Employee Share Plans
Many companies, both large and small, now have employee share plans. In theory, it is a win-win for company and employee. The company is able to reward and motivate staff without having to pay cash and the employee is given an opportunity to acquire shares on favourable terms.
There are a number of different schemes including:
- Options – a right to purchase shares in future at a fixed price
- Employee share loans – the employer provides a loan with or without interest to buy shares
- Partly paid shares – the employee acquires the shares at market value but pays only a small part of the price initially with the rest being called up by the company at a later date.
There are several factors that influence whether a share plan is a good thing to participate in. You may be liable to pay tax on the benefit you receive from the share plan, and any liability arises on the date that you acquire the shares. You may have to find cash to pay this tax. It is important to also consider the effect on your cash flow. Would it be better to receive cash instead? If you want to use your shares to pay off your mortgage or as a deposit on a house, you run the risk of the shares dropping in value at a time when you need to sell them. Another consideration is the extent of your exposure to shares in one company. By investing all your savings in the share plan you run the risk of being badly affected if the company fails or does not produce an adequate return. Employee share plans are a great idea, but you need good advice so you understand the risks and obligations as well as the potential returns.
A Winning Team
Whether you are a fan of ruby, football, netball or baseball, it’s a great feeling to see your home team take out the championship. Reaching high levels of success in sport can only be achieved with a total focus on teamwork, through which each player contributes their own individual strengths in a way that complements and enhances the skills of other players. Even top performing athletes in solitary sports have a team of support people behind them. Achieving financial success is no different. It is much harder to reach the top without the help of others to coach, encourage and impart their knowledge and skills. When it comes to your financial affairs, your support team should include your financial adviser or broker, accountant, solicitor, mortgage broker and insurance broker. If you are serious about wealth creation, find a team of people you can trust and confide in who understand your long term goals and who will help you get there one step at a time. Creating wealth doesn’t happen overnight (unless you are lucky enough to win a lottery) and your expert team needs to be prepared to help you over the long term rather than selling their services to you and then moving on. Your financial adviser will help you set the framework for your long term plan, your accountant and solicitor will ensure that your affairs are structured in the best way for tax and estate planning purposes, your mortgage broker will set up your borrowing so as to manage your cash flow and keep interest payments to a minimum and your insurance broker will ensure the wealth you create is protected from unexpected events. All these key players need to be working in tandem with you as the leader of the team. Then you can go for gold!
Cash in a Hurry
A wise person once said that the shortest period of time lies between the minute you put some money away for a rainy day and the unexpected arrival of rain. Although savings seem to disappear quickly, without them, unexpected events can become disasters. If you have a reasonable income and a small mortgage or none at all, having a chunk of money set aside ‘just in case’ should be easily achievable. Decide what level of savings will enable you to sleep at night and keep it in a high interest, accessible bank account. The rule of thumb is to have enough on hand to pay your living expenses for three months. For those with a large mortgage, a lot of short term debt, or barely enough income to cover expenses, having an emergency fund may seem an impossible achievement. If you are paying 7% interest on your mortgage, putting money into savings on which you are earning 3% less tax doesn’t make good financial sense. Some banks are now offering offset accounts where your savings can be offset against your mortgage to reduce the amount of interest you pay. If your bank doesn’t offer this arrangement, you could instead set up part of your mortgage as a line of credit. Put your savings into the line of credit so as to keep your interest to a minimum, in the knowledge that you can get access to the money easily if you need it. For those struggling to make ends meet it is still important to set aside a small amount each week, even $20 or so, to cover emergencies. Cut your expenses or increase your income so that you have a small surplus. Unless you are able to do this, your financial position is likely to worsen in the medium term.
Prudent Investment
Investment markets have taken a pounding in recent weeks as investors grow increasingly nervous about developments in the USA and Europe. Economic growth has slowed sharply in these regions and the slow-down is more widespread than previously forecast. Adding to this are fears of an imminent default by the Greek government which could have a flow on effect on other indebted countries and the banking sector. These factors increase the risk of a return to recession, especially in America and Europe, and that would not be good for investment markets.
It has always been expected that following the Global Financial Crisis the return to growth would not be a straight line process. There will be periods of both good and bad news. Think of a person with a life threatening illness, who is on the path to recovery in intensive care but suffering the occasional medical setback. The medium term prognosis for the global economy is good but it is still in intensive care. What is needed now are strong, sensible and credible policies from politicians to bring back confidence and increase certainty. Fundamental change is required.
In amongst all this turmoil, New Zealand is not so badly off. Exports are doing well, wages have gone up, the Rubgy World Cup has given us a boost and the housing market appears to be bottoming out. However, economic recovery won’t be strong and could be held back if the rest of the world deteriorates further.
The medium term outlook for investing in growth assets remains positive, but in the short term volatility will prevail. For investors, prudence is the key word. That means having a bit more in cash than usual and waiting for signs of the next upturn. Market volatility will create opportunities to make money, but just be cautious.
Working Less
While most of us say we can’t wait for retirement to be able to do all the things we’ve always wanted to do, the problem is how to fill in the thirty years or so after retirement, especially as we are living longer. Retiring from work doesn’t mean retiring from life.
According to a recent survey in North America, 40% of recent retirees said they were happier when they were working because they felt they had a purpose and structure to their days. Retirement isn’t always what people expect. There’s an increasing trend for people not to retire outright, but to start working less. Research has shown that retirees who cease to contribute and to be productive and active, die earlier than those who continue to engage fully in society.
The beginning stages of retirement are like a honeymoon. You don’t have to get up to go to work, you can play golf or go fishing whenever you like and you don’t have deadlines. But the euphoria and the novelty soon wear off; after all, there are only so many lattes a week you can drink and only so many times a week you can go fishing. Your former identity is no longer relevant and you need to re-evaluate who you are and what we want out of life. It’s important to keep all aspects of your life in balance; that is your finances, home life, health, relationships, leisure time and your purpose in life.
Being positive is an important part of enjoying your retirement and contributes to living longer. Some people enter retirement filled with negative thoughts and fears of ill health and lack of money. The key to happiness is to be happy with whatever you have and to be thankful for whatever is good in your life.
