How to avoid a student loan. Start saving today!
Dec 8, 2019
It’s that time of year again…
Nope, not Christmas, I’m talking about school finishing for senior students and with each passing day another batch finish up their exams. The only reason I know this is because when I’m at the check out of our one and only supermarket and if there is a teenager serving me I only have to ask “how are you, school finished yet?” before they tell me all about it because they are excited to be done with the school year. And who wouldn’t be?
I won’t give away details, this is a small town, but when I meet some of these kids at the check out I fear for the future of our society a lot less because there are some fantastic kids out there who are full of excitement for what they are doing at school, what they do out of it and what they will do when they are done with it. And now that their exams are finished, the ones I’m meeting are not languishing on the couch with a long hot summer stretching ahead of them, nope, they are headed to work for 30-40 hours a week.
They are about to work a lot harder than I do.
A few weekends ago a young guy was scanning my groceries - we absolutely blew our budget on that particular shop btw. $280. Didn’t stick “the list”. Ouch - and he was chatting away about his final exam and his finish date. When I asked him what he had planned for the summer, he said he will be working for about 35 hours a week at New World. Although I was desperate to ask him the finer details of his financial life, I didn’t want to freak this young guy out so I kept my questions to myself.
But my absolute main one was “what is a 16-year-old proposing to do with all the money they will make this summer? And also, I was thinking to myself, I’ve seen this kid serving at the check out all year long, how much has he made and what is he going to do with it? Or what has he already done with it? I really wanted to go back and offer to take him out for a coffee so I could ask all about it BUT THAT WOULD BE WEIRD.
In our town of Alexandra if a teenager wants to work (or an adult for that matter) over the summer there is plenty of paid work available either around the town itself working in local businesses or out on one of the orchards or vineyards that are all around this region. All they need to do is have the gumption to approach an employer and ask for a job before they finish school and then once they do finish a lot of these kids head straight to work. And you can forget being paid just a little koha, they are well paid for the age they are and the work they are doing and if they are prepared to put in the hours they can earn great money.
There are three types of minimum wage here in NZ:
Adult minimum wage is $17.70 an hour before tax if you are 16 years or older
Starting-out minimum wage $14.16 an hour before tax
Training minimum wage is $14.16 an hour before tax
There is more information on each rate here - Minimum Wage but for the young guy at the supermarket, I’m only interested in the first one. I don’t know his exact hourly rate but my best guess is that New World would pay on or slightly above minimum wage.
I went onto the IRD website to do a bit of math and if he works 35 hours each week, this is what his pay looks like:
35 hours a week = $502.75
Because I’m assuming he is conscientious (he is working after all), I’m assuming he will do the right thing and pay into his KiwiSaver despite the fact that he won’t get the government contribution until he turns 18. I’m also assuming, purely based on how expensive New World is to shop at that they also pay him 3% into his KiwiSaver ;-)
Not very scientific I know.
This is not the first time I’ve seen this young guy at my supermarket, he has been there all year and I know that school kids are asked to work a minimum of 10 hours a week meaning that all year long he has made $150.65 in his hand each week:
10 hours a week = $150.65
Therefore, by my after tax calculations his 2019 year looks something like this:
$502.75 x 9 weeks of full time work = $4,524.75
$150.65 x 43 weeks of part time work = $6,477.95
Total earned after tax and KiwiSaver = $11,002.70
Of course, there were many other school holidays throughout the year, but unless I take him out for coffee I’m never going to know if he worked them or not.
But hey, $11,002,70 has been earned by this teenager in 2019.
Not to mention that he has contributed an additional $790.74 to his KiwiSaver this year. I have my fingers crossed for him that he is in KiwiSaver and that he is in a high growth, lowest fee possible fund. Obviously, he will earn a much higher income one day and the government will also contribute, but if he never stops his regular contributions, because he has started so early he will have millions once he retires. Easily.
We really do need to have that coffee.
Which all brings me back around to the question I was dying to ask him, “what are you doing with your money”?
Because I was pretty keen to give him my opinion. Every teenager loves hearing an adults opinion right?
During the five minute chat while he checked out my groceries at the check out he also mentioned he is going to go to university in 2021, not a clue what he might study, but he is sure he will be going to university. You will see on the PAYE Calculator above a line named “Student loan deductions”.
This "student loan deductions” is the line I would like every teenager with a job and every parent, aunt, uncle, grandparent, sister, brother, guardian or friend of a teenager to note because what I want this teenager to do is to put the money they earn from their school job aside so they can pay for their university so that the above line on their payslip always reads $0.
The young guy I spoke with and all of the other teenagers gainfully employed during the year have A LOT of money pass through their hands and this is the ONLY time in their life where they have few or no bills to pay. It’s 99.9% likely that he is living at home and won’t be paying any rent or board, he most likely won’t be paying his own school fees or for his uniform and he is still too young to have a car. Chances are his only expenses are the phone his parents made HIM buy in an “effort to teach him about money” (note to parents, please try much harder than this) and the ongoing monthly bill for this and also junk food and a few (probably designer) clothes he might buy himself.
IF this was my daughter...
Heck, one day this WILL be my daughter getting a part-time job and I can tell you one thing for certain, she won’t be spending $11,002.70 on herself with nothing but the latest phone and some designer clothes to show for it. 80% would be going into a saving or investment fund which is earmarked for university and that is the key to avoiding EVER having to have a student loan deduction from your paycheque. A standard degree at university is affordable in New Zealand without taking on a student loan, particularly since they have waived the first year fees now, but the planning and saving MUST start the day your teenager begins their very first job. In the case of my own daughter, it started with her first pocket money. If you leave it to the last minute, of course it’s going to feel unaffordable.
Make an effort to talk to those who have gone to uni recently about exactly what it cost them for everything for the year and use that dollar figure to set your own goals with your kids. Otherwise, the poor habit of earning money and spending the lot can set in pretty quickly. At first, it’s a part-time job of 10 hours a week, earning $150 a week and if your teenager blows through that, well soon they will reach for buy now, pay later services and then onto credit cards. So, don’t let those bad habits set in, instead create great habits from day one because it’s going to give them so many options in the future.
The common catch cry is that we don’t teach our kids about money, well, here is a golden opportunity. Teach the teenager in your life to live on less than they make from the get-go and if they KNOW they have a significant expense coming in the years ahead (hint: they all do), such as university (or saving up a house deposit or buying a car), then teach them to save for that expense now and NOT turn to debt (interest free or not) to cover that expense, because I am telling you that it will haunt them for years to come.
Because here is the thing, I finished university almost 20 YEARS AGO (20!) and so did all my friends. I worked my way through university and came out debt-free but many of my friends did not. I contacted the first half dozen that immediately came to mind and asked if they still had student debt and here are the results:
Friend 1 - still paying it off
Friend 2 - still paying it off
Friend 3 - Paid it off just last year
Friend 4 - Paid off five years ago
Friend 5 - Paid off ten years ago
ME - paid if off before leaving university
Two out of the six are still paying off that debt TWENTY LONG YEARS after they finished their study (20!). I don’t want that to be the lot of this bright young teenager at the supermarket, having money deducted from his wages every single week or month for 20 years after he has finished studying and probably has no memory of what he even learned.
In New Zealand student loan debt incurs no interest as long as you stay in NZ, so, many figure that they either never have to pay it back and/or will just pay the minimum from their wages once they earn over $19,760 a year. I simply say, avoid it at all costs and if you do have to take it on, then pay it off as fast as you possibly can because the sooner you do, the sooner you will give yourself a 12% pay rise, because that is what is automatically deducted from your pretax income when you have student debt. In the example I used above if he continued to work at the supermarket AND he had a student loan he would have $28.68 deducted from his pay each week. Now imagine he had a $30K student loan to pay back and you can see just why it is taking my friends so long to pay it off. Because as long as you have a student loan you will see a deduction from your pay. And when the day comes to take out a mortgage, this reduced income IS taken into account.
Living at home is the cheapest your life is ever going to be, so it’s the time that you can really make the most of every dollar you make so please, if you do have a young adult in your whare, do think a few years ahead about what they might be needing money for and start saving and investing for that day, because it will arrive far sooner than you think.
Now, how am I going to subtly explain all this to that nice young fella at the supermarket next week when he is scanning my groceries - without sounding like a complete nut job? Unfortunately, I don’t think I can, so let’s just hope that his parents are reading this instead!
