Give Money for Christmas

christmas-moneyGive Money for Christmas

Whatever your age, Christmas is a stressful time of year, and much of the stress is caused by financial pressure. It seems rather silly that so much precious money is spent on gifts that may not give lasting pleasure, if any at all. Economists would argue that spending money on gifts for others does not give the most satisfaction (or utility, in economic jargon) per dollar spent. That’s because it’s not easy to judge how much the other person will appreciate the gift.  Despite that, we still give gifts as an expression of love, gratitude or concern for someone’s wellbeing. Yet there are lots of reasons it’s good to give money instead of, or as well as gifts.

To start with, there are plenty of people who could do with a bit of extra cash at Christmas to pay for necessities rather than luxuries. For students with low incomes and big debts, elderly people struggling to pay their bills, and children who are saving for something they really want, money is a welcome gift. You can use a gift of money as a way of teaching children about money; that is, explaining to them the need to set aside money for later, or to save for a goal. You could even give a small investment of shares or a managed fund to teach children how investment markets work.

Giving money doesn’t have to be boring. Check online for creative ways to give money. There are plenty of ideas for how to use notes and coins to make decorative gifts, such a money bouquet, a money Christmas tree, or a box of money ‘chocolates’.

Christmas is a time to think about giving to those who are most in need. Include a charity on your Christmas list to spread the good cheer!

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Pension or Lump Sum?

pension-or-lump-sumPension or Lump Sum?

Many retirees are in a position where they need to decide between taking a pension or a lump sum on retirement. Workplace pension schemes may offer options of a lifetime pension, a lump sum or a combination of the two. A part lump sum option also applies to members of the old Government Superannuation Fund Scheme and to people who have transferred a UK pension (under certain conditions). In addition, you can now use a lump sum to purchase your own annuity providing a regular monthly payment for life. In all these situations, the key question is “Should I take a pension or a lump sum?”

The answer will depend on your personal situation. The advantage of a pension is that it provides a known amount of income for the remainder of your life. This helps take away the uncertainty of how long you are going to live and what investment returns will be. If you live longer than the average person, the total value of the payments you receive will be more than the value of the lump sum invested (plus returns). The key disadvantages with a pension are that you cannot access the capital sum invested, and if you die before the average life expectancy, any funds not already paid out to you will be forfeited. To avoid these situations, you can invest a lump sum in a variable annuity which allows partial access to capital and has a residual value at the end of life.

The key factors for considering your options are your life expectancy – based on your health and family history of longevity – and your ability to access large lump sums if required. If you have a decent lump sum in addition to a pension or an annuity you may have the best of both worlds.

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Being Prepared

being-preparedBeing Prepared

There’s nothing like a week of earthquakes, floods and gales to make you realise the importance of being prepared for disaster. It’s not only environmental conditions that create disaster; there are personal disasters too, such as serious illness, loss of a family member or loss of a job.

A disaster of magnitude has financial consequences, whether it is loss of property, a temporary loss of income, loss of the ability to earn income, or increased costs. Preparing for a disaster starts with asking the ‘What if….” question. What if I am involved in a serious earthquake? What if I suffer a serious illness or injury and I am not able to work again for several months or even years? Try and imagine yourself being in that situation today to identify what you need to do to be prepared.

  • Is your home and business insurance up to date? The Earthquake Commission provides insurance for homes, land and contents for natural disasters. However, to make a claim from the Commission you need to have a current home or contents insurance policy.
  • If you run a business, do you have business interruption insurance? You can arrange cover for lost income or expenses if your business is not able to operate as usual.
  • Do you have adequate life insurance and income protection insurance? If you were to lose your life or suffer a serious injury or illness, your family may be left in a dire financial situation.
  • Do you have an emergency fund? The rule of thumb is to be able to easily access three months of living expenses.
  • Do you have all your insurance details to hand? Scan your policy details and keep them on a flashdrive in your emergency kit or other safe place so you can quickly make a claim.
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The Decline of the Middle Class

decline-of-the-middle-classThe Decline of the Middle Class

This year has had its share of surprises. Brexit and Trump have both caught the world unawares and, although both the Brexit referendum and the US elections were separated by time and place, there is a common theme which provides an explanation for the results; the decline of the middle class.

It has been eight years since the global financial crisis. Economies have been characterised since then by low growth, low inflation, low interest rates and high unemployment. It has been a hard slog for the working class, particularly those in older age brackets who have found it more difficult to get work or who have seen their retirement savings impacted by low investment returns. There is an increasing level of disparity between the rich and the poor, which has led to an angry, disaffected working class looking for a different solution to their economic problems.

A research report from McKinsey Global Institute, published in July, 2016, called “Poorer than their Parents: Flat or Falling Incomes in Global Economies” found that the trend for stagnating or declining incomes in the middle class is not just occurring in the US – it is a global phenomenon. The report found that as many as 70% of the households in 25 advanced economies saw their earnings drop in the last decade. This compares to just 2% of households who had declining incomes in the previous twelve years. The middle class, who have had the expectation of their fortunes increasing over their lifetimes, have been hugely disappointed; hence their vulnerability to influence by radical politicians touting new solutions. We have seen evidence of this in the UK and the US, and other economies may yet have a similar experience. Increased polarity between rich and poor leads to unrest and pressure for political and economic change.

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The Rise, Fall and Rise of Property Syndicates

property-syndicatesThe Rise, Fall and Rise of Property Syndicates

Falling interest rates are prompting investors to look elsewhere for returns, and, with the uncertainties of the share market, property is where they are looking. However, the rush for residential investment property has pushed prices through the roof. Commercial and industrial property is out of reach for the average investor and so property syndicates are back in favour again.

Markets go in cycles and about twenty years ago we saw the same trend. Interest rates had fallen, along with inflation, and people, particularly retirees, were looking for higher income returns. Companies like Waltus, Dominion Properties and St Laurence flourished. Opportunities to buy into property syndicates were quickly snapped up. While the property market was buoyant, investors were happy. It wasn’t too long before the risks became obvious. Some syndicates performed better than others. Investors who wanted to cash up their investments, particularly the non-performing ones, found it increasingly harder to find other investors to sell to. It was unclear when the syndicates would be wound up and the funds returned to investors. Eventually, providers were forced to roll the syndicates into one fund which meant that in effect, investors in high performing properties received a lower return so those in low performing properties could receive a higher return.

Investing in a property syndicate is akin to putting all your eggs in one basket. Liquidity is poor and promised returns may not eventuate if the tenants default or the building requires extensive refurbishment. Syndicates are a more expensive way to own property than owning it directly as the syndicate manager charges a fee. Alternative options for investing in commercial and industrial property are to invest in a listed property trust, or a property managed fund. While there are still management fees to be paid, they offer much greater diversification and liquidity

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Personality and Investment Decisions

personality-and-investmentPersonality and Investment Decisions

People who find themselves suddenly having to make significant investment decisions often feel overwhelmed, confused, or even afraid. They fear making costly mistakes which could jeopardise their financial futures. In most cases, fear stems from lack of information, understanding or experience which undermines confidence in making the right decisions. These emotions can bring about the very thing that is feared – that is, costly mistakes. Learning to invest is a bit like learning to ride a bike. When you first get on a bike, never having ridden before, your fear of falling off means you ride slowly with your feet ready to touch the ground, so you are much more likely to fall. Once you learn to proceed confidently with your feet firmly pushing the pedals, you have a quick, smooth ride with a low risk of falling.

Fear can lead to procrastination of decision making, or inertia. The cost of not making an investment decision or delaying it is the opportunity cost, which is the investment return that could have been achieved if the decision had been made earlier. Fear can also lead to panic decisions after an investment has been made, which can result in actual loss or in opportunity cost.

On the other hand, some investors are over-confident which means they take on high risk that can lead to disastrous consequences. Somewhere in between are those investors who stick to a narrow range of investment options they are familiar with and who lack the confidence to step outside that range. This means their investments can lack diversification resulting in increased risk or opportunity cost.

Investors often behave irrationally, without logic or reason, driven  by emotion. In the words of author Jason Zweig, “Investing isn’t about beating others at their game. It’s about  controlling yourself at your own game”.

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Property Investment Basics

property-investment-basicsProperty Investment Basics

Low interest rates and rapidly rising property prices are driving investors to property investment. Many would-be property investors don’t understand the complexities involved and can easily make costly mistakes. Here are some basic principles to follow.

Understand that property investing is a business. It requires planning, discipline, a wide range of knowledge, willingness to take calculated risks, and a focus on getting a good return on your investment. There is no room for emotion in property investment.

Develop your strategy. There are many different approaches to property investment with different financial outcomes. You might choose to:

  • Buy property to retain for the long term, buy to renovate and sell, buy to renovate and retain, or be a property developer.
  • Specialise in certain types of property, such as apartments, properties with multiple tenancies, coastal properties, or low cost housing.
  • Specialise in a particular geographic area.

Different strategies have different implications for taxation and cash flow.

Get help from a team of experts. As with any other business, you will need an accountant and a lawyer. It also helps to have good relationships with real estate agents, mortgage brokers, insurance brokers, property managers, property inspectors and tradespeople.

Learn as much as you can before you invest. Read property magazines, learn from other investors and research the areas you are interested in. Practice doing financial analysis on properties for sale so you get a feel for the kind of property that makes a good investment.

Investing is a great way to build wealth because of the principle of leverage – that is, borrowing money to invest. Leverage multiplies the returns you receive on your investment. Get it right and you could well make a fortune. Get it wrong, and you could lose a fortune. There’s a good incentive to stick to the basic principles.

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The Big Squeeze

the-big-squeezeThe Big Squeeze

New Zealand’s rate of inflation continues to be low, even though our economy is growing. Lower petrol prices, cheaper airfares and computer equipment are some of the biggest contributors to low inflation and have reduced the impact of higher prices for housing-related goods and services. However, this is not necessarily cause to celebrate. The way in which people spend and save is very much influenced by the rate of inflation. Rapid increases in prices can cause people to spend now rather than later in order to buy cheaper. Saving becomes less attractive because the purchasing power of money declines over time. On the other hand, when prices are falling, spending is delayed in order to buy cheaper. The economy then slows down and prices can fall even further.

While high inflation is not desirable, neither is deflation (falling prices). The aim of the Reserve Bank is to keep inflation at about 2%; not too high and not too low. The principal tool for achieving this target is the Official Cash Rate (OCR), which in turn has an influence on the interest rates set by banks for deposits and lending. In theory, a lower OCR should mean lower deposit and lending rates for savers and borrowers. This in turn encourages spending and investment, leading to higher inflation. However, the OCR is only one of several factors that determine bank interest rates, so a change does not always achieve the Reserve Bank’s aim.

With inflation only just above zero, there is a danger we will head into deflation and the Reserve Bank is likely to continue to drop the OCR. If this translates into lower bank interest rates, savers will be caught in a big squeeze between falling interest rates and rising inflation. This is an uncomfortable place to be for retirees.

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Ownership of Your Assets

ownership-of-your-assetsOwnership of Your Assets

The more wealth you acquire, the more important it becomes to look at how your significant assets such as your home, investments and insurance policies are owned. Ownership has flow on effects in terms of tax, estate planning, and protection of your property against claims from creditors or former partners.

At the simplest level, assets can be owned individually or jointly if you are in a committed relationship. Owning assets in your individual name does not protect you against a relationship property claim from your partner in the event a relationship ends. Individual ownership of investments can, however, have tax benefits if you are your partner are on different tax rates. In the event that one partner dies, ownership of jointly owned assets will automatically pass to the survivor, whereas individually owned assets transfer to the estate, resulting in time delays and cost. ‘Tenants in common’ is a variation of joint ownership where on death of a partner, ownership of the deceased person’s share transfers to the beneficiaries of their estate. This can be useful as a way of transferring wealth away from the survivor so they fall within asset thresholds for means tested benefits, or as a way of ensuring children from a prior relationship receive their inheritance.

Family trusts are particularly useful for easy estate planning and protection of assets from creditors or relationship property claims. However, it is becoming very difficult to use them as a protection from means testing, for example for rest home subsidies. They are costly to set up and administer, and have to be looked at in relation to the benefits offered.

There is no perfect solution for asset ownership. Every solution has pros and cons, and it is a matter of weighing them up to see which offers the greatest benefits overall.

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Get Rich Fast or Slow

get-rich-fast-or-slowGet Rich Fast or Slow

The rate at which wealth grows is determined by three things: the difference between your income and your outgoings (that is, how much you save), the nature of your assets and the nature of your liabilities.

 

Saving

Income is a flow of money which can be either spent or saved. Wealth is like a store of money where savings are accumulated. The more you save, the more your wealth should grow.

The nature of your assets

Assets are things of value that you own. Lifestyle assets are those which decrease in value over time, such as your house contents, your car and many other possessions which add to your lifestyle but not your wealth. Investment assets which produce the greatest wealth are those which grow in value and provide income such as bank deposits, shares, rental properties and businesses. By reducing your holdings of lifestyle assets and increasing your holdings of investment assets you should build wealth more quickly. Your family home falls into a third category called lifestyle property. It will add to your wealth less quickly than investment property as it does not produce income.

The nature of your liabilities

Your debts can be categorised along the same lines as your assets according to the purpose of the borrowing, that is, lifestyle debt (for living expenses and lifestyle assets), investment debt (for rental properties or businesses) and lifestyle property debt (the mortgage on your family home). Lifestyle debt is known as bad debt because it is money borrowed to buy things which go down in value or have no lasting value. Investment debt is good debt as long as the net return from the investments purchased is greater than the cost of borrowing.

Building wealth is about saving more, increasing investment assets, reducing lifestyle debt and borrowing to invest.

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