Future Focus: Six life changing tips
I recently ran a financial literacy course for students. These are the life changing tips I gave them.
I recently ran a financial literacy course for high school aged students in Sydney’s Inner-West. All of the students who attended the session were about to sit their High School Certificate that determined if and where they would attend university.
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. They attended this session during a free afternoon when they had the opportunity to go home. 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.
This is how important getting ahead and changing the narrative is for them. They want to learn how to build wealth and didn’t have access to these resources at home or at school.
I found it challenging to design an investing class for a group of students. I knew they wouldn’t be able to action my advice for at least half a decade. Despite the challenge I did have one advantage – I could relate to the students. Many of them were in the position that I was when I left high school. A student with a part-time job to help with expenses with nothing left over to spend – let alone invest.
I wanted to focus on giving them information that would help them now. I wanted to help them get set up and ensure that they weren’t on the backfoot when they did start to invest. To do this, I gave them what I called ‘life changing tips’. These are tips to help them with decisions that will impact their ability to create and sustain wealth and quality of life in the future.
Here are the life changing tips I shared. Some, based on personal experience, but all based on data and research.
1. Stay away from BNPL, be careful with credit cards.
Debt is easily accessible and can significantly alter the quality of life for those that do not have the discipline or means to pay it back. ASIC estimated that 7 million Australians used Buy Now, Pay Later in 2022 with one in five of these customers reporting they cut back on essentials like food to make repayments. The average Australian holds almost $25,000 in consumer debt – this is excluding student loans and home loans. $2,800 of this is carried on credit cards.
If you have a $3,000 credit card balance with an interest rate of 20% p.a. and only make the minimum payments per month, you end up paying $14,168 for those initial purchases.
Think 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 purchases will almost never match up to the opportunity cost of what you could have done with the additional interest costs.
Only use credit cards if you are in a healthy place financially where you are able to pay off the balance each month. Many of the students asked me about credit card points. Getting a credit card can be a good way to get points. The value of the points is not worth the interest expenses.
2. Build and maintain your emergency fund.
Morningstar has conducted research on ways to improve your financial well-being - how your finances can increase your happiness. Top of the list was an emergency fund. An emergency fund provides peace of mind. The study found that most high-net-worth individuals did not have an adequate emergency fund.
51% of Australians do not have enough savings to cover a $1,000 emergency without borrowing funds. That leaves many vulnerable to the cycle of debt which is difficult to escape.
Research from Beyond Blue shows that financial stress is one of the leading contributors to anxiety in Australians. Data from the Australian Psychological Society shows that financial stress is the leading cause of divorce. 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 3-6 months of expenses, and 1 year of expenses for self-employed individuals.
3. Harness the power of compounding.
Compounding has been called the ‘eight wonder of the world’. It is simply earning a return on a return. It supercharges your portfolio growth, and the earlier you learn the impact, the earlier you can harness it.
Source: Morningstar Investment Management. About the data: The image represents the monthly savings necessary should the investor earn 7% per annum from a hypothetical asset. No adjustment has been made to account for inflation, fees, transaction costs, or taxes.
I learned that a good way to get a high-school aged student’s attention is talking about becoming a millionaire. I showed the above chart which shows how much you need to save to have $1 million by the age of 65.
As you can see, it is not a linear progression. The older you are when you start investing, the more you need to save to reach the same end goal. The reason for this is explained in the graph on the right, which shows the split between capital (the amount you invest) and growth (the gains you make from investing). The earlier you invest and the more time you have in the market, the savings that you need to accumulate reduces.
The graph on the right shows that when you start saving at 25 your capital contribution to your investment is $194,211. The market, and compounding, adds the rest. That is a huge contribution. Understanding the power of compounding early will change your life.
In my portfolio, I prioritise 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. This drove home the importance of contributions and compounding to building wealth.
I worked in Client Services and with transaction histories and account balances all day. It was basically a view of the blueprint to building wealth—I saw how individual investors had built up their portfolios over time. Going into this job, I believed that investing was for the wealthy and had no exposure to it growing up.
Working in this role allowed me to see every type of scenario imaginable played out—including those that were contributing small amounts per week over a long time period. I have not had any lump sum wind fall and I do not expect anything in the future. I know that for me to build a comfortable life, I need to prioritise saving to build my capital base. The earlier I save, the more my money will work to build wealth.
4. Invest in more than cash.
Australians, and especially women, love to keep savings in cash. Research shows that women tend to stick to cash and fixed income options for their savings. This is often not the best option for their future. We are trying to stretch our savings further and further. Our life expectancy is rising and often our retirement is almost as long as our working life. Effectively, for every year we earn our salaries, we need to provide for two years of savings. Adding to this issue is inflation.
Below is a look at milk prices over the years.
Keeping your savings in cash means it is not going to be able to purchase the same amount of goods in a year. It will be even less in 5 years. Less in 20 years. 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 are in a savings account paying you a higher interest rate, the situation is not much better.
I made it clear that keeping savings in cash would result in a lower quality of life.
5. Define your goals and understand why you are investing.
Vanguard’s 2023 Investor Study shows that people with clear goals are twice as likely to feel confident about their financial future. In addition to confidence, 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 behaviour.
We are advocates of defining an investment goal. Start with these questions:
- How much will your goal cost? (remember inflation!)
- When do you want to achieve your goal?
- How much have you saved for your goal?
- How much can you save in the future for your goal?
With these inputs, you are able to define a goal and know what you need to reach it. The example I used during this course was to purchase a house by 30.
This is a much clearer and more valuable goal than ‘I want to have as much money as possible’. Following this process means that you are informed about the assets you need to hold, and whether you are on track over the period it takes to achieve your goal.
6. Don’t listen to your friends or finfluencers about what to invest in
Building wealth is not easy. It requires effort to learn about investing. Achieving your goals does not come without a time commitment.
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 are looking to achieve.
You may hear a hot stock tip. Your friend makes a convincing case that you can’t resist. You invest in it. It goes down 20% the next day. How do you feel? You are much more likely to sell your investment because of a concept called loss aversion. People feel the pain of losses more than we feel the joy of gains.
You are much more likely to retain confidence in your investment, stay invested and achieve better outcomes if you know what you’re invested in and why.
Poor behaviour is one of the largest impediments to wealth creation. We conduct a study each year called Mind the Gap, that looks at the impact of poor behaviour. The last edition of this study showed that investors switching in and out of investments caused them to lose 1.6% of their return a year. Think about our lesson in compounding. That 1.6% p.a. might not seem like much but it will have a mammoth impact over the long-term.
You are much more likely to fall victim to this if you take on a ‘hot tip’ with no basis.
The majority of the exposure the students have to financial services and products is through so-called ‘finfluencers’ who post financial information on social media.
Be wary of a teacher that is only a few pages ahead of the student. This 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 consume than financial reports or Product Disclosure Statements (PDS).
I encourage all investors, new and old, to view all information that comes from the financial services industry with a healthy dose of scepticism. Always question what the motive is behind the information, whether there’s an agenda, and if the purveyor is qualified.
Final thoughts
I learned a lot from this session and I am still reflecting on the stories that I heard. I ran this financial literacy course at a public school. It is a selective arts school where most of the students had to put together a portfolio and plead their case for admission at 11 and 12 years old. It is incredibly impressive.
After entry, their passions are fostered and many thrive in an environment where they are encouraged to pursue their talents. A noticeable amount of 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. It reminded me of the choices I made which I’m sure are not unfamiliar to many of us.
I have wanted to be a florist for as long as I can remember, even though I have found a career that brings me happiness and fulfilment.
What I told these students is that investing is the greatest enabler of choice. Building wealth provides you the option to explore your passions. Building financial security allows you to leave a job that doesn’t fulfil you, and give you buffers to create a lifestyle of choice.
I have been taking floristry courses on some weekends over the last few years. Turns out that I’m a rubbish florist. I want to make the most cost-efficient bundle or include as many flowers as I can since I have already purchased the raw materials. I don’t have an eye for simplicity and can’t see the beauty in complementary colours and textures. I have too much of a business mind.
Maybe I was meant to write about investing after all.
Invest Your Way
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