Here in NZ, we are notoriously bad at saving. We rank among the world’s worst at #26 out of 29 OECD countries in a 2019 report. More recently, in the quarter ending March 2021, household savings fell to its lowest in 2 years.
It’s speculated this is partly due to people spending up because they can’t travel. Regardless of the reason, it is not good news.Spending instead of saving is not a good strategy for future financial security, and younger generations stand to suffer the most for it.
The state of financial education
There is no argument against the fact that financial decisions made early in life can cause financial hardship later on down the track. Younger people are easy prey for debt traps through the likes of mobile phone plans, online shopping deals, ‘buy now pay later’ schemes, gaming and credit card offers.
Are we doing enough to give our kids the tools they need to make wise financial decisions? No.
Massey University has undertaken a 20-year longitudinal study to track the financial behavior and knowledge of a group of New Zealanders through life stages. It started in 2012 when the group was aged 18-22.
Recent data from the survey showed that half of the participants said that when it came to finances they learned “everything” or “almost everything” from their parents. When asked how they expect to learn in future, the most common answer was “life experience.”
It’s great that kids are learning from their parents - IF the parents actually have good solid knowledge of financial matters. As far as relying on life experience, financial mistakes can be costly and difficult to recover from. It’s not good enough.
A 2013 study reported that:
- Only 8% of NZ schools had compulsory financial education, while the OECD average was 28%.
- 30% of NZ schools do not provide any financial education.
A 2019 series published on Stuff reported:
- 14% of students reported learning a lot about finances from school, while half said they learned little or nothing.
- 82% of school leavers wished they learned more about money at school.
One study attributes 30-40% of retirement wealth inequality to differences in financial knowledge. We aren’t doing our younger generations any favours by not providing a solid financial education so they can make good decisions from the start.
Living longer costs more
A longer life span means we need to have more saved for our retirement years than ever before. It also means that the current working population is paying taxes to fund the Super for a larger population than ever before, while trying to save for their own retirement.
People used to rely on intergenerational wealth, but we’ve seen some pretty significant changes in recent years. It used to be that people were receiving their inheritance when they were in their 30s, when they likely had young children and just bought a first home. Now, most people don’t get their inheritance until they are much older, when they are already in the prime of their own wealth. This means the current generations cannot rely on intergenerational wealth to come to them when they could most use it like past generations have.
On top of this, unemployment rates are highest among younger people. With the effect of the Covid pandemic on people’s jobs, employers have the pick of more experienced workers. As of September 2020, over 20% of 15-19 year-olds were unemployed, over 10% of 20-24 year-olds, and about 5% of 25-29 year-olds. The rest of the population has rates under 5%.
The need to save more while having a high cost of living and issues around employment are a triple whammy for today’s youth.
Buying a home for retirement
It has long been a Kiwi tradition that to comfortably retire you should buy a home and pay it off. In that Massey University study, 96% of the participants believed that owning a home will be helpful in retirement.
There are a few issues with this plan in today’s world.
One, it now takes an average of 15 years to save a deposit, so home-buying is occurring later in life. If you buy a home in your 30s and take out a 30-year mortgage, you could still be paying that mortgage when you retire.
Two, home ownership rates are the lowest they have been since the 1950’s, at just over 60%. That leaves a lot of people out of the ‘relying on a home for retirement’ plan.
Three, to get equity from your property you have to sell it. This takes time and costs money. If your property value has dropped, you could end up owing. You could rent your property for income but that then means you then have to be prepared to be a landlord.
Four, it’s putting all of your eggs in one basket. If you are unable to make your mortgage payments, the bank can take your home. What happens if you divorce, or you or your partner lose your job? What if property values plummet right when you need the cash?
There are other, more diversified options for saving for retirement, and the earlier you start, the more you stand to save.
Get financially literate
One of the reasons I started BetterSaver was to provide unbiased expert advice in a way that was accessible to all Kiwis. I want us all to have the opportunity to make the best decisions possible for ourselves and our families.
The easiest way to affect the most people is through KiwiSaver. As soon as you start working, you can sign up for a KiwiSaver account. Your employer and the government both contribute to it. Your money is invested in diversified accounts based on the risk level you are comfortable with.
I found it heartening that 90% of the young people in the Massey University study have a KiwiSaver account. Now the important thing is that they make the most of their KiwiSaver by making sure they are in the right fund and contributing the right amount.
The BetterSaver team is here to help you find the best KiwiSaver fund for you. Plus, we research a lot of areas around financial well-being and share our knowledge through our blog, socials, and podcasts.
We can improve our future financial outlook by taking action now.
Take the first step by sorting your KiwiSaver - it takes less than five minutes to take our Fund Finder quiz and switch funds.