October 25, 2010
 Planning for Christmas
Keeping your debt level under control at Christmas time requires a small amount of discipline and a large amount of common sense. Here are a few tips to help keep you afloat as we lead up to the Christmas period:
Set a budget for Christmas and stick to it. Set you budget now before you get caught up in the Christmas frenzy. Decide how much you will spend in total and then check to see how this compares with the amount you have saved already and how much you can save over the next two months.
Make a pact with family and friends. In large families, buying presents can get out of hand, both in terms of the value of presents bought and the number of people you buy for. Make a pact with loved ones on whether you will buy each other gifts and how much you will spend.
It’s the thought that counts. Remember that the value of a gift is not a measure of your love or care for the recipient. A gift that is chosen thoughtfully has much more meaning and value than a gift that is chosen purely on its value.
Take a break from Christmas. If you are still paying off last year’s Christmas spending, let alone starting to save for this year’s, have a year off Christmas to let your savings catch up. One year off is all it takes to get ahead.
Start planning in January for next Christmas. Take advantage of the January sales to stock up in advance. Purchase gifts throughout the year so you can take advantage of special price deals or, alternatively, set aside money each month in a savings account.
Christmas is a time for giving and sharing, but don’t give more than what you have.
October 18, 2010
 Low Risk Investments
Many investors are understandably reviewing their attitudes towards investment risk and return following the Global Financial Crisis. However, with interest rates low, it is not easy to achieve competitive, low risk, low volatility returns.
Traded Endowment Policies (known as TEPs) offer these attributes, yet are not widely known or understood. A TEP is simply an endowment policy that has been sold by its original owner through a trading platform such as the Life Insurance Policy Exchange (LIPE).
Typically, endowment policies have been used for long term savings. Policyholders may choose, however, to sell their policies before the agreed maturity date. Rather than surrendering the policy back to insurance company from which it was purchased, in which case the policy is cancelled, a policy holder can choose to sell the policy to LIPE. The policy remains in effect, albeit with a different owner, and the benefit of accumulated bonuses is not lost. Policy holders can receive a significantly better return for their policy by selling to LIPE rather than surrendering.
The appeal of this type of investment is that in most cases the value of the investment is already guaranteed by the bonus structure of the underlying policy. In addition, because it is an insurance policy, any gains are tax paid. This is particularly beneficial for investors on a high marginal tax rate. Currently, TEPs are offering a projected yield of 5.36% to 5.95% tax paid.
One of the quirks of traded endowment policies is that the original life insured by the policy remains the life insured. In the event, therefore, that the original life insured dies before the policy matures, the owner of the policy is entitled to an early payout, thus further increasing the yield. For obvious reasons, the name of the life insured is not revealed to the investor!
October 11, 2010
 Making a Will
There is a well known saying that there are two certainties in life; death and taxes. Despite the certainty of death, many fail to plan for it by making a will. Lack of time, lack of money, and indecision about who should be the executor or the guardian of young children are the usual excuses.
The most expensive part of dying is administration of the estate (typically several thousand dollars) and that becomes even more expensive and time consuming if there is no will. Dying without a will also means that your estate is divided up according to the Administration Act using a specific formula, and this may not be how you wish it to be divided.
While you can write a will yourself, it pays to get professional help from a lawyer or trustee company to ensure that your will is valid and deals with your property as you intend.
These days, with many relationships ending before death, there are some traps to watch out for. Unless you have updated your will after a separation or divorce, it will still remain valid. If you enter a new relationship, then after three years or more, your partner can claim half your assets on your death under the Property (Relationships) Act unless you have previously entered into a ‘contracting out’ agreement that sets out a different division.
Other documents you should consider preparing are Enduring Powers of Attorney, which enable specified people to manage your affairs and your welfare should you become mentally incapacitated, and a Living Will, or advance directive, which states what medical care you should be given if you become physically or mentally unable to decide, for example if you are on life support.
Review your will and other documents regularly to ensure they remain up to date.
October 4, 2010
 Tax Cut Priorities
There is a great opportunity right now for everybody in the work force to improve their financial situation. Unfortunately, the majority of people will miss out on this opportunity through not taking the right action.
From 1 October, income tax rates will be cut and Government benefits will be increased. While GST will also be increased, most people in the work force will be better off. For example, someone on a gross income of $50,000 will have around $20 a week extra as a net result of the changes. There is a useful calculator here which gives you an estimate of the net benefit based on your income.
Most people will allow the extra dollars each week to slip away on extra spending. It only takes a coffee a day to see it all disappear. Working on the old theory that you don’t miss what you have never had, the best financial decision you can make right now is to estimate your net benefit from the changes and make a proactive choice about what to do with it.
There’s an order of priority with the choices you have. If you haven’t yet joined KiwiSaver, make that your first priority as this will give you the highest return on your money. Next on the list is paying off your credit card or hire purchase, so set up an automatic payment for the extra amount. If you have no short term debt, set up a payment into a savings account to build up an emergency fund. If that is already under control then increase your mortgage repayments to repay your debt quicker. The next priority is to make sure your retirement savings are on track. Finally, if you have all these things in hand, it’s yours to spend as you wish!
October 1, 2010
 Rent or Buy?
Property prices have fallen significantly over the last two years making houses much more affordable than they have been for some time. Despite this, buyers are still in short supply. The most logical reason for this is that buyers expect prices to either continue dropping or to at least stay flat for some time. This creates a dilemma for first home buyers and people moving towns; is it better to rent or buy in the short term?
Whether you are buying a property to live in or to rent to someone else, there are two factors to consider. The first is the extra income you will have if you buy, either because you are no longer paying rent or because you renting to someone else. The second is the capital gain you can expect from owning the property. Property prices are not expected to increase significantly over the next 3-5 years. At the same time, rents are still low in comparison with property prices. If you can rent a property for an annual rent of 5% of its market value, why would you borrow money to buy when the interest rate is around 7% and there is little prospect of capital gain?
In the short term, with no expectation of property prices increasing, renting makes sense unless you can buy a property well below market value. For first home buyers, this allows more time to save a bigger house deposit and for others who have sold, it is an opportunity to temporarily live more cheaply in the kind of house that might previously have been out of reach to buy.
In the long term, it makes sense to buy a property for security and peace of mind and to ensure you don’t get left behind when prices inevitably rise again.
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