A Safety Net for Entrepreneurs

A Safety Net for Entrepreneurs

It goes without saying that one of the reasons entrepreneurs are successful at growing wealth is that they are risk takers. Some entrepreneurs argue that in fact there is little risk in what they do, because they fully analyse the financial implications of their wealth-building strategies before they part with their money. Even so, they are betting on their own ability to predict future outcomes accurately. It’s not hard to think of entrepreneurs who have made and lost several fortunes in their lifetime, or who have a list of failed projects alongside those that were successful.

Being on a high growth path to wealth creation can be addictive. When money comes easily, why not keep making more? Cash flow is the life blood of any business and strong cash flow creates the opportunity for expansion. In the extreme, entrepreneurs who rely on cash flow for growth in effect create their own Ponzi scheme. It works well as long as the cash keeps rolling in, but if for any reason the cash dries up, the business quickly collapses like a house of cards.

There is a simple solution for avoiding complete devastation. Every entrepreneur needs a financial safety net – a store of wealth that is ideally unencumbered, and kept separate from the business. Instead of using all the business cash flow to fund expansion, some is diverted into other investments that have a lower risk profile, such as property. This store of wealth can provide a minimum standard of living or a foundation on which to rebuild a business in the event of a failure. For this strategy to be successful, the safe assets need to be protected via legal structures from business creditors and any temptation or pressure to use them to rescue a failing business must be resisted.

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Get Your Full Tax Credit

Get Your Full Tax Credit

There are very few people who, if offered a 50% guaranteed return on their money, would turn it down, particularly with investment returns being so low at present. Yet every June, thousands of people miss such an opportunity by failing to realise that their KiwiSaver contributions are less than what is required to get the full Member Tax Credit. In order to get the full credit of $521, contributions for the year 1 July to 30 June need to be $1,042. Topping up your contributions to that level means that for every dollar you put in, you get a tax credit of fifty cents; a 50% guaranteed return.

This should be of particular interest to you if:

  • You have stopped working temporarily, for example to have a family
  • You work part-time
  • You are paid a low income
  • You are self-employed and not on PAYE
  • You are on PAYE for only some of your income

Member tax credits are paid in July based on contributions up to 30 June. It is important to check every June that you are on track to get your full Member Tax Credit. Usually your KiwiSaver provider will send this information to you. Rather than putting in a lump sum top-up every June, you can make your life simpler by setting up a direct debit to your KiwiSaver fund every month to make up the difference. That way, you don’t have the problem of having to find a lump sum each June. Your total contributions each month should be at least $87. Your regular voluntary contributions can be changed at any time if necessary.

Of course, while you are checking your contributions you should also check that your tax rate is correct and that you have chosen the most appropriate investment option for your funds.

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Fifty and Broke

Fifty and Broke

There is an emerging socio-economic class which I call Fifty and Broke (FAB). FABs are post- babyboomers, from a generation of divorce, serial relationships, corporate restructuring, multiple career changes, consumerism, and increased longevity. Many people suffer at least one crisis during their lives, such as relationship breakdown, redundancy, business failure, bankruptcy, mental health problems or a serious illness such as cancer. Such crises are a test of resilience. Those who are resilient soon bounce back; those who don’t fall behind or never really recover. FABs may have a low level of resilience or may have suffered multiple crises in their lives that would crush even the most resilient of people. They may also be people who have suffered a crisis late in life, leaving them little time or opportunity to recover. They are typically single or in a second relationship, have no savings, do not own a house (or have a big mortgage), have a  low paying job or intermittent work, have health issues and are living from week to week.

FABs face a difficult situation. If depression and stress have not already been present as a factor, they are a likely outcome of being broke. FABs can face a downward spiral where the hopelessness of their situation causes them to lose confidence in themselves and to get stuck in negative thinking, thus lessening their prospects for recovery.

The best way to avoid becoming a FAB is to work on improving your resilience, which is your ability to properly adapt to stress and adversity. The attributes that underpin resilience include:

  • The ability to make realistic plans and to implement them
  • Self confidence
  • Communication and problem-solving skills
  • Emotional self-control.

Being highly resilient will help you bounce back from adverse situations, but even so, sometimes the challenges are just too great.

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Financial Planning for Young Singles

Financial Planning for Young Singles

For young singles with a reasonably good income, life is full of possibilities. There is a lifetime ahead with many choices and opportunities along the way and plenty of time to recover from any mistakes made. However, choice can create uncertainty and confusion. It can be very hard to set goals when there are so many possible opportunities and unknowns. A financial plan is a set of strategies that help you achieve goals and without goals, it is hard to plan.

Rather than attempting to plan when there is so much uncertainty, it is better to focus on getting the fundamentals right so that when your goals become clearer, you are in a great position to move forward.

Know where your money goes. Your aim should be for your outgoings to be less than your income. Set up a budget in four categories – savings, your financial commitments (rent, insurance etc), your living costs (food, phone etc) and your fun money.

Set up an emergency fund. The golden rule of personal finance is ‘always pay yourself first’. Set up an automatic transfer so that every time you get paid, money goes into your savings account – preferably at another bank so it is harder to access!

Stay out of debt. Use your emergency fund for unexpected expenses, not your credit card. Save up for what you want to spend money on. It’s easier to save if you have a clear idea of what you are saving for.

Protect your wealth. Get some basic insurance cover for your personal belongings and to cover health costs or loss of income.

Learn how to invest. Get to understand your KiwiSaver as a way of learning about investment so when the day comes that you have a lot of money you will know what to do!

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Keeping Your Money Clean

Keeping Your Money Clean

Opening a bank account and buying and selling investments are not such simple processes as they were a few years ago. Now you must provide formal photo identification such as a passport or driver’s licence, proof of address, and, if you are transacting a large sum of money, evidence of how you came to have the money. For family trusts, each trustee, including independent or professional trustees, must provide this evidence as well as a copy of the trust deed. While this can seem like an invasive process, especially for elderly investors, it is all for a good cause. New Zealand’s financial system has such a good international reputation that it is a target for criminals wanting to ‘clean’ the proceeds of crime. In the interests of keeping our system clean, financial institutions and financial advisers are required to check identification and source of funds and report suspicious transactions to the Financial Intelligence Unit. Some would say this all seems a bit unnecessary, however each year around 10,000 suspicious transactions are reported. Criminals can go to extreme lengths to clean money, including a process called ‘layering’ where they spread their funds through many small transactions to avoid suspicion. It’s not just hardened criminals who are involved. Think of all those tradespeople who do ‘cashies’ and then spend or invest their money without declaring the income. Tax evasion is just as much a crime as theft or fraud.

Later this year, the range of entities required to comply with anti-money laundering legislation will be extended to include lawyers, accountants, real estate agents and businesses selling big ticket items such as luxury boats. Buying property is a popular choice for criminals – it is estimated that around 30% of money laundering activities are conducted through property transactions. Perhaps that explains our property prices!

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The Power of $20 a Day

The Power of $20 a Day

Check your bank account and you are sure to find lots of small transactions that average at least $20 a day. A coffee, lunch, snacks, a beer or wine after work; each transaction is low in value but combined they can add up to a significant sum. Money can only be spent once and should be spent on what gives you the most satisfaction. It helps to have a clear understanding of how else money could be spent now and in the future so the best choice can be made. Let’s look at what else $20 a day could be used for over a period of five years.

Buy your first home

Putting $140 a week into a savings account at 2.5% interest (after tax) will give you just under $39,000 over five years. This is a big enough sum to make the difference between being able to buy or not when added to funds available from KiwiSaver. Saving this amount also lets your lender know that you have good money habits.

Pay off your mortgage quicker

Putting money on your mortgage ‘earns’ you the equivalent of whatever your mortgage interest rate is, tax paid. At an interest rate of 5.9%, over 5 years you will save around $42,000 on your mortgage. Talk to your bank about how to increase your repayments without incurring a penalty.

Add to your retirement savings

A long term retirement portfolio invested mostly in growth assets (property and shares) could return around 8% per annum. Over a period of 5 years, you could add just under $45,000 to your retirement fund. By saving on a monthly basis, you have the added advantage and increased return that comes from ‘dollar cost averaging’ – that is, buying investments at varying prices as they go through their cycles.

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Money Barriers to Getting on With Life

Money Barriers to Getting on With Life

It’s good to be cautious with money. However, is there such a thing as too much caution? When is it OK to take a risk? Throughout life there are significant events that require large amounts of money or which come with a high level of financial risk. The anxiety that comes with this risk can hold cautious people back from taking vital steps – whether it is taking on a student loan in order to study, getting married, buying a house, having children, setting up a business, paying for a medical procedure or making the decision to retire.

Anxiety can stem from a number of different things. Seeing friends go through tough times financially can cause concern. Worries about the future also have an impact, such as nervousness about future employment, property prices, interest rates, or the cost of living. Other considerations are the lack of savings, low income or high levels of credit card debt. All this leads to people deciding to wait a few years before taking the plunge on big financial commitments.

Money is something that should enable you to enjoy life, not hold you back. If fears about money are preventing you from enjoying life, there are some things you can do to reduce them. Take an objective look at your financial situation, without letting emotion get in the way. Get your calculator out and look at the consequences (financial and non-financial) of both taking the risk and not taking it. Think of what your plan B might be if things don’t turn out as expected – such as having a back-up fund to fall back on. Obviously, making a serious effort at saving and getting rid of debt helps a lot. It is always better to be in a sound financial situation before taking a big risk.

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Tips for Successful Saving

Tips for Successful Saving

The first step towards creating wealth is also the hardest. Being able to spend less than you earn is a pre-requisite of every other strategy for wealth creation. Despite good intentions, savings plans are easily de-railed by distractions, disasters and lack of discipline. Here are some simple tips for improving your chances of being a successful saver:

Have a realistic, attainable and desirable goal. Nobody ever changes their behaviour without the motivation to do so. Motivation comes from moving towards something pleasurable or away from something painful, so set a goal that moves you in one of these directions. If it’s a big stretch, break it into smaller benchmarks. Don’t try to achieve too much too quickly.

Focus on doing what you can, even if it’s just small step. Small steps can become bigger steps over time as you learn how to manage your money better. A combination of spending a bit less, saving a bit more, and earning a bit more can make a big difference.

Spend mindfully. Impulsiveness is the enemy of a successful saver. Consider and reflect before you make a purchase. Fear of missing out (on a bargain or a unique item) drives impulsive behaviour, but that fear is often unfounded.

Save automatically. Pay yourself first by setting up an automatic payment into a savings account every payday. Ideally, keep your savings account in another bank so it’s out of sight and out of mind. Start with a small amount which you gradually increase.

Be prepared for the unexpected. Life never goes according to plan so you need to save more than just what you need for your goals to cover unexpected expenses. It’s frustrating to see your savings go backwards, but if the expenses are unavoidable it’s better to use savings than go into debt.

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Prepare for Rising Mortgage Interest Rates

Prepare for Rising Mortgage Interest Rates

Inflation is on the rise and this often signals an increase in interest rates. The rate of inflation for the three months ended March, 2017 was 1%, which lifted the annual rate to 2.2% – the highest it has been for about six years. However, much of this increase was due to food and energy prices which are notoriously volatile. These are usually excluded in measuring what is termed core inflation, which is the long term trend in prices. So while prices are rising, it is still likely that the Official Cash Rate (OCR) will not change until next year.

That said, the trend for mortgage interest rates is up. The OCR is just one factor which impacts on mortgage interest rates. Mortgage lenders borrow money offshore and rising interest rates overseas will have an impact, as well as ongoing high demand for mortgage lending. While many people fix their mortgages, those who fixed when interest rates were at their lowest point will be facing an interest rate reset soon. It is time to prepare for increases in mortgage repayments. Work out what new repayments will be by using mortgage calculators that are available on most bank websites. One way to prepare is to voluntarily increase your mortgage repayments now to close to what they will be at the higher interest rate,  if can do this without penalty. This will allow you to get used to higher payments while also reducing the size of your mortgage. If you can’t see a way of making increased payments, you may need to talk to your lender about extending the term of your mortgage or converting your mortgage to interest-only for  a period of time. These are last resort options, as it is best to pay off your mortgage as soon as possible.

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Home Buying Mistakes

Home Buying Mistakes

The fear of missing out is continuing to fuel the property market. Buying in a heated market can lead to impulsive decisions with negative financial consequences. Here are the top five mistakes people make when borrowing money to buy a house:

Relying on the lender’s analysis of how much you can borrow

The focus of the lender is on whether they are going to get their money back rather than on what is best for you. Applying most of your available financial resources to buying a new home may or may not be the best decision for your long term future even if you are able to afford the repayments.

Ignoring the possibility of rising interest rates

Low interest rates mean low loan repayments and potentially the ability to borrow more. Bear in mind that borrowing up to the maximum you can afford now means that when interest rates eventually increase, loan repayments may become unaffordable.

Not setting aside an emergency fund

If all your spare funds are tied up in the house, there is nothing to come and go on if you get hit with an unexpected expense or a sudden reduction in your income.

Underinsuring your house and yourself

Avoid underinsuring by getting a valuation done for insurance purposes. This is different than a market valuation that might be done at the time of purchase and will take into account additional factors such as landscaping features and demolition costs. Taking on an increased level of debt should also trigger a review of your life and income protection insurance.

Treating your house as an investment

From a strictly financial point of view, it makes sense to live in the lowest value house you feel comfortable living in while building up an investment portfolio, which may include other property.

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