House-hunting millennials: you can have your brunch and eat it too

Article as seen in The Herald.

"Shouldn't they be economising by eating at home? How often are they eating out? Twenty-two dollars several times a week could go towards a deposit on a house." – Bernard Salt, Writer

As the avocado season draws to an end, it’s time to get our finances in order. Like many of my fellow millennials, I didn’t start thinking about my own finances until after university, and by then the damage had began – my student loan was a monstrous amount and I found myself joining the workforce in considerable debt.

After graduation, I started as a financial adviser. This was the first time I had thought about my financial future, planning to secure my first home and investing in my retirement.
It was like being at money school – a school I wish we all had to attend.

Let’s face it, for our generation there will be no guarantee a future government will pay us a pension and it’s likely that the retirement age will go up. These warnings are coming loud and clear.

Who is to blame? Boomers with their free education and cheap houses, or millennials for their “now” attitude and appetite for avocado-with-feta-on-toast brunch?

It’s actually irrelevant.

There remain many opportunities for millennials who want to take steps to create a brighter financial future.

Nine simple things any millennial can do:

1. Know your goals

It’s very important to know what you want from your financial future before you set about making a plan. What do your 40s, 50s, 60s and retirement look like? If you’re going to be that 70-year-old Kiwi that travels a lot, or wants income from property investment, plan backwards from that and work out what you need to do and how much money will be required.

2. Make KiwiSaver work for you

Negative attitudes around KiwiSaver benefits need to change. Balances are getting higher and it’s becoming a significant asset for many people.

Many millennials are already small business owners – freelancers or self-employed – it’s worth knowing that the minimum amount you should be putting into KiwiSaver is $1,086 so you receive the government’s tax credit of $543. This is a 50% return that you’ll struggle to find elsewhere.

You should also consider the risk level of the fund you’re in. For example, if you’re saving for your first property, you might want to be in a more conservative (or low-risk) fund, but if retirement is your goal, a high-growth fund will likely deliver you the best return, but at higher risk.

3. Buy a house where you can afford to – now!

They say that the best time to buy a property was yesterday, but that’s no use to millennials earning a decent wage but spending it on high rents in New Zealand’s major cities.

It also feels like a game of catch-up, with banks now looking for a 20 per cent deposit, an average house in Auckland requires around $190k to be saved, and by the time you’ve saved that, the average price has increased.

Forget about where you can’t afford, carry on renting where you are and buy what you can afford to rent it out. If where you can afford is the “next big thing”, then the gains you make should be enough to kick-start a property search in your preferred area.

4. Team up with mates for property gains

If you can’t borrow your deposit from the equity gains in your parents or grandparents’ properties (ye olde ‘Parental Bank’), unite with your fellow millennials.

You don’t necessarily all have to move in, but consider owning a property together, either to rent or for one couple to part own and part rent. At least this gets you onto the ladder.

Lawyers can draft up all the necessary paperwork to make sure the ownership arrangement is fully understood.

Remember, you can have the Kiwi dream without living in it.

5. Realise your mortgage is not set in stone

Don’t get caught in the trap of signing a mortgage deal at the bank and walking away saying “I’ll see you in 30 years”. Interest rates change, bank lending rules change and your goals will change. Depending on these, it might mean tackling your mortgage differently every year.

Ultimately, the goal is to pay your mortgage off quickly, meaning you’ll repay less over time and the property can become the leverage tool with which a whole manner of lifestyle changes can become available.

The contract between you and your lender isn’t a rigid one and mortgages should reflect the best aspects of your financial situation; if you think your current lender isn’t the best option for you, ensure you seek advice from a mortgage adviser about your options.
Mortgages can be split up into manageable chunks to achieve a series of short-term goals. For example, aiming to pay five per cent of the loan in a year (both principal and interest) is very attainable. The five-per-cent chunk sits aside from the total and can have current best interest rates applied to it – it’s an easy way to make a dent in your debt.

6. Get insurance early and level your premiums

New Zealand is the third most uninsured country in the OECD and it doesn’t look like that’s going to change any time soon.

Not many people know that if you’re insured for private health cover before you are three months old and continue your policy from then (just transferring when the parents no longer want to pay) you’ll never have to fill out a medical declaration form.

The point is, the younger you sign up for health insurance, trauma, life and income protection, the more likely you’re to be covered without exclusions and the cheaper your premiums will be if you level them. By levelling the premium (whereby you pay a higher amount initially but the amount stays the same and doesn’t escalate with age), you’ll save tens of thousands over a lifetime.

Your health and ability to earn an income are your biggest assets. To lose either would be a major financial set-back, which could put your life goals out of reach.

As the public healthcare system’s waitlists continue to grow, health and medical insurance becomes more important as it can assure a quicker recovery and return you to earning income. If your income is covered too, you will be able to continue paying your mortgage repayments and living expenses – only a startling 22% of Kiwis have this cover, with many choosing to only invest in house insurance, which just covers fire, theft and damages.

7. Use investments to create cash flow

Many people don’t start investing money until their 40s or 50s, but it is a useful tool for people of any age. Allocating some money to investments (which can be made on your behalf by a funds manager) can give you enough returns to pay off another debt. Cash flow can also be created from a property you’ve bought and rented out.

8. Make tiny sacrifices now to save exponentially later

It’s as simple as realising that saving an extra $1k a year now can save many times more than that amount in years to come.

For your mortgage, by making an increase in payments of around the price of a flat white a day, you could reduce your mortgage term by more than four years. That’s a huge saving when you consider that the average total repayment is more than two and half times the original loan amount.

9. Work on your financial literacy

Stop thinking you’re just one of those people that is “bad with money”. You can change that.

There are a vast number of books and online resources that can help, but in New Zealand most financial advisers will give you free financial advice – you’ve just got to ask.

Above all, let’s make our children better with money by ensuring they are raised with a focus on financial literacy. We all use money every day; it should be a priority to learn how to make it work for us.

Our money habits are learned, so the younger we start, the more intuitive it becomes.

Article By Travis Hamilton - Get In Touch

Travis Hamilton is the Adviser Development Manager for Lifetime. He happily identifies as a millennial, but doesn’t consider himself part of the selfie generation.