“When I graduated from University in 2009 , I was 23 and had $200 in my bank account.
In other words, I was like most American college students - poor and in debt -
I maintained the same modest lifestyle I had while I was a student. I began attacking my student loans by making double and triple payments. Like a lot of other recent graduates, I was conditioned to fear debt and so I started reading a lot about the 2009 crisis and about economics in general.
One important question emerged - why am I rushing to pay off loans with around 6% interest (NZ rate) when the S&P 500 share market index has historically returned 11%? I decided to revert to paying the minimum on my student loan and invest the surplus instead. I was very much a novice investor, but I started investing monthly when a lot of other people were discouraged from investing at all [in 2009 and 2010]. Consequently, I was investing when shares were cheap.
When I turned 26, I noticed something astonishing. My student loan debt and the money in my investment account had converged to the same amount - $35,000. It was a really good feeling knowing that I could wipe away my entire student loan debt with just a few mouse clicks. I could have but I didn’t. I continued to pay the minimum student loan payments and kept adding to (and growing) my investments.
Today I am well on my way to paying down my student debt, but I also have tens of thousands in stock market gains.”
There’s lots of ideas here!
First of all, this young man did some study of money, which too many of us don’t, because money just seems too hard.
Secondly, he was not worrying about buying a first home at all - he was paying attention to his student loan - debt - and options to get rid of it faster.
Thirdly, he recognised that you can buy shares monthly and they can offer good returns.
You cannot buy a house with no deposit and with a student loan, but you can invest small sums monthly into shares.
He invested in gloom - when shares were cheaper.
Kind of the opposite of buying a house in Auckland right now.
He did have an advantage of living in a country where house price madness is largely absent, so he did not get distracted from his programme.
But, the knowledge he gained (and you can too) will stand him in excellent stead later in life.
Of course not everyone has surplus income to invest into shares in their first job. And markets are not often as low as they were in 2009 and 2010, which was an excellent time to invest. And not all of us have the “stickability” that he obviously had.
However, in summary from last week and a recap from earlier, these pointers can help you get on your way:
· Concentrate on growing your career and income before you buy a house.
· Do the maths on your student loan.
· Before you buy a house, remember house prices don’t automatically rise in all towns in NZ.
· Do the sums on your proposed mortgage payments.
· If you can earn an extra $100 per week and put that on to your mortgage, what are the
savings/rewards you can make? You should know these figures before borrowing $1.
Supplied by Alan Clarke, financial & retirement adviser, & author. He also writes regular articles for the media and on line.
Alan is an independent authorised financial adviser (AFA) FSP26532
His disclosure statement is available on request and free of charge.