In the recent Budget, Finance Minister Bill English stated that student debt was $11.6 billion.
Of that, students living overseas owe $2.3 billion, with only 20% making any effort to repay their loans. Debt levels in general throughout New Zealand, including mortgages, credit cards and hire-purchase, are at an all time high. At the end of April, $5.4 billion was outstanding on credit cards.
The Reserve Bank has held the official cash rate at 2.5%, and general market consensus on the comments made by Dr Bollard was that interest rates will begin to rise about December this year. Inflation is officially at 4.5% and rising slowly.
Present generations of young people see debt as a normal fact of life. Generation Y New Zealanders are not really concerned in general with all debt levels. Generation Y are persons born between 1978 and 1994. This generation has not known hardship; has not experienced monetary losses from investment decisions; or, held long-term employment.
Their demands for flexible working hours, the opportunity to do work that makes a difference, an absence of loyalty to their employer and an unwillingness to put up with corporate slavery, are here to stay. This generation wants a life.
The coming rise in interest rates might be a wake-up call to the younger generation but I doubt it? As interest rates rise along with food costs and the price of petrol keeps fluctuating, what will be sacrificed to meet the mortgage payments?
Probably not the discretionary spending on lifestyle living, like holidays and eating out - but savings.
Fortunately for those who have made a wise decision to join KiwiSaver, they are unlikely to meet the criteria to withdraw. It is fortunate that the scheme has been made locked in until retiring age, at present 65. It has also therefore ring-fenced the now compulsory employer's contribution.
The problem with today's generation is that they have no cushion to handle a period of unemployment or hard times, as no funds are put aside for a rainy day. It is too easy to just put it on the credit card. Or, as appears to be happening now with the Y generation, head to Western Australia.
There has been a faint glimmer of change, in that recent card spending figures show a reduction, as households are being more selective in spending. If the coming rise in interest rates could encourage a change of lifestyle and attitude towards saving, it will have achieved something. Is it possible?
What is required is more education on the basics of financial planning. Proportion your income to sectors such as basic requirements (say 70%), saving to spend, such as holidays (15%), long-term for retirement (10%), and 5% for discretionary treats. It works but it requires discipline.
• Peter Smith is an authorised and certified financial planner and is the principal of Kepler Group Otago Ltd, Dunedin. Email: pete@keplergroup.co.nz. A disclosure statement is available on request and free of charge.
