Keeping up with the Joneses
The late-model European car pulls into the garage of a large home in a trendy North Shore suburb. Mr and Mrs Jones unpack the ski gear. The kids, on holiday from their private school, rush inside to blob out in front of the flatscreen TV.
If it sounds too good to be true, it probably is.
The flashy home is mortgaged to the hilt. The cars are owned on finance. The TV was an impulse buy that maxed out yet another credit card.
The Jones family has built a pretty house of cards, but the only thing propping it up is credit. Underneath it all, their real wealth has about as much substance as the Ridges' reality TV show.
Of course, none of this is actually visible to the neighbours peering over the fence.
"There's an incredible amount of keeping up with the Joneses still going on in New Zealand," says David Kneebone, executive director at the Commission for Financial Literacy and Retirement Income.
"It's extraordinary at times and I fear for those folks when they get to their retirement."
The Commission undertook detailed financial knowledge surveys in 2005 and 2009 and both times the results came as a surprise.
While there was some skew towards higher income earners being better with money, it wasn't as clear-cut as you might think.
"Many people with higher incomes just don't feel that they have to maximise the incomes they have and they fritter it," says Kneebone.
There's a growing number of people in the middle-to-upper income bands who have been living beyond their means for too long, he says.
That's certainly been the experience of personal finance author Joan Baker.
"I have seen people in the past with a combined income of eye-watering figures. Several hundred thousand dollars, each of them," she says.
They're living the lifestyle, but there's "nothing there" in terms of real wealth. The cash-flow is strong, says Baker, but none of it ends up on the balance sheet.
How can it be possible to earn a big salary and still spin your wheels? Middle-class angst is a force to be reckoned with.
Long before Biblical times, people have coveted their neighbour's wife, donkey and other prized assets. It's probably human nature.
These days there's a "huge amount of pressure" to live in a certain way, says Baker.
Even the best of us are not immune to it. Baker and her partner Martin Hawes, also a finance whizz, get around rural Otago in a couple of second-hand Subarus.
The 4WD vehicles certainly come in handy for doing business on the mainland.
"If I was back living in Auckland, I'm not sure I feel I could do that," Baker confesses.
She's often seen pressure build within relationships, too. "He wants the really nice car and she wants the holiday. Instead of having a row about it, they have both!"
Then there's the kids. The child of one of Baker's former clients asked his mum if their family was poor. Why? Because his classmates had swanned off overseas for the holidays, while the poor wee mite had to endure world-class skiing down the road at Coronet Peak.
"A parent who wasn't fairly rock solid in their own self-esteem might have responded to that and said 'we're going to Disneyland in the next holidays'," says Baker.
Income vs Wealth
Got a new job, or a pay rise? Chances are you upped your spending accordingly.
We do it unconsciously says Baker, and it happens by degrees. A nice lunch here, a new pair of shoes there - it all adds up.
There's a lot of truth in the old adage that it doesn't matter how much you earn, it matters how much you keep.
A higher income doesn't translate to wealth unless you live below your means.
The sermon is too easy to ignore when you're living large and caught up in the moment. Time to introduce a 40-year reality check.
Meet Matt. He's 25 years old, earning a modest $40,000 a year as a clerk at a big retailer.
His senior manager Mikhaila is the same age, but she's quickly climbed the corporate ladder to pull in $100,000 a year.
Over the years, Mikhaila buys a new car, rents an inner city apartment and develops a penchant for designer suits and blingy jewellery.
She spends everything she earns and lives a fantastic lifestyle, taking regular holidays to Europe and eating out most nights.
Matt's cut from different cloth. He buys secondhand, has flatmates, cooks most of the time and manages to put away $800 a month.
Ten years down the track, Mikhaila's net wealth is a big fat nothing. Meanwhile her underling, who still earns less than half her income, is worth about $125,000.
Fast forward all the way to age 65. Mikhaila is on the verge of pension age and realises she still has no savings.
By this point, Matt's modest but steady savings plan has set him up to live out his golden years in comfort with $1.2 million in the bank.
Finding the Balance
Of course, these simplistic examples are always a bit of a false dichotomy. A higher income doesn't magically turn into wealth, but it sure gives you more opportunities.
Matt had a pretty spartan life until retirement and Mikhaila could have splashed out a fair bit without spending every last cent.
There's no reason you can't have your cake and eat it too.
If you don't have the willpower to save part of your income, then you need something that takes it out of your hands.
That's why mortgages work well, says Baker. It's not that houses are a fantastic investment - it's just that they force you to save steadily.
Being able to set-and-forget is also the beauty of KiwiSaver. It comes out of your pay cheque before you even see it, so you don't really miss it.
While bumping up KiwiSaver contributions might be a quick fix, Baker says it does have its limitations.
The money is locked away and doesn't offer any particular advantage once employer and government contributions are maxed out.
Baker recommends ticking all the boxes for KiwiSaver and then hashing out a regular amount to save on top of that.
Have it automatically diverted from your pay and then the remainder can be budgeted out for spending on anything you please.
Doing it the other way around rarely works out, she says.
"It's very hard for human beings to decide every Friday, or at the end of every month - "Oh! I'll just save $1000 here."
Building wealth at any income level is a pretty straightforward process. If you get the fundamentals right, minor slip-ups won't matter.
Sorted's three-step model is about as simple as it gets:
1. Think - Set financial goals, plan, and protect your assets
2. Shrink - Work towards paying off high-interest bearing debt
3. Grow - Increase your wealth through regular saving and investment
- © Fairfax NZ News