Money Habits, Saving, Investing!
Money is not a subject that’s taught in schools, nor are money habits, financial literacy or investing.In fact, if you ask people to write down the first 10 words that come to mind when they even hear the word ‘money’, it often brings up an association with things like scarcity, greed, hard to get, working hard, saving, credit card interest, hire purchase, debt etc. Not words that will inspire, uplift, encourage or motivate anyone at all. Why do people have such a bad association with it? Some of it may be their upbringing if their parents struggled to pay the monthly bills. Maybe both parents were working 50 hours a week or more just to make ends meet. It could be a wide range of learned behaviours and beliefs, that over time – many people have come to have a terrible association with the word ‘money’. By far the majority of people will work 40+ hours a week from their late teens to at least when they are 65 years old – and still have very little to show for it. Some will buy a home when they’re young in their 20’s or 30’s rather than rent, and then may upgrade in a few years time. Often what happens is people trade up a few years later with a growing family and then purchase another home that stretches their borrowing capacity to the limit. So, a few years later when they want that bigger home, they take out another 25 year loan, having paid mainly interest on their first loan, but not much principal. Their original goal of having paid off their home in 25 years has now been extended by several years. And this usually happens many times in people’s lifetime. By doing this (rather than taking a shorter term loan on their 2nd, 3rd or 4th homes), they borrow again to their maximum limit, so therefore taking out a new loan again for 25 years. By repeatedly doing this, not only does the end date of being mortgage free get pushed out each time, but they end up paying a lot more interest than is necessary. This sort of basic information is not ever taught, nor even talked about when applying for a loan for your 2nd, 3rd home etc. By having an original goal of being debt-free on your mortgage on your first home in say 25 years, you would do things differently – if sticking with that plan. So let’s say, 5 years later when this family wants to buy a bigger home, the automatic question to the bank that people usually ask is “how much can we borrow” instead of saying “we are now going to be mortgage free in 20 years time, can you work out how much we can afford on a 20 year loan please?” Then, if they want to move again in another 5 years time, the question to ask the bank would be “we now have 15 years left until we are mortgage free, could you please work out our borrowing capacity based on that time-frame?”It will of course be a lesser amount each time that they are able to borrow compared to taking out a new loan for 25 years, but the point is not to buy the most expensive house you can afford, and the original goal remember was to be debt free in 25 years.That’s all well and good for someone that has been able to save a deposit and actually buy their first home. What about all the people that don’t even get that far? Today like no other time in history, saving for a deposit to buy your first home is getting more and more difficult. Whereas 20 – 30 years ago, pretty much anyone that seriously put their mind to it could save up a deposit of 5 – 10% as a down-payment for their first home. Now, with prices being as high as they are, it’s still possible to do this, but just no-where near as easy as it once used to be. There are many factors that contribute to prices being as high as they are today, and there is no simple fix that will solve everyone’s problems. Some of these factors are low interest rates, a growing population, demolishing many housing NZ blocks of flats/houses etc and a lack of new houses being built. Also, the human emotional factors including scarcity and the fear of missing out creates a lot of competition amongst buyers, forcing prices up like never seen before. This happens with novice property investors as well. They often ignore the actual numbers that make sense and therefore pay prices for properties seemingly determined by – as much as the bank will allow them to borrow. Some of the other contributing factors are the many policies the current government introduces to try and fix the perceived problems they see. Unfortunately, almost every new rule, policy or change they make seems to have almost the opposite effect. Given the current government’s history (and most previous Labour Governments) of trying to rob the rich to pay the poor, and knowing what these effects have on the economy and property especially, many property investors I know always vote Labour because of this. Not because they agree with their policies, but because it makes them wealthier. Prices go up and so do rents with seemingly everything they introduce, property wise.For me, a conversation on house prices or what they might do is very boring and something that has never interested me. When I buy any property, whether it’s residential or commercial, it has to make sense to me whether the price of it stays the same forever, or goes down. I always assume when buying any property that the value will stay the same or drop, not increase. The first property I ever bought in my 20’s, I sold for a $40,000 loss 7 years later. However, over the last 30 years of investing, generally prices have gone up, and of course there have been times when prices have dropped as well. During the GFC, prices where I live in Hawkes Bay slowly dropped by 25 – 30% over about an 8 year period. Speculators lost a lot of money, as did a huge amount of investors with short term narrow minded thinking. There were so many bargains I bought during that time because many investors thought the sky was falling. They were investing on assumptions and panicked when things went differently to how they thought things should go. For me, knowing that the numbers all worked and the overall purpose of investing, buying at that time made so much sense. Today with prices so high and yields so low, it is a lot more difficult to make it work for the average investor, and personally I haven’t bought any residential properties as rentals for a few years now. Commercial/industrial with the right properties makes a lot more sense to me today. With prices so high as mentioned, saving for a deposit is now more difficult than ever. There is Kiwi-saver which is very helpful and creates a forced type of saving which works really well. Without this, I think even less people would be able to buy their first home today. Saving money is a big subject in itself. Lots of people will save for something, like saving a deposit for their first home. This is a good use of savings. Others will save to spend, in other words save up for something and then spend it on a holiday, a car, or something for the house etc. It’s not really saving as the end result or intention is still to spend it. Then there’s saving for one’s retirement, so ‘saving to save’ and then spend it many years later. Saving for this to me has always been fairly pointless, although better than doing nothing of course. By understanding the concept of money, investing and leverage, it makes a lot more sense to put these financial principles into action, as opposed to saving a few dollars each week. By learning about these things and putting the fundamentals into action will over time likely be far more rewarding than saving. If you do not understand leverage, you work too hard and most likely will work for your entire life. A lot of people are happy to do this as they see investing, owning a business, buying rental properties etc as too risky and rather stressful. That is perfectly fine as we are all different. But for those that do want more, they can still work at a job they love or even simply tolerate, as well as understand about money, finances, leverage, investing etc. I haven’t had a job with paid wages now for 30 years. This was back when I was a mechanic at age 26, having received my last pay cheque. I learnt early on about finances, leverage and investing principles. And although there have been times I have lost huge amounts of money, I learnt each time from it, making me wiser and more financially intelligent. I loved being a mechanic, but at the same time I was also enjoying learning about basic financial skills, skills and ideas that are not talked about or taught in schools. To give you an idea of the saving dilemma, let’s say you had a fairly good paying job and were able to save $1,000 a week. That may sound like a huge amount of money to save each and every week, regardless of your expenses. After a year you would have saved $52,000. Sounds ok, but not really that much. After 10 years, that’s a little over $500,000 and just over $1 million after 20 years of serious saving (you would have the same result of saving $500 a week for 40 years, an entire working life almost).That may be enough to live on for a quite a few years, but do you know many people that could save $1,000 a week for 20 years?! By using and putting into place over the last 30 years the financial principles I mentioned, my financial position now is equivalent to saving that $1,000 a week for 500 years (over $25 million). It would also be the same as saving $500 every week for 1,000 years.There is nobody on earth that is going to even live to 500 or 1,000 years old, nor would they probably want to, but it shows there is a huge difference between saving and investing.A quote I remember from many years ago from Robert Kiyosaki in his teachings in the early 1990’s was ‘savers are the losers.’ What he meant by that was by trying to save money – you are actually losing it. You lose the value of it by inflation eroding it away. So, he didn’t have a very positive view of ‘saving’ money; if that was indeed someone’s way of getting ahead or planning for their retirement. While it’s no doubt better than doing nothing, there are better options if people do want to learn more. A very basic overview of one of the principles is this.You can do four things with both time and money:-1. You can spend it – self explanatory2. You can save it – save money, also save time by doing things faster3. You can invest it – invest time into education, learning, reading etc, invest money in various ways.4. You can leverage it – leverage means doing more with less. For example, people who run a business leverage their time by having employees do work for them, so they don’t have to do it all them self. By charging their time or making them more productive than what it costs to hire them is ‘time leverage’. When you have rental properties whether it’s residential or commercial, the rent that the tenant pays you helps to pay your mortgage(s). This is also time leverage.You can leverage your money by using a small amount of your own money to borrow a larger amount of money from the bank. This may be to buy a property to live in, or a residential/commercial/industrial property, business etc that someone else helps you to pay for. By understanding these concepts, especially ‘leverage’ and using it correctly, you will be well on your way to having a better understanding of money. You want to be a good custodian of money, not an enemy to it. Many people today have a very poor association of money and think it’s dirty or evil. By having that kind of association, they think it’s bad to have it, and so have to get rid of it as soon as they can. This results in spending money as soon as they have it, and often before they have it. In other words, putting depreciating items such as furniture, TV’s, washing machines, cars etc on hire purchase, credit cards etc. Compound interest according to Albert Einstein is the 8th wonder of the world. Used correctly, it’s incredible what compound interest will do. Unfortunately, many people use it the opposite way around and start creating unnecessary debts using credit cards, hire purchases etc which also compounds meaning they can never get out of debt. Again it’s all about education; using very simple techniques and habits that can make the difference between being forever struggling financially and in debt to creating financial abundance. I think the majority of people today want a comfortable, easy life with not too many dramas, hassles or stress. For this reason, they do not want to learn about financial matters, money, investing or even talk about it. That is perfectly fine and there is nothing wrong with that as everyone has different priorities in life. But there are a few basics that everyone can learn that over time, will make a world of difference.For those people that are motivated to want to learn & understand more and are not afraid of being wrong at times; learning about money and finances can be very rewarding. It may mean going outside of your comfort zones at times, taking a few risks here and there, getting comfortable with large amounts of debt and also possibly making mistakes along the way. Maybe your friends or family will laugh at you and think you’re crazy and try to talk you out of it. Usually, it’s more to do with them and their own insecurities, possibly even thinking to themselves ‘please don’t leave me behind’. To me, the negatives are very small compared to the potential massive rewards that can come from educating yourself about money and finances.
By Graeme Fowler