It’s About Time

its-about-timeIt’s About Time

It’s about time, or, to be more precise, it’s mostly about time. That is the answer to the question on most investors lips, which is ‘How should I invest my money?’ The next question to ask should be ‘How long do I want to invest my money for?’ Your investment time frame is one of the key ingredients in deciding how best to invest your money. The problem is, many inexperienced investors don’t understand the connection between time and investment.

Your investment time frame is the time after which you will need to access the amount of money invested in order to spend it. This is not to be confused with the time after which you will need to spend the income from the money invested. Many people approaching retirement have the mistaken belief that their investment time frame ends at the age of retirement. If things go according to plan, you will still have money invested the day you leave this earth. That could be thirty or so years after you retire. Your money will be mostly used up, but gradually. While every dollar you spend has a different investment time frame, it is more practical to consider three investment time frames – short term, medium term and long term. Money allocated to each of these time frames should have a different investment strategy. Money required in the short term needs to be invested mostly in stable assets, despite the lower return, to avoid the risk of loss. Funds for the longer term should be invested in assets which will grow, albeit with volatility, to get a good return. Funds for the medium term should be a balanced combination of the two.

Investing in this way gives the opportunity for a good return while making sure funds are available when required.

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Get Ahead Before You Retire

get-aheadGet Ahead Before You Retire

The last five years or so before retirement are some of the most important in your life. Your choices between spending and saving in those few years will determine the quality of your retirement. The wealth you have accumulated at the time of your last day of paid employment will determine your financial future for the rest of your life – which could be around thirty years.

In these last few years, it is really important to decide how you wish to spend your retirement and therefore how much money you will need. Then you will need to calculate how much you will need to save each year to reach your target level of retirement savings.

The transition from a high level of income to a low level of income after retirement is not an easy one. It is always a lot easier to find ways to spend extra money than it is to find ways to spend less! As you approach retirement, try and adjust your spending to fit what your retirement income will be. You will need to make allowances for any work-related spending, such as transport. The benefits of doing this are:

  1. You will be able to test how realistic your retirement budget is before you give up your job
  2. You will be able to adjust gradually over a period of time to your new income instead of going ‘cold turkey’ from a high level to a low level of income
  3. You will be able to save even more for your retirement.

Finally, check the balance between the value of your home and the value of your investment portfolio. If your house represents more than 70% of your total wealth, you may be in danger of being asset rich but cash poor in retirement.

 

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Include a Charity

include-a-charityInclude a Charity

Giving is for everyone. We all have causes we care about and we all have the power to give money to help those causes. Whether you leave this earth with $10 to your name or $10 million, you can provide for you chosen charity in your will. It is one of the easiest ways to give.

There is a common misconception that donations or bequests to charity are only made by wealthy people. This is not so. They are made by people who care about the communities they live in and the causes they are passionate about. Without the generosity of these people, many of our charities would struggle even harder to survive. There are many reasons why people choose to give; to contribute to the ongoing work of a chosen charity, to leave a gift as a lasting memory or to give back to the community.

The starting point is to choose a charity you would like to help. Do a little research on the areas you are interested in and the organisations working in those areas to find one that is a good fit for you. It is a good idea to make contact with the charity to let them know of your intentions. They will then be able to include your bequest in their future planning. The next step is to contact your solicitor to arrange for your will to be updated. You might wish to leave a fixed sum of money, a percentage of your estate, or a specific asset, such as a property or an investment fund.

Make sure you tell your family and friends about your bequest so they can ensure your wishes are carried out. Who knows, you may prompt them to make their own bequest. For more information click here.

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Conquer Your Fear of Debt

Fear of DebtConquer Your Fear of Debt

When it comes to confronting your financial fears, the ultimate four letter word is debt. For many households, debt it is the single biggest contributor to stress. It has the power to destroy relationships and even lives. Everybody’s tolerance of debt is different.  Problems occur when two people in a relationship have different views about debt, or when debt repayments cause financial hardship. If debt is dragging you down or causing fear, here is how to confront it.

 

  1. Make a list of all your current debts, the interest rate you are paying on each debt and the minimum repayments. Your first priority is to make the minimum repayment on all debts. The next priority is to make additional payments over and above the minimum on the debt with the highest interest rate. Once that is paid off, start on the debt with the next highest interest rate and so on.
  2. It goes without saying that if you are struggling with debt, you shouldn’t take on more debt. If things are getting out of hand it is tempting to borrow more to keep up repayments. Instead of this, negotiate a new repayment arrangement with your creditors or refinance over a longer term.
  3. Free up more money to pay off debt. Make a list of everything you spend in a month and look at what you can cut back on. Personal items, groceries and subscriptions to services you no longer use are the easiest areas to target.

Be smart with your borrowing. Borrow only what you have to, for the shortest amount of time at the lowest possible interest rate. Shop around for the best deal rather than the one closest to hand. Don’t borrow up to your limit; leave some wriggle room in case something unexpected happens.

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Planning with Uncertainties

UncertaintiesPlanning with Uncertainties

Making plans for your financial future is hard enough at the best of times, but when there are lots of unknowns it is even more difficult. There may be uncertainty around basics, such as what your income will be from one week to the next, or one year to the next, and around what your outgoings will be, such as when you transition from a working life to retirement. At a higher level, there may be uncertainties around which house, town or country you will be living in, or which career you will have.

There is always a temptation when there is uncertainty to not plan at all, because it is too hard. Yet planning is even more important when life is uncertain. The way to deal with uncertainties is to clearly separate them from the things that are certain.

Perhaps you have your own business or you work on commission, or work irregular hours. There is usually a base level below which your income doesn’t usually fall. That is the income level you should plan with. Regardless of what your income is, where you are living or who you are living with, there is a basic level of spending that covers the essentials of life. These are the expenses to start planning with. It is best to underestimate income and overestimate spending in order to err on the side of caution.

You may also have uncertainty around future plans for a sum of money you have on hand. Perhaps you are thinking of using the funds to renovate the house or set up a business. Think of the minimum time period in which your level of certainty will increase and invest for that time frame to get a better return.

As the uncertainty diminishes, plans can be adjusted accordingly.

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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.

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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.

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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!

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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.

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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.

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