Small Steps to Financial Success

Small StepsSmall Steps to Financial Success

It’s great to have big, audacious goals to achieve. Perhaps you want to retire early, become financially free, or become a multi-millionaire. To achieve big goals, you have do things differently than you have done them before. However, finding the confidence to take a big leap out of your comfort zone is not easy. Big goals can seem unachievable at first, as well as scary, so a good plan is to take small steps initially rather than a giant leap. Small steps successfully achieved give you a sense of making progress while building your confidence to make changes.

Clarify your starting point

You can’t achieve a goal without knowing where you are starting from. It’s no different than taking a road trip. If your destination is Whitianga, the route you take, and the time you take to get there, will be different depending on whether you are starting out in Auckland, Wellington or Christchurch. Take stock of your current situation including your assets, debts and income and then develop your strategy.

Make one small change at a time

Set up a regular payment into a savings account, even if it is just a small amount. Review your KiwiSaver fund. Investigate ways to increase your income. Research investment opportunities. Doing something every day to take you towards your goals can add up to big progress over time.

Track your progress

What gets measured gets done! A simple way to achieve your goals is to create an image you can use to mark your progress. For example, if you want to reduce debt, draw a flower with a number of petals each of which represents a unit of debt ($100, $1,000 or $10,000). As you pay off each unit of debt, colour in a petal so you finish with a beautiful flower.

Comments { 0 }

Top Tips for Your Fifties

FiftyTop Tips for Your Fifties

Whether you plan to keep working after becoming eligible for NZ Superannuation or not, 65 still looms as the defining age for retirement, and it looms even larger in your fifties. Depending on your circumstances, the prospect of reaching 65 can lead to feelings of joy, fear or uncertainty. The ten years before retirement are like the last lap of a marathon race. If you are leading, you could easily trip and fall before the finish line. If you are at the back of the pack, it is still possible to have a surge of energy for a respectable finish.

Power up your savings

How much you save during the last few years of your working life will determine how well you live in the twenty or thirty years of your retirement. Work towards living on whatever your retirement income will be and save the rest.

Blitz your debt

Crunch your remaining mortgage by having part of it floating or as a line of credit, so you can make extra payments without penalty. Put your credit card on ice and use a debit card instead.

Slash your outgoings

If you have no dependents and a good asset base you may be able to cut back on your life insurance. Shop around for the best deals on utilities.

Boost your investments

It’s a myth that all your investments need to become more conservative as you get closer to retirement. Match your investments with the time frame in which you will need to access your capital; conservative for short term, growth for medium and long term.

Plan your dream retirement

The amount of money you need will depend on how you want to spend your retirement. Be clear on your retirement goals so you have a financial goal to make your dream real.

Comments { 0 }

Protect Your Wealth

Protect Your WealthProtect Your Wealth

Creating wealth takes time, effort and discipline, and also a willingness to defer spending and take calculated risks. It is not always a straight line process. In fact, it can be a bit like playing monopoly. Every now and then you draw a bad card that costs you a lot of money or sends you straight to jail!

Wealth protection is just as important as wealth creation, yet it is often overlooked. Keeping wealth safe is not just a matter of making sure your money is kept in the bank or in other secure investments. Financial risk is only one of the many threats to wealth. In business, it is good practice to do a risk audit – that is, to identify the risks faced by the business and look at what methods are available to minimise or mitigate these risks. The same approach can be taken with personal affairs. The starting place is to note the key risks to personal wealth. Then consider the size of the potential negative impact associated with each risk, how likely it is to occur, and what can be done to reduce or eliminate the risk. Sometimes there is a cost associated with reducing or eliminating risk, such as insurance or legal costs, and this needs to be weighed up in relation to the extent and likelihood of possible loss. Clearly, a high risk of a large loss would probably justify the outlay of protective measures, while a low risk of a small loss may not.

Risks to personal wealth can include the risk of illness or death of yourself or a close family member, the risk of loss of property through theft or disaster, the end of a relationship, investment risk, and risks associated with being a business owner or director. Don’t ignore them!

Comments { 0 }

Give and Get Back

donationsGive and Get Back

It is tax refund time and if you have given funds to an approved charity or other donee organisation, you can bundle up your tax receipts and submit a claim for a tax rebate of one third of the amount donated. A list of approved donee organisations can be found on the IRD website. Many people are unaware that ‘voluntary’ school fees can be claimed as a donation as long as you have a receipt with the word ‘donation’ written on it. State run kindergartens are also approved donee organisations. The total amount of donations you can claim a rebate for is limited to your taxable income for the year.

Saving up receipts over the course of year is a hassle. They are likely to get either lost or forgotten about. There is a way of giving that is much easier both on paperwork and your pocket. It is called ‘payroll giving’. It is simple to set up, however it needs the co-operation of your employer.

Payroll giving works well if there are organisations you support on a regular basis. Your employer makes the donation to your chosen charity each payday and you immediately receive the tax credit. So if you donate $15 it only costs you $10. Giving a small amount each payday is much easier to budget for than giving one large amount annually. You don’t have to save pieces of paper or fill out the rebate form at the end of the year. There is a small amount of work for your employer to make the appropriate deductions and payments but these steps are easily put into a payroll system. Many employers are not aware of the payroll giving scheme, so if it is of interest to you, bring to their attention. More information is available here.

Comments { 0 }

What Investment Income Really Means

Investment IncomeWhat Investment Income Really Means

When it comes to managing investments, a big source of confusion is the relationship between income, return, cash flow and capital. These four things come together make investments grow and to provide funds for the enjoyment of life. Different approaches are needed depending on what your financial goals are.

When people say they want a good income from their investments, what they usually mean is something completely different. If they are growing their wealth, they really mean they want a good return. Return is the total sum of income and capital gain. The return from a rental property is the sum of the net income received and the change in the value of the property. For shares, it is the dividends paid plus the change in value of the shares. On the other hand, investments such as bank deposits don’t change in value and their return is simply the interest income. If your goal is to grow wealth, a higher return can be achieved by investing in assets which change in value.

At a point in time, usually retirement, the goal changes from growing wealth to providing funds to enjoy life. At this time, when people say they want a good income from their investments, they really mean they want good cash flow. Cash flow is the total sum of income and capital drawdown. Investing for cash flow is not the same as investing for income and opens up the possibility of investing funds for both income and capital gain. They key issue is to manage liquidity – that is, to ensure that money (either income or capital) is available when required. Retired investors should not be constrained by living on the income from capital; they should use capital as well as income to provide the money needed to enjoy life.

Comments { 0 }

Getting Ahead in Your Thirties and Forties

Thirities and FortiesGetting Ahead in Your Thirties and Forties

Mid-life is a critical time for making the right financial decisions. It is a time when there are many demands and considerations to be juggled; partners and children, parents, career, personal goals, current lifestyle and future lifestyle. It can be a crazy time and it seems like there is never enough money to go around. The way to deal with the craziness is to work on some fundamental principles to build a solid base for managing income and wealth.

Take charge of where your money goes. Money has a habit of disappearing quickly when there are lots of competing priorities. Use multiple bank accounts to allocate your money to savings and different types of spending; your financial commitments (mortgage, rent etc), your household expenses (food, power etc) and personal expenses.

Have an emergency fund. Each payday set aside a small amount to build up a fund for when unexpected things happen.

Pay off your mortgage as soon as possible. Aim to pay off your mortgage at least ten years before your plan to retire. Set up a line of credit as part of your mortgage structure with the remainder on a fixed rate. The credit limit should be about the same amount as you can save over the next 1-2 years towards paying your mortgage off quicker. Aim to get the line of credit balance to zero over that time, then redraw the funds to pay a chunk off the balance of your mortgage when the fixed period expires. Repeat the process.

Contribute to KiwiSaver. Put in enough to be eligible for the maximum tax credit while you are focussing on repaying your mortgage. Once your mortgage is gone, either increase your KiwiSaver contributions or set up another retirement fund, contributing enough to enable you to achieve your retirement goals.

Comments { 0 }

A Business or a Job?

A business or a jobA Business or a Job?

Owning a business is often touted as a great way to increase wealth. Wealth coaches urge employees to give their jobs and start a business to get themselves on the path to riches. So, is owning a business the path to riches? It depends.

There are several ways to get into business and they each have potentially different outcomes. If you have a great idea and plenty of enthusiasm, you can start your own business. You don’t have the upfront cost of buying an established business, and if you get it right, you may be able sell it for a lot more than what it cost you to establish. However, start-ups are notoriously risky and most fail within the first five years through lack of money.

A safer option is to buy an established business with a proven track record. The trick here is to do your homework and make sure that the information presented by the seller is accurate, and there are no hidden problems with the business, such as falling sales or a change in technology that will make the products or services obsolete.

If you have lots of enthusiasm but need help with ideas or business skills, buying a franchise is another option, however this comes with the added cost of franchise fees.

With any business proposition, ask yourself what you want from it. If you are looking at as a way to increase your income or build wealth, the business has to have growth potential and you have to be prepared to put in the effort to make it grow. With all the risks and hard work involved, you need to be sure you will be better off financially in the long term. Buying a business needs to be more than just buying a job for yourself.

Comments { 0 }

Understanding Market Volatility

Market VolatilityUnderstanding Market Volatility

Volatility in the share market is both a threat and an opportunity. It is a threat for people who don’t understand it and an opportunity for those who do. It is something to be welcomed. Without volatility there would be no capital gain. There is a natural process at play in market cycles called ‘reversion to mean’. Simply put, this means that share prices follow a long term upward trend, around which prices will be higher or lower in the short term, but will always head back toward the trend. When prices get too high or too low, there will be a trigger which points them back in the direction of the trend. Market cycles can take some years to play out, and investors who have spent a long time in the market have a greater understanding of this principle and how it works. The more crises an investor has successfully lived through, the easier it is to put emotion aside and resist panic.

The reversion to mean principle relies on diversification to work well. A diversified portfolio will broadly track the movement of the market as a whole. Investment risk will then change from a risk of loss to a time risk, providing funds remain invested. A diversified portfolio will always regain any value lost; the only uncertainty is how long it will take to do so. This is why the time frame for investment is such an important part of investment strategy. If funds are needed in the short term for another purpose, there is a risk that investments will need to be sold at a loss, before they have had time to recover their value. A well-considered strategy takes investment time frames into account. Short term volatility shouldn’t alter the strategy for achieving a long term goal.

Comments { 0 }

Your Financial Safety Net

Safety NetYour Financial Safety Net

Life is not meant to be boring. It is for living to the full, making the most of opportunities and taking a few risks along the way. A financial safety net to protect you when things go wrong is a key part of creating and preserving wealth.

The degree of risk you can take changes with age and accordingly the size of the safety net you need increases. Young people have little accumulated and not much to lose, but they also have the potential to make big gains through taking risk. Those near the end of their working life have a lot to lose and little to gain from risky ventures and so their safety net needs to be bigger.

There are a number of ways you can create a safety net. Start by building up a slush fund, preferably tucked away in an account that is not visible on your internet banking so you are not tempted to spend it.Insurance also forms part of your safety net. In addition to insuring your property and your life, consider whether you should insure your income. Your future earnings are possibly your biggest financial asset and need protection. Don’t put all your available funds into risky business ventures; have some of your wealth in safe investments as a fall-back. If you are borrowing money or taking any kind of financial risk, make sure your wealth is protected with all the necessary legal structures and documentation relevant to your situation, such as a limited liability company, a trust or a contracting out agreement.

Along with risk comes the possibility of increased wealth and enjoyment of life. A financial safety net allows you to make the most of possibilities without the fear of a hard landing if things don’t go according to plan.

Comments { 0 }

Elder Abuse

Elder AbuseElder Abuse

Our population is aging and incidents of elder abuse are increasing in line with this trend. Elder abuse is a serious issue in New Zealand, and Age Concern report that they receive around 2000 referrals a year, with the most common types being financial, physical and emotional. For every referral, there are, no doubt, many more cases which go unreported.

Financial abuse of the elderly can take many forms. At the lower, but still unacceptable, end of the scale, is pressure put on elderly parents by their children or others with regard to their financial affairs. In some cases, children may put pressure on parents not to use up their savings in order to preserve the children’s inheritance. Such pressure could see the elderly being persuaded not to move into a rest home or retirement village, not to take overseas trips or buy a new car, and not to borrow funds for living costs through home equity release. Alternatively, children or others, such as caregivers or friends, may pressure the elderly to give them money or possessions. Loans may not be paid back, or the elderly may be co-erced into providing security or guarantees for loans. Elderly parents can sometimes be forced to accommodate, with no payment, children with financial problems or grandchildren whose parents cannot care for them. This can cause significant financial hardship. At the higher end of the abuse scale, there can be misuse of powers of attorney to take money or straight out theft of money or possessions.

Elder abuse is not OK. We all have a duty to watch for signs of it and take action if necessary. This may include contacting other family members or caregivers, referring the matter to a community organisation such as Age Concern, consulting a solicitor, or contacting the police.

Comments { 0 }