Make Smart Financial Decisions
Life is full of financial decisions. Whether you are deciding how much to spend on your holiday, how to finance your car purchase, which house to buy, or how to invest your nest egg, the consequences of your choices can have a lasting impact on your financial future. Sometimes the way things work out is a matter of luck, but rather than leave your life to chance, here’s how to be smart with your financial decisions.
- Set your emotions aside. Decisions made in a state of excitement, nervousness, fear or greed are often regretted. Financial decisions should be based on cold, hard analysis of the information at hand. If you are not sure what to do, sleep on it, get more information or seek advice.
- Look at the worst case scenario. If things don’t go according to plan, will your financial situation still be secure? How much can you afford to lose?
- Look at the best case scenario, but don’t make it too optimistic. Make your best case scenario your most realistic one.
- Do your financial calculations so you can see in black and white what the implications are. Read the fine print so you know exactly what costs are involved and how your decision will affect your financial situation in the long term.
- Write down the pros and cons on a piece of paper and consider alternative options.
- Make sure you understand exactly what you are committing to, especially when it comes to signing documents.
- Get professional advice. It’s not always possible to know all the aspects of a financial decision or how to accurately predict outcomes. A professional adviser can help you ask the questions you didn’t know to ask and learn from the mistakes others have made.
The Plight of Charities
It’s been a rough year for charities and my guess is that over the next year, some very worthy organizations will be forced to close up shop. There are many factors working against charities at present:
- The Christchurch Earthquake has sucked up a huge amount of money from the big charitable trusts, leaving little behind for charities who have in the past relied on those trusts for funding.
- Government funding for many programmes delivered by charities has been cut back.
- While revenue is dropping, operating costs are going up.
- With the economic downturn, more people require assistance from charities and fewer are able to make donations.
- We are becoming an increasingly cashless society, leading to reduced revenue from street appeals.
Charities are being forced to think outside the square when it comes to funding. At the leading edge are organizations moving towards ‘Social Enterprise’, which is a blend of enterprise, capitalism and philanthropy. They fund their charitable objectives with profit made by selling products and services. In some cases, these organizations are able to raise funds from investors on which they pay a modest return. Social impact bonds, which are being trialled in several countries, raise money from investors to fund delivery of preventative social services. If the social outcomes are achieved, the government pays back the money to the investors and adds a success payment. There is no reason why social enterprise needs to be driven by charities. From the other end of the spectrum, large companies are seeing benefits in applying some of their profits for philanthropic purposes under the banner of ‘Corporate Social Responsibility’. What a different world we would live in if this combination of enterprise and philanthropy became the norm for all businesses, charities and government.
Commission or Fees?
It seems it is only a matter of time before the payment of commission to financial advisers will be banned, and advisers will instead charge fees. Commission will be banned in the UK from 1 January, 2013 and in Australia there is a proposal to ban most commission from 1 July 2012. In New Zealand, the Committee of Inquiry into Finance Company Failures has recommended that Government “investigate the possibility of conflicted remuneration structures in the provision of financial advice, including consultation with Australian authorities on the model proposed in that country”. Commission can vary between products and, whether true or not, there is a perception that advisers may place business where they receive the highest commission. Any adviser who receives commission cannot be considered to be independent. Unscrupulous advisers can increase their commission income by switching clients from one product to another. The payment of commission at the time of sale means there is no financial incentive for the adviser to follow up with their client to ensure the client is happy and that the recommended product is still appropriate. In effect, the client loses control of the relationship with the adviser. While clients may feel they are getting ‘free’ advice if the adviser takes only a commision, in effect, there is still a cost because commission is paid from product returns either directly or indirectly. On the other hand, fees are completely transparent, they are sometimes tax deductible for the client and can be negotiated. The payment of fees creates a relationship between adviser and client whereby the adviser has an ongoing obligation to service the client or the client may refuse to pay. A switch from commission to fees should result in an improvement of the quality of advice and the ability of clients to demand good service.
Plan for a Long Life
When our great grandparents were born, they could expect to live on average for 55 to 60 years and it was likely they would continue working until just a few years before they died. The introduction of Government pensions was intended to provide a means for those who were too sick or too old to work to live a few short years at the end of their lives without financial worry. Of course, what has happened since then is we are now living much longer and healthier lives. At age 65, on average a man can expect to live another 18 years and a woman can expect to live another 20 years. Around half of retirees will live much longer than this.
Pensions were originally designed to do no more than cover the cost of the necessities of life. It was not envisaged they would have to cover overseas travel, healthcare, buying a new car, replacing the carpets and curtains in the house and so on. NZ Superannuation is around $523 a week after tax for a couple, and there is nothing left over for luxuries. If you are one of the lucky ones who live into their nineties, you will spend around a third of your life in retirement. That’s a long time to live in poverty. As a result, many people are now working for several years after becoming eligible for a pension and if this trend continues it is logical that the official retirement age will increase.
It makes sense when you are planning for your retirement to plan on living for a long time and to work for as long as you feel able. Build up enough funds to last you for at least 20 years in retirement so your final years aren’t spent in poverty.
