Be Prepared
The Christchurch earthquake is a forceful reminder that our lives can be turned upside down in an instant and without warning. Being well prepared for disaster greatly increases your chance of survival on all levels; physical, emotional and financial. Those of us lucky enough to be observers of the Christchurch earthquake rather than its victims have a great opportunity to learn valuable lessons about what should be done to prepare. Stories abound of people queuing up for hours to get a bucketful of water, scrambling amongst wreckage to retrieve important documents and irreplaceable personal items and dealing with loss of income through death, injury and the destruction of businesses and jobs.
Being financially prepared before a disaster is just as important as preparing your survival kit. The most important things to consider are:
- Always make sure you have financial reserves, either as cash in the bank or the ability to borrow additional funds if you need to.
- Make sure you have adequate insurance cover for your home and personal possessions
- Consider the financial impact that death or severe injury might have on your family and take our appropriate insurance cover on your life, your health and your income.
- Have details at hand of how to go about making an insurance claim
- Make sure you have a will and that it is up to date
- Keep all your important financial records in a safe place. An excellent facility for this is a New Zealand developed software package called myINFOSAFE(www.myinfosafedirect.com) which allows you to keep records of all important information such as documents, passwords, education history, health records and valuable possessions. The information can be downloaded onto a portable device such as a USB stick and taken with you when you move to safety.
Money for Students
The start of the university year sees thousands of eager school leavers leaving the safety and comfort of the family home and beginning their journey towards independent living. For parents and students alike, the dilemma of how to fund academic pursuits is not an easy one to resolve. Taking on debt is something that most prudent money managers avoid. There are, however, two categories of debt; ‘good debt’ and ‘bad debt’. The question is, in which category do student loans belong?
Putting it simply, bad debt is debt which is usually incurred to buy things that do not produce an investment return such as cars and holidays. Good debt is money which is borrowed to buy assets which produce a return such as an investment property or a business. Whether student debt is good or bad depends on how the money is used. Study is an investment that provides a future return. The best return will be gained from a qualification that will lead to higher levels of future income. The lowest return will be gained from qualifications with poor employment prospects or from having a great time partying but failing to get a qualification at all.
Student loans are repaid by way of an additional deduction from income once the student starts working. In effect, a student loan is simply an obligation to pay a higher rate of tax for a period of time and in that way is different from a personal loan.
What should parents do? Leave your money in the bank for as long as your child’s loan is interest free. Encourage your children to live as frugally as possible to keep borrowing to a minimum and to take courses of study that will lead to better income prospects. That way, only good debt will be incurred.
Invest in your Home
Your home is your castle, so they say, and if it’s not as grand as you would like, now is a good time for improvements. Why? Largely because of the state of the economy. On a long term scale, we are at an economic low point. Properties are difficult to sell at other than a bargain price, tradesmen are short of work, and interest rates are low. With the cost of borrowing likely to be low for some time, a good case can be made for renovating your home to make it larger or more comfortable rather than selling to upgrade. Negotiate a good price with tradesmen and suppliers to keep the total costs down and potentially you can add significant value to your house without having to outlay a large amount of money.
Now is also the time to take advantage of the subsidies available for insulating your home. Insulation has the advantages of making your home more comfortable and easier to sell with the added benefit of reducing your power bills. More information on home insulation subsidies is available here.
There are some words of caution, however, if you are thinking of embarking on a renovation project. Strictly speaking, your home is not an investment; it is what financial planners refer to as a ‘lifestyle asset’. If you have spare funds, you can usually get a better return on your money by investing in assets which give you income as well as capital gain. If you need to borrow to do your renovations, don’t borrow so much that you are living from payday to payday to keep up with the mortgage payments. Finally, do your sums and check local property values to see if your resale value will improve by more than the cost of your project.
Save the Nation
New Zealand is on the brink of a financial crisis unless national savings increases, according to the final report of the Savings Working Group (SWG). Government, households and businesses are all guilty of overspending and borrowing too much money, leaving our economy in a vulnerable state. The SWG has recommended policies to increase the quality, quantity and rewards of saving. These include reducing serious tax distortions, and improving the disclosure for financial products, especially for fees and performance as well as improving their efficiency and returns.
In the area of retirement saving, the SWG has recommended that all employees over the age of 18 be automatically enrolled in KiwiSaver with the ability to opt out. At present, automatic enrolment applies only for new employees. Also recommended is that the enrolment age be lowered to 16 and that the default employee contribution be set at 4% with the option to drop it to 2%. Of course, one of the most obvious solutions to our savings problem is to increase the retirement age. Despite this being a good economic solution it is still politically unacceptable, at least until after the next election.
The proposal for the Government to help make annuities available to retirees is an excellent one. Many retirees prefer to have a regular monthly payment to supplement income rather than a lump sum to invest. It has been suggested that payouts from KiwiSaver could be part lump sum and part annuity.
While much progress has been made to introduce financial literacy into the school curriculum, the SWG has gone one step further and suggested that financial education be compulsory in schools. This is to be applauded. Increasing the level of knowledge of financial matters is critical for changing attitudes towards saving and thereby securing the financial future of our nation.
