Elizabeth Kerr says 'average' is a moving baseline and if you aim for that you'll end up in the poor house

By Elizabeth Kerr

Growing up I thought I was pretty average. 

I wasn’t the best at school but I wasn’t the worst either. 

I wasn’t picked last for the team but I was never first.  

I think I lived in an average house and had an average kiwi upbringing.  

This averageness continued on through high school, and to some extent I’d say the world was designed to encourage and reward me for being average. 

However as an adult the pursuit of average with your finances is going to end up putting you in the poor house.

Average is just not good enough anymore, and what’s worse is that it’s a moving baseline.  

The average house price just 5 years ago was $393,231 now its $542,277!  

The average and endorsed way of managing your finances is to spend as much as you like as long as you have enough income to meet all the repayments.   

The average way to save for retirement is to make the minimum contributions to Kiwisaver and hope that’s going to cover it, or to access your equity by moving somewhere cheaper.

Let’s look at average as it plays out below:

  • Girl leaves university at 22 years old with an average student loan of $19,000
  • She gets job with the average graduate salary of $42,000 and gets an average of 2% pay rise each year.
  • She makes the average contribution to kiwisaver which happens to be the minimum 3%.
  • She makes the minimum repayments to her student loan taking her 8 long years to pay off.

Her first 8 years look like this:

So, without doing anything out of the ordinary we can assume she will receive just $30k in the hand or $2509 per month and it increases slightly every year.  

Once we take out money for her non-negotiables such as rent, eating, mobile phone, bus fare (totalling $1033 conservatively) she is left with $1475 per month to clothe and entertain herself.  

She could put more towards her student loan/kiwisaver or start investing – but she doesn’t. This is also unbearably average.

After she has paid off her student loan she meets an averagely good looking, average earning husband and they want to buy a house. Together they spend the national average of $542,277 on their first home. By the time they can afford a 20% deposit ($108,455) using their savings and kiwisaver contributions they are now 39 years old. They have $433,822 to go and they lock it in and pay the minimum each month of $2536. It takes them 25 years to pay off the home. They pay it off aged 64. Just in time for retirement. They thank their lucky stars they didn’t remortgage and buy a bigger house when their 1.9 children asked them to.

Aged 65 they only have $97k each in their kiwisaver plus the pension (if its still around) to live off until they die at the average age of 91 for her and 88 for him.    

Suddenly average starts to become really hard. Many people manage on much less but they had high hopes of achieving much more.  

You see, shooting for average left them with not enough in the end.

But what could she have done if she wanted to make things much better?  Now she might have married a rich social media app developer and lived happily ever after in the beaches of California but that’s as likely as winning lotto (1 in 38 million). 

The more realistic answer is that she manipulates the variables at her disposal.  Her first house could have been so much, much cheaper.   

She could have worked for a year or two to pay for her uni, or even studied for free in Invercargill SIT.  

When she did complete her studies and start working she could have saved more of her earnings, paid off her loan faster, or even started a hustle on the side.  

What would have happened if she had saved her $1000 extra per month into her money machine instead of spending it when she first started work?  

What if she totally forgets she receives a payrise each year and just lives off her graduate income instead?  

Or what if they were both totally committed and created a lifestyle that lived off half their combined income when they married, or they raise their Kiwisaver contributions to 8%?  

Things then start to get better than average.

Sure, she might have looked a little strange to her friends blowing money at cafes and on gym memberships, but attaining your own money machine requires you to be radically different – you just can’t have it all. 

Of all of the major financial lifestyle choices you can make you need to consciously choose where you fit into the range and based on your incomes and unique values instead of being swept up with society’s expectations and pressure to keep up with the Joneses, even if they are just average. 

(Before you start telling me that their house would be worth enough to downsize, not every township has enough capital gains to make this choice worthwhile; and not every old couple wants to leave their family home and community for a cottage in Levin).

In closing this week; my average couple earn collectively just under $5 million over their entire working lives. $5 million!!! Surely they could have carved out a quality early retirement with that? But they didn’t. They started their journey positive that their averageness would provide for them in retirement as long as they didn’t shoot too high on the way. They started their journey with entitlement and left all their savings AND investment until the later years. They missed all of the benefits of compound interest and had to make a lifestyle adjustment when they stopped working.  

Thinking about ALL of the money you have, and will earn, over your entire lifetime is quite good for figuring out what you can and cannot afford to do with the big financial decisions. Starting with the end (retirement) in mind will ensure you know how to avoid a drafty caravan and dry Weet-Bix.  

Go on, why don’t you give it a go for yourself?   If you need some help email me at Elizabeth.Kerr@interest.co.nz or find me on Facebook.