1. Starting out

Freedom! You’ve finished school and the world is opening for you. Perhaps higher education, first full-time job, car, clothes, entertainment. Maybe you’re finally moving out of home into your own place – choosing your own furniture, parties, only cleaning your room when you feel like it. Freedom! The world is your oyster, so make the most of it...

Most of us either start our first job when we leave school, or after we have spent time studying to attain technical or professional qualifications.

On first beginning work, the usual and understandable desire is to spend, spend, spend.

At this stage of our lives, it’s great to feel a sense of financial independence. It’s wonderful to have a good time and know you are paying for it yourself.

However, starting out involves more than getting a job – and an income. For many, the expenses are also starting. You may buy a car or move out of the family home and rent. You may want to put some money aside for a deposit to buy a house. You may be obliged to pay off a student loan.

Most students need to go into debt to some degree to finance their studies, but those who take control from the start are less likely to run into problems.

Although it seems far off, take a minute to think about this: If you are aged 20 today and you wish to retire at age 55, you still have 35 working years left. Based on current trends, when you reach age 55, you can also expect to live for perhaps another 35 years after you have stopped working.

What will you live on in those retirement years? If you don’t want to end up poor but wish to enjoy your retirement, you should begin to save a small amount of what you earn now.

Not for a minute do we suggest giving up enjoying life along the way. But we hope to show that small savings in this financial passage can lead to a happy and well-funded retirement.

There is no magic about money. Simply, if you don’t save, it will not be there when you need it.

So, start out now with this idea in mind: I want to end my working life with enough of my own money to allow me to live comfortably until I’m 90, and I want to have a good time along the way.

Start now!

It is important to begin saving for your retirement as soon as you can. The power of compounding interest will ensure your money grows over time.

For example, at age 25, if you save $2,000 and it grows at a rate of 7% every year for the next 40 years, it will be worth $30,000 when you retire.

If you don’t start saving until you are 35, but invest the same $2,000 for the next 30 years, its value will only grow to $15,000.

Starting with the same $2,000 at age 45, its value at retirement will only grow to $7,700.

There’s a simple rule about money. An investment growing at 7% per year almost doubles its value every 10 years. Just look at the following chart:

So, the sooner you start a savings programme, the easier it will be to achieve your financial goals. It’s staggering to believe, but if you put away just $2,000 every year (that is less than $40 a week) for 40 years, by the time you reach retirement you will have a pot worth around $400,000, assuming an investment return of 7% p.a. That is how you get rich slowly!

Although it would be nice to be able to invest $2,000 each year from day one, for a number of reasons this may not be possible. To help you, look at our simple savings ideas, then complete a budget planner.

This should help you find money to save while not taking too much away from what you are currently able to spend.

Once you have worked out how much you can save, all you have to do is decide what method you will use – for example, a monthly payment from your cheque account to the savings fund of your choice.

A good indicator that you are well on track is if, by age 30, your savings and superannuation have reached a total of around 75% of your annual income.

Health

During this financial passage, as you set yourself on the road to financial independence, you should also set down the path of lifelong good health.

Reports from the Cancer Society of New Zealand and the National Heart Foundation of New Zealand show that smoking clearly causes serious heart and lung diseases.

While the decision to smoke is obviously one of free choice, for your own long-term good health, male or female, you should choose not to smoke. Otherwise, you face the chances of being one of 4,700 New Zealanders who die annually from diseases caused by smoking.

Now is also a very good time to start a health insurance plan. While younger people generally don’t need health insurance as much as older people do, remember that health insurance policies usually exclude existing medical conditions. Therefore, the longer you leave it, the greater the risk of not being able to get all the cover you need.

Check your progress

Now it’s time to complete your personal checklist to see how well you are doing with your money. Total all your points and then refer to the comments below to see what more you need to do.

Those areas where you don’t score full points are where you need to change your habits before they have a chance to become long-term problems.

A score of 80 or more is excellent. This indicates that you understand the need to balance what you do today with what you will need in the future. Congratulations.

A score of 60-80 is OK. You can see from your answers what you need to work on. Make changes now – it’s very important to get your financial habits sorted out early.

A score of less than 60 is a worry. You must change your patterns, or in future years you’ll be saying the same things, “I never have any money”, “I can’t save”. The truth is you can save and you must save in order to have any security in the future.

Summary

You are free and earning an income – enjoy it, but remember that even small savings in this financial passage will lead to a happy and well-funded retirement. Scored less than 80? Make sure you tap into the magic of compounding interest – an investment growing at 7% per year almost doubles its value every 10 years!

The good news is you now know what you need to do and you have a whole working life ahead in which to do it.

Now go to Back to basics for more information about keeping your finances under control.