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Keeping Your Money Clean

Keeping Your Money Clean

Opening a bank account and buying and selling investments are not such simple processes as they were a few years ago. Now you must provide formal photo identification such as a passport or driver’s licence, proof of address, and, if you are transacting a large sum of money, evidence of how you came to have the money. For family trusts, each trustee, including independent or professional trustees, must provide this evidence as well as a copy of the trust deed. While this can seem like an invasive process, especially for elderly investors, it is all for a good cause. New Zealand’s financial system has such a good international reputation that it is a target for criminals wanting to ‘clean’ the proceeds of crime. In the interests of keeping our system clean, financial institutions and financial advisers are required to check identification and source of funds and report suspicious transactions to the Financial Intelligence Unit. Some would say this all seems a bit unnecessary, however each year around 10,000 suspicious transactions are reported. Criminals can go to extreme lengths to clean money, including a process called ‘layering’ where they spread their funds through many small transactions to avoid suspicion. It’s not just hardened criminals who are involved. Think of all those tradespeople who do ‘cashies’ and then spend or invest their money without declaring the income. Tax evasion is just as much a crime as theft or fraud.

Later this year, the range of entities required to comply with anti-money laundering legislation will be extended to include lawyers, accountants, real estate agents and businesses selling big ticket items such as luxury boats. Buying property is a popular choice for criminals – it is estimated that around 30% of money laundering activities are conducted through property transactions. Perhaps that explains our property prices!

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The Power of $20 a Day

The Power of $20 a Day

Check your bank account and you are sure to find lots of small transactions that average at least $20 a day. A coffee, lunch, snacks, a beer or wine after work; each transaction is low in value but combined they can add up to a significant sum. Money can only be spent once and should be spent on what gives you the most satisfaction. It helps to have a clear understanding of how else money could be spent now and in the future so the best choice can be made. Let’s look at what else $20 a day could be used for over a period of five years.

Buy your first home

Putting $140 a week into a savings account at 2.5% interest (after tax) will give you just under $39,000 over five years. This is a big enough sum to make the difference between being able to buy or not when added to funds available from KiwiSaver. Saving this amount also lets your lender know that you have good money habits.

Pay off your mortgage quicker

Putting money on your mortgage ‘earns’ you the equivalent of whatever your mortgage interest rate is, tax paid. At an interest rate of 5.9%, over 5 years you will save around $42,000 on your mortgage. Talk to your bank about how to increase your repayments without incurring a penalty.

Add to your retirement savings

A long term retirement portfolio invested mostly in growth assets (property and shares) could return around 8% per annum. Over a period of 5 years, you could add just under $45,000 to your retirement fund. By saving on a monthly basis, you have the added advantage and increased return that comes from ‘dollar cost averaging’ – that is, buying investments at varying prices as they go through their cycles.

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Money Barriers to Getting on With Life

Money Barriers to Getting on With Life

It’s good to be cautious with money. However, is there such a thing as too much caution? When is it OK to take a risk? Throughout life there are significant events that require large amounts of money or which come with a high level of financial risk. The anxiety that comes with this risk can hold cautious people back from taking vital steps – whether it is taking on a student loan in order to study, getting married, buying a house, having children, setting up a business, paying for a medical procedure or making the decision to retire.

Anxiety can stem from a number of different things. Seeing friends go through tough times financially can cause concern. Worries about the future also have an impact, such as nervousness about future employment, property prices, interest rates, or the cost of living. Other considerations are the lack of savings, low income or high levels of credit card debt. All this leads to people deciding to wait a few years before taking the plunge on big financial commitments.

Money is something that should enable you to enjoy life, not hold you back. If fears about money are preventing you from enjoying life, there are some things you can do to reduce them. Take an objective look at your financial situation, without letting emotion get in the way. Get your calculator out and look at the consequences (financial and non-financial) of both taking the risk and not taking it. Think of what your plan B might be if things don’t turn out as expected – such as having a back-up fund to fall back on. Obviously, making a serious effort at saving and getting rid of debt helps a lot. It is always better to be in a sound financial situation before taking a big risk.

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Tips for Successful Saving

Tips for Successful Saving

The first step towards creating wealth is also the hardest. Being able to spend less than you earn is a pre-requisite of every other strategy for wealth creation. Despite good intentions, savings plans are easily de-railed by distractions, disasters and lack of discipline. Here are some simple tips for improving your chances of being a successful saver:

Have a realistic, attainable and desirable goal. Nobody ever changes their behaviour without the motivation to do so. Motivation comes from moving towards something pleasurable or away from something painful, so set a goal that moves you in one of these directions. If it’s a big stretch, break it into smaller benchmarks. Don’t try to achieve too much too quickly.

Focus on doing what you can, even if it’s just small step. Small steps can become bigger steps over time as you learn how to manage your money better. A combination of spending a bit less, saving a bit more, and earning a bit more can make a big difference.

Spend mindfully. Impulsiveness is the enemy of a successful saver. Consider and reflect before you make a purchase. Fear of missing out (on a bargain or a unique item) drives impulsive behaviour, but that fear is often unfounded.

Save automatically. Pay yourself first by setting up an automatic payment into a savings account every payday. Ideally, keep your savings account in another bank so it’s out of sight and out of mind. Start with a small amount which you gradually increase.

Be prepared for the unexpected. Life never goes according to plan so you need to save more than just what you need for your goals to cover unexpected expenses. It’s frustrating to see your savings go backwards, but if the expenses are unavoidable it’s better to use savings than go into debt.

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Prepare for Rising Mortgage Interest Rates

Prepare for Rising Mortgage Interest Rates

Inflation is on the rise and this often signals an increase in interest rates. The rate of inflation for the three months ended March, 2017 was 1%, which lifted the annual rate to 2.2% – the highest it has been for about six years. However, much of this increase was due to food and energy prices which are notoriously volatile. These are usually excluded in measuring what is termed core inflation, which is the long term trend in prices. So while prices are rising, it is still likely that the Official Cash Rate (OCR) will not change until next year.

That said, the trend for mortgage interest rates is up. The OCR is just one factor which impacts on mortgage interest rates. Mortgage lenders borrow money offshore and rising interest rates overseas will have an impact, as well as ongoing high demand for mortgage lending. While many people fix their mortgages, those who fixed when interest rates were at their lowest point will be facing an interest rate reset soon. It is time to prepare for increases in mortgage repayments. Work out what new repayments will be by using mortgage calculators that are available on most bank websites. One way to prepare is to voluntarily increase your mortgage repayments now to close to what they will be at the higher interest rate,  if can do this without penalty. This will allow you to get used to higher payments while also reducing the size of your mortgage. If you can’t see a way of making increased payments, you may need to talk to your lender about extending the term of your mortgage or converting your mortgage to interest-only for  a period of time. These are last resort options, as it is best to pay off your mortgage as soon as possible.

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Home Buying Mistakes

Home Buying Mistakes

The fear of missing out is continuing to fuel the property market. Buying in a heated market can lead to impulsive decisions with negative financial consequences. Here are the top five mistakes people make when borrowing money to buy a house:

Relying on the lender’s analysis of how much you can borrow

The focus of the lender is on whether they are going to get their money back rather than on what is best for you. Applying most of your available financial resources to buying a new home may or may not be the best decision for your long term future even if you are able to afford the repayments.

Ignoring the possibility of rising interest rates

Low interest rates mean low loan repayments and potentially the ability to borrow more. Bear in mind that borrowing up to the maximum you can afford now means that when interest rates eventually increase, loan repayments may become unaffordable.

Not setting aside an emergency fund

If all your spare funds are tied up in the house, there is nothing to come and go on if you get hit with an unexpected expense or a sudden reduction in your income.

Underinsuring your house and yourself

Avoid underinsuring by getting a valuation done for insurance purposes. This is different than a market valuation that might be done at the time of purchase and will take into account additional factors such as landscaping features and demolition costs. Taking on an increased level of debt should also trigger a review of your life and income protection insurance.

Treating your house as an investment

From a strictly financial point of view, it makes sense to live in the lowest value house you feel comfortable living in while building up an investment portfolio, which may include other property.

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Health Insurance for Retirees

Health Insurance for Retirees

Health insurance is a popular product, with around 30% of the population having cover, often through a workplace scheme. However, there is a high cancellation rate amongst retirees due to the big increase in premiums as you get older. After paying premiums for some years, often without a claim, is it wise to cancel health insurance just at the age when you are most likely to need it? Premiums are higher in old age for good reason – there is a high probability of claim. Without insurance, you will be reliant on the public health system, which may mean going on a waiting list for health care. Insurance is a means by which we pass financial risk onto someone else. As with all insurance cover, there are three questions to ask.

  1. What are the risks? You may have a known existing health condition which is likely to get worse or lead to other problems. There may be a family history of certain medical conditions.
  2. What are the consequences of those risks? There may be loss of enjoyment of life resulting from non-urgent conditions that put you on a long waiting list. If you are still working you may also suffer loss of income through illness.
  3. How much risk are you willing to accept? If you have significant financial assets, it may be possible for you to cover private health care costs yourself without affecting your standard of living. Alternatively, you might choose to have an excess on your policy so you share the risk with your insurer and pay a lower premium.

There are many retirees with low incomes for whom health insurance is simply not affordable. Their best strategy is to live a healthy, active lifestyle and keep savings on hand for unexpected health care costs.

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Money for Retirement

Money for Retirement

Calculating how much money you will need in retirement is no easy task. With life expectancies around 90, there is a period of 20 to 30 years to plan for.  A simple planning framework can help get around some of the uncertainties to make it easier to work out how much money you will need.

There are three types of outgoings you need to plan for:

Money for daily living expenses. These are expenses that occur on a regular basis and predictable, such as food, petrol, rates, insurance, power, phone, clothing etc. NZ Superannuation (around $30,000 for couples and $20,000 for singles) will barely cover these costs but will not usually be enough to cover additional accommodation costs such as rent or a mortgage. Additional income from part time work or investments will give you a better standard of living.

Lump sum expenses. These are larger expenses which occur infrequently such as the purchase of a new car, an overseas trip, home maintenance and renovations, and large medical or dental bills. The easiest way to plan ahead for these is to break your expected retirement timeframe into shorter periods of say ten years. Generally, the first ten years is when you are likely to be more active and wanting to travel. The second ten years is the time when home maintenance is likely to be required, while the final ten years is when you need to consider what kind of aged care you may need – such as moving to a retirement village or paying someone to look after you. Typically, lump sum spending decreases over time.

Bequests. If you would like to leave a sum of money for family or for a charitable purpose, set these funds aside at the beginning of your retirement in a long term investment portfolio.

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Your Pre-Retirement Checklist

Your Pre-Retirement Checklist

Retirement is not what it used to be. There are many options for making the transition from full time work to being fully retired, ranging from early retirement to late retirement or a gradual shift through working part-time or choosing a less stressful job. Along with all these choices comes the dilemma of when and how to retire. It can be a nervous time because it is not always easy to get back into the workforce once you have left. So before you take the big leap, here are some things to consider:

  • What kind of retirement do you want and how much will it cost? Do a budget for weekly living expenses and big one-off expenses like travel and replacing your car.
  • Consider what your income will be, taking into account NZ Superannuation, other pensions, other Government benefits and any part-time work.
  • Calculate how big your retirement nest egg will need to be to finance your retirement lifestyle. There is a good retirement calculator at sorted.org.nz.
  • Review your current financial situation. Have you paid off all debt? Do you have a well thought through investment strategy that will enable you to achieve your retirement goals? Do you have some cash on hand as well as longer term investments? Have your insurance policies been reviewed?
  • Do a ‘dry run’. Try living for a few months on what your retirement income will be and see how it feels. Not only will this allow you to see how tolerable your retirement lifestyle will be; it will also allow you to save a bit more.
  • Do your financial housekeeping. Make sure your Will is up to date, set up Enduring Powers of Attorney and ensure all your important financial records are stored tidily and safely.

Now you are ready to make your choice!

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Traps for KiwiSaver Home Buyers

Traps for KiwiSaver Home Buyers

One of the best incentives for young people to join KiwiSaver is the ability to withdraw funds for the purchase of a first home. All but $1,000 can be withdrawn providing certain criteria are met. You need to have been a KiwiSaver member for at least three years and you must not have owned property before unless special circumstances apply. A Home Start grant of up to $5000 per person for an existing house and $10,000 for a new house is also available if your income and the value of the house you are buying are within certain limits, and you may also be eligible for a Welcome Home Loan, for which you only need a 10% deposit.

There are some traps to watch out for. If you purchase or inherit a piece of land on which to build a house, after that time you will not be a first home owner and you will not be able to withdraw your KiwiSaver funds. Funds transferred into your KiwiSaver from an Australian superannuation scheme are not available to purchase a house. To be eligible for a Home Start grant, you need to have been a contributing member of KiwiSaver for three years or more. If you stop work, for example by going on maternity leave, you may need to keep up contributions at a reasonable level to stay eligible. This can be done by contributing $20 a week directly to your KiwiSaver fund. It can take up to a month to process a Home Start grant and it is best to apply for a pre-approval for both the Home Start grant and Welcome Home Loan to make sure you are eligible. The pre-approval will last for six months, giving you time to find house with the knowledge that you have finance available.

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