Australian Year 12 students are missing out on a helluva lot this year. Formals, graduation ceremonies with an audience, potentially even Schoolies.
Forgoing these things is bitterly disappointing. It even prompted the Prime Minister Scott Morrison to issue a special message to near-high school graduates recently.
But the biggest loss is actually a silent omission in their education. With high school curricula stripped back to the basics – to make up for home/lost time – money smarts training is on the cutting-room floor.
This is the real-world survival stuff that makes or breaks you.
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Sure, a lot of us had to learn by expensive experience. But this cohort of kids faces far more economic, environmental and technological challenges than we ever did.
Here are the five vital money lessons that, in an ordinary year, I outline to as many graduating classes as possible – but of course, not this year.
This is the S.M.A.R.T. Start strategy I’ve developed to underpin my Smart Money Start financial literacy incursions (usually) around the country.
The ‘S’ in S.M.A.R.T. is for...
Save, don’t cave
The great physicist Albert Einstein took time out of physics to call a thing known as compound interest the 8th Wonder of the World.
So, compounding is the pure power of earning interest on interest – or returns on returns. When you simply leave your income in an account or investment, the snowball effect of making money on money is almost magic.
But Einstein went further, saying: “He or she who understands compound interest earns it; he or she who doesn’t, pays it.”
‘Save don’t cave’ refers to the latter.
Whatever you buy with credit costs you more than the base price. That simple. That’s what interest is.
Now, for this generation of graduates, this has been clouded by the explosion of buy now, pay later services. These get away without being regulated or reigned in by our Consumer Credit Protection Act because they don’t actually often charge interest.
What they charge are penalties instead, if you miss repayments. (Pay-day lenders that prey on the cash-strapped – and have seen a massive spike in usage by young people in COVID times – do the same... equating to sometimes 400 percent interest.)
Tell your kid-ult that if they simply save for things up-front, they’ll never have to pay more than the price on the label and never be sucked into a debt spiral.
And throw in that so-called rent-to-buy facilities – you know, when you can’t afford white goods to set up a home so lease them long term – can cost you many many times more.
Bottom line: If you don’t have the cash, you can’t afford it. The only exception is a house and maybe (although you should ideally save for this too) a car.
The ‘M’ in my S.M.A.R.T. Start is for....
Moderation, not deprivation
Yes, you can fritter your future by wasting everything on the small, inconsequential stuff – think games and apps and lunches and beverages. Micro spending can do maximum damage... but you also need to enjoy life!
Like dieting or studying, it’s not sustainable to deprive yourself of all spending; you need to give yourself rewards along the way.
A great way to know what amount is safe to splurge is to follow my magic money split.
We will deal with this in the ‘A’ in S.M.A.R.T...
Amass a cash stash
So the magic money split goes like this:
Step 1. Pay your bills.
Step 2. Save 10 per cent of your after-tax salary for ‘future you’. Whenever you possibly can (and if the Covid-economy means that at the moment you can’t, don’t feel down about it.)
Then, with the rest of your money:
Stash for later fun – Target rewards so sweet you can almost taste them. These might include a car, a holiday or, ultimately, a house.
Splash for fun now! The serotonin-spiking goodness.
How much you stash versus splash is up to you. But we all need strong motivation to resist instant gratification. No matter how old. So get dreaming about those big, beautiful goals.
Meanwhile, why should you save 10 percent on top of these longer term savings goals? Because if graduates invest just $6 a day from the moment they leave the school gate, at an 8 percent average investment return, they’ll be a millionaire by the time they retire.
Better still, because they’ve harnessed the help of time, they will only have saved $100,000 of that themselves – $900,000 will be effectively free!
Which brings me to the ‘R’ in S.M.A.R.T…
Rates, not mates
The interest rate you pay – and earn – is everything. Getting back to Einstein, you can earn a pittance or a fortune. When it comes to debts, you could easily shell out double the price of house.
You need the very best rates on every product and a top tip: no provider will have the best of even two products. You need to be with a different institution for each aspect of your financial life.
And a penny-drop moment that could save young adults circa $150,000 is that the institution that shamelessly coveted their adult business since primary school, via school banking, may well offer the best rates on, well, nothing. (There is currently an ASIC inquiry into the merits and motivations of school banking.)
It doesn’t need to if it’s secured your lifetime loyalty through lovely little cartoon characters.
And that brings us to the crucial ‘T’ in S.M.A.R.T...
Target a perfect score
Your school leaver should think of this a little like school… you want an A-grade credit record to get access to top-class financial products.
Or even to get approved for a mobile phone contract.
Australia now has positive credit reporting, like the United States, which means virtually your every money move feeds into a credit score that is a dynamic but potentially damning snapshot of your financial self.
Even utilities providers look at this when deciding to switch you on.
You can damage your credit score by missing a credit repayment by as few as 14 days, or a bill by 60 days. And every application you make for credit will drive it that little bit down too.
This stays on your rolling credit report for up to five years and will hurt your chances of getting a loan during that time. Even if you do get approved, a poor score could mean you pay higher interest.
And in an imminent related danger for young people moving out into share houses: if your name is on a bill or the lease, and it doesn’t get paid, you are liable. Even if you’ve moved out long before.
Congratulations on graduation… now getting a S.M.A.R.T. money start will change you/your young adult’s life.
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