Get Rid of Dumb Debt
The most common financial mistake people make is to borrow money at a high rate of interest in order to buy something they don’t really need or without considering whether they could borrow at a lower cost. This type of borrowing is what the Retirement Commission calls ‘dumb debt’ and they have launched a campaign aimed at encouraging people to get smarter with their debt. Examples of dumb debt are:
- Paying only the minimum repayment on your credit card
- Buying a large item such as a car without shopping around to find the best finance deal
- Buying on hire purchase without checking all the additional charges such as set up costs and insurance
- Being tempted by interest-free offers on hire purchase without being able to pay off the debt in the interest-free period
There is a very useful debt calculator on the Retirement Commission’s website, www.sorted.org.nz, which helps you work out the total amount of interest you pay over the period of your loan. For example, if you make a purchase of $2,000 on a credit card with an interest rate of 20% and monthly repayments of $100, you will take just over two years to pay it off and you will pay $453 in interest. If, on the other hand, you save $100 per month at 3% interest, you will be able to save the $2,000 you need within just over 19 months.
The best way to avoid dumb debt is:
- Never borrow money to buy things you don’t really need
- Always shop around for the cheapest deal on finance, taking into account the interest rate and additional charges
- Don’t borrow unless you know you can afford the repayments
- Save the equivalent of your debt repayments before you make your purchase
New Era for Financial Advice
As we edge closer to 1 July, 2011, financial advisers are spending most of their waking moments preparing for the new regulatory regime which will clearly identify those advisers who are authorized to give financial advice on investment products and those who are not. Financial advisers who are not authorized have some significant decisions to make about what happens to their investment clients. Investment products generate ongoing commission or fees and this stream of revenue is an asset which can be sold. Some advisers have chosen to sell their clients to authorized advisers. Some have sold their investment business back to the product providers using a ‘buyer of last resort’ facility. Some advisers are hoping, rather foolishly, that no-one will notice they are collecting fees or commission from investment clients to whom they are not authorized to give advice. An even more disturbing response is that some advisers are planning to ask their investment clients to sign a waiver stating that they do not wish to receive personal advice, that they wish to make their own decisions and therefore that they are transactional clients only. This could be seen as a blatant attempt to sidestep the new regulations and any investor asked to sign such a waiver should seek expert advice before signing it. No doubt the Financial Markets Authority will be taking a keen interest in this practice. The additional costs for authorized financial advisers, including registration and authorization fees, levies, membership of a dispute resolution scheme along with the increased amount of time required to document advice mean that inevitably investors will have to pay more for advice and commissions are likely to be replaced with fees. Investors should regard this as a positive move as along with the increased cost will come improved service and quality of advice.
Top Up Your Retirement Savings
Now is a good time to be thinking about whether you are putting enough aside for your retirement. A review of your long term plans should be done on an annual basis and June is a good month for two reasons; firstly because it is too wet and cold outside to be doing anything more interesting and secondly because you should make sure you have put enough into your KiwiSaver fund to get the maximum Government tax credit. If you are self employed, working part time, or a low income earner, you might find your contributions for the year are less than $1,040. This means you will not receive the maximum tax credit of $1,040 as it is a matched credit. You can check what your contributions have been with your KiwiSaver provider and if there is a shortfall it is simply a matter of making a lump sum deposit into your fund. Your KiwiSaver provider will tell you how best to do this and it needs to be done well before 30 June to allow time for processing. If you have joined KiwiSaver part way through the year or turned 18 during the year, you are only eligible for part of the tax credit.
Retirement savings are not just about KiwiSaver, however. Depending on your goals, you may need to supplement your savings with other investments. There is a great retirement calculator at www.sorted.org.nz which will give you guidance on how much you should be saving. You will need to think about the age at which you would like to have the choice of not working, and how much income you will need over and above NZ Superannuation to pay for extras such as home maintenance, replacing your car, travel and other things you may wish to do in retirement.
Love and Money
Relationships are complex and adding financial stress into the mix complicates things even further. Arguments about money are the leading cause of relationship breakdown and it follows that if couples can find a way to reduce financial stress and avoid conflict over money, the chances of a successful relationship are greatly enhanced. When two people come together from different backgrounds, they usually have different attitudes towards money or different money personalities. That’s because your money personality is shaped by a number of factors that relate to your upbringing and your past experiences. These different money personalities show up as different attitudes towards spending and saving, debt, financial risk, and building wealth. It is important to remember that when it comes to personalities, there is no right and wrong; just different. The best way to deal with differences is to firstly identify what they are, then to acknowledge them with acceptance and discuss how they can be taken into account. Opposite personalities, such as spenders and savers or risk takers and risk avoiders require compromise and boundaries. For example, a spender can be given freedom to spend up to a certain limit, or a risk taker can be given an agreed amount of money with which to speculate. Problems occur when there is no compromise, when boundaries are not set and more importantly when people do not acknowledge or understand the consequences of their actions. For example, a spender may incur large debts without thinking about how the debts are going to be repaid. In a good relationship, each person acts in such a way as to cause minimal negative impact on the other. Agreeing financial goals is a great place to start so that you are both working towards the same outcomes with regard to your income and your assets.
