would like their president going out to the local food store and purchasing milk.

Jayamanne: We had something similar too. I think it was with Scott Morrison.

LaMonica: Yeah. Just fake outrage. For the sake of outrage. But anyway. Let’s go back and look at those prices. So we can see that keeping your savings in cash means it’s not going to purchase the same amount of goods in a year. And it will be even less in five years. Less in 20 years. So if inflation is 2.5%. And your transaction account is giving you 0.05%. You are losing the purchasing power of your money every day. If you’re in a savings account paying you a higher interest rate, situation really isn’t that much better.

Jayamanne: So I made it clear that keeping savings in cash would result in a lower quality of life. Especially because the attendees for this session were women who were much more likely to save more but invest less. So the fifth life changing tip is to define your goals and understand why you are investing. And we love talking about goals on this podcast, Mark.

LaMonica: Yes. I think podcasting now is a, you know, traditional example of masculinity.

Jayamanne: It is. You’re right.

LaMonica: So there you go. Maybe not traditional. But we do talk about goals a lot, but there is a reason. So Vanguard’s 2023 investor study shows that people with clear goals are twice as likely to feel confident about their financial future, as well as making you more confident. Goals give you a North Star that will increase the chance of achieving what you want out of life. A goal means you will take on an appropriate amount of risk and reduce poor behavior. You could think of a goal, Shani, as your investing compass.

Jayamanne: Nice tie-in. So we talk about defining goals a lot, and we’ve got a lot of resources on this, but you start with these questions. So the first is how much will your goal cost? And you’ve got to remember inflation. The second is when do you want to achieve your goal? The third is how much have you saved for your goal? And the fourth is how much can you save in the future for your goal? So with these inputs, you’re able to define a goal and know what you need to reach it. So the example I used during this course was to purchase a house by 30 years old. So in 13 years, I want a $250,000 deposit, which is $333,000 adjusted for inflation, and I’m saving $1,500 a month.

LaMonica: And you ran through how your outcomes would change if you didn’t invest, which I think is a really good way to try to explain this to the class. And the differences are that if you stayed in cash, you would have $187,000 and of course fall short of your goal. Stay in a term deposit paying 4%, you would have $229,000 in today’s dollars. It’s close, but not quite at your goal yet. To get to the goal, the investor would need a 5.2% annual return.

Jayamanne: So this is a much clearer and more valuable goal than I just want to have as much money as possible. And following this process means that you are informed about the assets you need to hold, whether you’re on track over the period it takes to achieve your goal. All right, so we’re on to our last life changing tip and it’s don’t listen to your friends or finfluencers about what to invest in.

LaMonica: Which is a little controversial.

Jayamanne: It is, but luckily we’re not popular enough to be called finfluencers.

LaMonica: That is true, but speak for yourself. So I think what we’d like to say here is that obviously building wealth is not easy. It requires some effort and that effort is really to learn about investing. So achieving your goals does not come without a time commitment.

Jayamanne: That’s right, Mark. And day trading doesn’t work. Hot tips won’t get you there. What does work is investing in assets that have a direct correlation to the financial goals that you’re looking to achieve.

LaMonica: And this is how it works when you do follow this path. You may hear a hot stock tip. Your friend could make some convincing case that you of course cannot resist. So you go and invest in it. Goes down 20% the next day. How do you feel after that? Well, you’re much more likely, of course, to sell your investment because of a concept called loss aversion. People feel the pain of losses more than anyone feels a joy of gains. So you’re much more likely to retain confidence in your investment. Stay invested and achieve better outcomes if you know what you’re investing in and why.

Jayamanne: Poor behavior is one of the largest impediments to wealth creation. And we’re going to talk about mind the gap because we can’t go on an episode without talking about it, but it looks at the impact of poor behavior. And the last edition of this study showed that investors switching in and out of investments cause them to lose 1.6% of their return a year. So think about our lesson in compounding. That’s 1.6% per annum. That might not seem like much, but it will have a mammoth impact over the long term. And you’re much more likely to fall victim to this if you take a hot tip with no basis.

LaMonica: And before, of course, meeting with you, Shani, and spending time with you, the majority of the exposure that any students have with anything investment related, anything financial service related is through so-called finfluencers who post financial information on social media. And to that we say be wary of a teacher that is only a few pages ahead of the students. That is the case for many finfluencers. Most do not have a financial background or a qualification to give general financial advice. Many of them have done a great job at making engaging content, which is much more palatable to consumers than financial reports or product disclosure statements.

Jayamanne: Or investing compass.

LaMonica: Or investing compass.

Jayamanne: But I encourage all investors new and old to view all information that comes from the financial services industry with a healthy dose of skepticism and always question what the motive is behind the information, whether there’s an agenda and if the purveyor is qualified.

LaMonica: Okay, Shani. So anytime you do a session like this, obviously, hopefully the people you were presenting to get something out of it. But hopefully as a presenter, you also get something out of it. So what did you get out of this?

Jayamanne: Yeah, I definitely did. I mean, I learned a lot from this session and I’m still reflecting on the stories that I heard and I ran this financial literacy course at a public school. It is a selective art school where most of the students had to put together a portfolio and plead their case for admission when they were 11 or 12 years old. And I think that’s pretty impressive. And after entry, their passions are fostered and many thrive in an environment where they’re encouraged to pursue these talents. And a noticeable amount of these students that attended the financial literacy session shared that they were not professionally pursuing these talents after university because they needed to consider a sustainable livelihood.

And it reminded me of the choices I made, which I’m sure are not unfamiliar to many of us. We all make the choice to decide what sort of career we want to pursue and have to consider what is going to be a livelihood that sustains our lifestyle. And what I told these students is that investing is the greatest enabler of choice. Building wealth provides you the option to explore your passions and building financial security allows you to leave a job that doesn’t fulfill you and gives you buffers to create a lifestyle choice.

LaMonica: All right, well, thank you. I think that is a great lesson that you’ve gotten from these students. Hopefully, everyone has found these lessons interesting as well. So thank you guys very much for listening and we will be back next week with a new episode.

(Disclaimer: Any advice in this podcast is general advice or regulated financial advice under New Zealand law prepared by Morningstar Australasia Proprietary Limited and/or Morningstar Research Limited without reference to your financial objectives, situations or needs. You should consider the advice in light of these matters and any relevant product disclosure statement before making any decision to invest. To obtain advice for your own situation, contact a financial advisor.)

Invest Your Way

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For the past five years, we’ve released a weekly podcast and written on morningstar.com.au to arm you with the tools to invest successfully. We’ve always strived to provide independent, thoughtful analysis, backed by the work of hundreds of researchers and professionals at Morningstar.

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