December 27, 2010
 Where to Invest in 2011
Investors with cash on their hands face a huge dilemma. Should they leave their money in the bank at a low rate of interest, or take a risk and go back into the investment markets that have left many with a much reduced level of wealth? Investor confidence has been left shattered by the Global Financial Crisis but will return. As we move into 2011, we should reflect on some of the lessons learned in the last few years, such as:
- The importance of investment liquidity; that is, the ease and speed with which investments can be converted to cash.
- The importance of diversification; that is, not having all your investments in one asset class or one geographic location
- Return doesn’t necessarily reflect the level of risk
- Markets don’t stay down forever.
Investors have a choice of four asset classes; cash, bonds, property and shares. They can also choose to invest in New Zealand or offshore. Cash is safe and liquid, but unlikely to produce a good return in the short term. As interest rates rise, bond values will fall and already investors are moving away from this asset class. There are bargains to be had in property but with low projected growth, this asset class is for those with a long term investment horizon. For shares, the outlook is much more promising. In particular, emerging markets such as China, India and Brazil are expected to outperform developed markets over the medium term. There are also opportunities in what are referred to as ‘alternative’ investments, for example investments based on commodities such as mineral resources, precious metals, water and agricultural products.
Investing in 2011 will be no different than investing in any other year. There will be good opportunities for those who use sound investment principles.
December 19, 2010
 Money for Christmas
Giving money to kids for Christmas might seem like an easy escape from choosing a gift but in fact it can be a great way to teach kids important lessons about money and life.
If your kids receive money from you or from others at Christmas encourage them to make a wish list before they spend it. Against each item on the wish list, write the approximate cost and add up the total cost. The first lesson for kids to learn is that you can’t have everything you want with the money you have available and it is necessary to decide on the most important priorities.
The next discussion to have is about money and time. There are two important lessons on this topic. Firstly, kids need to understand that money can only be spent once; either now or later. Budgeting to have money available over a period of time is a key financial skill. Secondly, if you choose to spend your money later, you can earn interest on it in the mean time and have more to spend. Teach your kids about the power of compound interest, to show them how much their money can grow the longer it is invested.
As well as spending and saving there are other options for your kids to learn about. Investing in a business can be a great way to multiply your money, or lose it depending on how well the business does. Encourage your kids to think about how they could use their money to set up simple business – perhaps buying unwanted gifts and selling them for a profit! Last, but not least, talk to your kids about the importance of helping others who are less fortunate. Giving to others is a great way to realize just how wealthy you really are.
December 13, 2010
 Your Leaky Money Bucket
Money always seems to disappear faster at holiday time. Most people are short of money not because they buy big expensive things but because they spend little bits here and there. This kind of spending is what I call ‘Leaky Bucket Syndrome’. Imagine your bank account is a bucket into which your income is paid. Now imagine your bucket has many tiny holes in the bottom of it. Spending your money in lots of small amounts – $5 here, $20 there and so on – is like money leaking out of the holes in your money bucket. This kind of spending can add up to hundreds of dollars each pay day.
You can plug the holes in your leaky bucket by finding out where your money is going. This is a little tedious but necessary. Gather up your bank statements and credit card statements for at least the last three months. Make a list of headings of essential spending, for example rent or mortgage, insurance, rates, groceries, phone, power, medical expenses, petrol, car maintenance, etc and work out how much you have spent on each. Now add up how much you have spent on non-essential and personal items such as entertainment, gifts, haircuts, beauty treatment, clothes.
Compare your total spending to your income over the same period. You’ll probably find that there’s some money you can’t account for! The leaks in your money bucket will be spending that you can’t account for or money you have spent on non-essential items. The best way to plug your leaks is to have a separate bank account into which you put money for spending on your non-essential items. By keeping within the limit of that account your spending will be easy to control and you should always have enough for your essential expenses.
December 6, 2010
Planning a Holiday?
If you are going on holiday no doubt you’ll have a few tasks on a checklist to be done before you leave; cancel the paper, get someone to feed the cat, arrange for the lawns to be mown, check the oil and tyres on the car etc. While it’s a busy time of year, it’s a good time to make sure your finances are in order too. Here’s a checklist of important things to take care of before you go away:
- Do you have a safe place where all your important documents are kept, for example, insurance policies, wills, family trust deed, records of any investments, mortgages or loans, birth and marriage certificates, passports etc?
- If anything happened to you, would someone else know where to find these documents?
- Do you and your partner both have wills? Who else has a copy? Are they up-to-date?
- Do you have adequate insurance cover for your personal possessions?
- Do you understand what exclusions, limitations or conditions you have on your insurance cover and what your excess is?
- Do you know what to do and who to call if you need to make a claim, especially if you are away from home at the time?
- Do you have a list of all your possessions, including serial numbers, photos, or some other evidence of what you own?
- Do you have adequate life insurance?
- How would your partner and family fare if you were to suffer a serious accident or illness and be unable to work again?
Chances are that you won’t need to know the answers to these questions for a long time, but adverse events can often happen without warning. Having your finances in order makes dealing with them much easier.
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