Canny View: Millennials need a financial plan

It's important to have foundation financial goals. Photo / Supplied

When young people and young families reach out to me or other financial advisers, it's typically centred around particular financial questions, goals, or issues they need help with at that point in time.

Other times, it's a combination of all these things, as their situation has become too complex to manage by themselves.

Yet, one of the fundamental ways that financial advisers help their clients is by educating them to better understand and prioritise their financial goals. This article will explore how to better your financial goals in an actionable and sensible way.

Let's have some foundation financial goals.

Sian Woodham is an Authorised Financial Adviser and Risk insurance specialist at Stewart Group.

First and foremost, it's important to tackle foundation financial goals that in turn, allow you to pursue more lifestyle-focused goals over time.

Common foundational goals include establishing an adequate emergency fund, eliminating high-interest debts, having life/health insurances, putting a little aside for investing, making regular contributions to KiwiSaver, and building strong financial habits. I know it sounds a lot, but it's achievable with some good advice.

1. Establishing an emergency fund

Boring as it may sound, every strong financial plan includes an emergency fund. It's the first line of defence against the unexpected. Without an emergency fund, you could be forced to take out debt on high-interest rates (think of credit cards), or even dip into savings.

Typically, an adequate emergency fund is anywhere between three and six months' worth of living expenses. The best way to start building an emergency fund is to set aside any bonuses, tax returns, compensation increases and/or by setting up an automatic payment to a savings account each pay day.

2. Eliminating high-interest debts

The most common form of high-interest debts to always avoid is credit cards. It never makes sense to hold a balance on a credit card, hence the importance of having an emergency fund.

If you've found yourself having trouble paying off credit card debt, first develop a plan towards paying it off.

It starts with addressing the underlying issue of why you found yourself in debt trouble.

Oftentimes, it's simply spending more than you earn on a month to month basis.
Establishing a budget and cutting expenses that don't align with things that add value to your life is a great place to start when trying to cut back spending.

3. Having insurance covers

I often get asked whether you need life insurance at all in your 20s or 30s – and why. If you are in your 20s or 30s without children, the need to purchase life and health insurances can seem unnecessary and think it's just a waste of your hard-earned cash. Putting it off, however, may cost you.

The truth is, insurance costs much less than you think, especially with the right plan. Being young and healthy gives you an incredible advantage when shopping for insurance. Premiums rise by an average of 8 per cent to 10 per cent for each year you postpone buying coverage. Always remember you want to have the policy in place before you need it.

4. Contributing to KiwiSaver

Once you've got your emergency fund and insurances checked off the list, you can turn your attention more fully to investments, your retirement or get ready for home ownership (if that's your goal).

Try to take full advantage of KiwiSaver. The Government will contribute 50 cents for each dollar you contribute in a financial year, up to a maximum of $521.43, and, if employed, your employer should contribute at least 3 per cent of your gross wages. That's effectively free money.

A dollar invested "today" can be worth more than a dollar down the line. (The power of compounding interest, it's a great thing.)

5. Building strong financial habits

Although it's a less tangible goal, having strong financial habits in place helps accomplish all other foundational goals. That includes understanding your monthly cash flow, avoiding high-interest debt, investing for your future self, and continuing to increase savings/investments over time.

If you've received a salary increase recently, make sure you increase retirement contributions or transfer funds to other investment accounts. This will ensure that over time, you're saving and investing in line with your growth in lifestyle expenses.

When it comes to investing, you're taking a long-term outlook. No one can predict what markets will do in the short term, yet what we do know is that staying patient, invested, and keeping costs low over the long term can help build considerable wealth. It doesn't happen overnight, stay the course and keep your sights on the long term.

• Sian Woodham is an Authorised Financial Adviser and Risk insurance specialist at Stewart Group – a Hawke's Bay-based CEFEX certified advisory firm helping people make smarter financial decisions since 1986. Stewart Group provides personal fiduciary services, Wealth Management, Risk Insurance and KiwiSaver solutions.

• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz