We were away with a bunch of friends over the weekend and among the topics that got thrashed around (besides the Sevens, the cricket and a bit of music) was this very topic. No, I don’t just mean this week or last month but over all the years we have been in the work force. What have we done with all that money we have earned?
One of the group said, “Maybe it is something to do with turning 50, but for the first time in my life, I am wondering where all that hard earned money has gone.”
“Do you really want to know?” came the collective reply.
“Probably not, I think the answer would scare me.”
What a thought provoking conversation. I am not sure I would want to know the answer to that question either.
Part of the answer is obvious, the taxman takes a good chunk of what we earn, as does the bank if we have a mortgage or the landlord if we rent. Then of course we have to eat and then there’s the kids.
But what do we do with the rest of it?
Right now the men are probably thinking of what is buried in their partner’s wardrobe, and the girls are thinking of the shed or garage that houses the boy’s toys.
Are you as ‘comfortable’ financially as you would like to be whatever age you are?
We are finding more and more people that are saying, “No, we aren’t where we want to be.” And this isn’t just the 50+ age group, younger people are saying the same thing.
And then yesterday morning, providence really kicked in. An article in the NZ Herald shouted, ‘The $100,000 mistake Young People are Making’. It looked at why you should be sorting out a super fund as soon as you start working.
Okay, I know that if you’re in your 20s having this retirement fund thing shoved in front of you is a pain, even damn boring, but read on, I have some good news for you.
“Just by looking at your super fund in your 20s rather than your 40s or 50s can mean a difference of around NZ$94,000. You could easily be looking at a $100,000 difference in your super fund account depending on how and when you sort it,” Aarsen told news.com.au.
Many developed nations are moving towards a self-funded retiree system and it is inevitable that NZ and Australia will do the same, meaning sorting super is more important than ever.
The NZ Herald article went on: Super is definitely an important part of anyone’s future and if people take care of it now they know they’ll be sorted by the time they can access it.
A recent study in New Zealand found that Kiwis would need to save as much as NZ$101,000 by the age of 30 to have a comfortable retirement, which includes the odd vacation or meal at a restaurant. These savings need to build up to $400,000 by the time the retiree turns 65 to make the post-working years comfortable.
“Most people don’t want to work until they’re 80 or 70 and you won’t have to if you do the small things right, right now.”
And it’s about now that I’m going to show you the marvels of compound interest. Stick with me, we’re going to follow two people both aged 20.
Our first person, is switched-on and got some great advice, puts $420 a month into an account where they’re earning 6% per annum. They do this for 10 years (they’re then 30yo) and then stop, at that point they have $68,239 in their account. They then let compound interest do it’s wonderful thing for the next 35 years. By then they’re 65 and have $524,491 in their account.
Our second person, also very diligent about saving, but starts 10 years later at age 30. They deposit the same amount, $420 each month into an account earning the same interest rate, 6% pa, for 35 years. By the time they reach 65 they have $400,514 in their account.
Our first person only saved for 10 years and then stopped and still accumulated over $124,000 more than our second person who saved for 35 years! And our first person still has the luxury to further invest that $420 each month for 35 years!
The magic of compound interest has done the hard work!
If we don’t have the discipline (and the nouse) to start saving early, technology can really help us spend our money. We pay bills electronically, we have multiple cards, so we don’t need to carry cash. While transactions have become easier, our awareness of money and where it goes fades.
To have the lifestyle you desire now, as well as creating wealth for the future takes a complete change in mindset and strategies.
You’ve heard the saying, “Insanity is doing the same thing over again expecting different results.” But it’s not insanity that keeps us stuck – it’s our habits, our behaviour.
We have a free webinar running at the moment that shows you how changing those habits can change your financial future, click here to get started.
If you are not where you thought you would be financially or you’re not comfortable with how money makes you feel, talk to us, we would love to have a chat.
Note: We are not Financial Advisers, the figures were calculated using sorted.org.nz and are not adjusted for inflation, the interest rate of 6% was from a KiwiSaver provider in the Conservative sector (higher rates can be achieved in Balanced, Growth or Aggressive sectors), Super Funds in Australia produce similar returns and the method of calculation used here were verified by a registered FA.