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Choosing When to Spend

Choosing When to Spend

There is nothing wrong with spending money. In fact money has no value unless it is spent. As they say, you can’t take it with you, so if you don’t spend your money during your lifetime, then someone else (the beneficiaries of your estate) will get the pleasure of spending it. During your working life and retirement, money will come to you on a regular basis unless something bad happens, such as the loss of your job, a business failure, or a severe health problem. How you fare in life financially will be determined by the timeframe in which you choose to spend the money you receive. As you receive money, you can choose whether to spend it now or later. If you choose to spend some later, you can choose how much later you wish to spend it.

Choosing to spend money later is called saving. Unfortunately, the word ‘saving’ has become associated with depriving yourself of enjoyment of life. The way to view saving is that in fact it increases your enjoyment of life – but in the future rather than now. There are three types of saving. Firstly, there is the saving you need to do to cover unexpected expenses and loss of income. Next, there is saving for big, one-off planned expenses such as holidays, a new car or home maintenance. These expenses occur in the medium term (the next five years or so). Then there is the saving you need to do for the long term, including retirement.

The art of managing your financial affairs prudently is to be able to correctly apportion your income into these different categories; money to be spent now, money for unexpected expenses and events, money for spending in the medium term, and money for spending in the long term.

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Investing for Children

Investing for Children

Parent and grandparents often want to set aside funds for their young children so they can be used to help further their later education or for some other worthwhile purpose. Here are some useful tips on how to do it in the best possible way.

First, consider the investment time frame. When is the earliest point you would wish the child to have access to the funds? If there is at least a five year time frame then some of the funds should be invested in assets that will grow in value over time, such as shares. For a shorter period, more stable assets such as term deposits may be more appropriate.

Putting funds into KiwiSaver is an option, however, the funds will only be accessible if they buy a first home, reach the official retirement age, leave the country or suffer hardship. There are diversified funds with investment profiles similar to KiwiSaver but which are not locked in. These funds are invested in a mix of fixed interest, property and shares.

Use the investment as a way of teaching your child about saving for the future. Review it with them once a year or so, and as the years go by explain more about how it works. They may choose to add more funds of their own to achieve a particular goal they have in mind.

Take heed that later in life, your child may enter into a relationship and, if you have invested a large sum on their behalf, you may wish to get advice on protecting it from a relationship property claim.

Given that student loans are generally interest-free, your child may be better to keep their funds invested through their study years and use them as a deposit on a home or to set up a business.

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Hammer Your Financial Commitments

Hammer Your Financial Commitments

It’s hard to save when there is a never-ending stream of bills to pay. One way to get sorted financially is to look closely and what your financial commitments are. Keeping your financial commitments to others well and truly under the hammer means more money for you.

Financial commitments are expenses that you have to pay on a defined day and are usually a specific amount. Rent, mortgage payments, credit cards, insurance and car registration are examples of financial commitments. There are five key strategies for keeping them under the hammer.

  1. Identify what your financial commitments are. Go back through your last three months or so of expenses and write down all the committed amounts you have paid to others.
  2. Use this list to work out your total annual commitments in dollars and then divide that by the number of pays you have. How much of your income is already committed to be paid to others before you get a chance to spend it?
  3. Your commitments can be further broken down into essential commitments and non-essential commitments. Gym memberships, magazine subscriptions, online subscriptions to music and movie channels are examples of non-essential commitments which, when added together, can chew up a big chunk of your income. Are these more important than your financial goals?
  4. Take a close look at your essential commitments such as rent, insurance, credit cards, phone and internet charges. Are you getting the best deals? Are you paying off debt on things you didn’t need to buy?
  5. Set up a separate bank account for your financial commitments and transfer enough money each pay day to cover the average cost per pay.

Every dollar you shave off your regular commitments will add up to a significant sum over a period of time.

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Keep Your Cool in Uncertain Times

Keep Your Cool in Uncertain Times

The world is full of uncertainties. How will Brexit play out? What effect will Trump’s outlandish statements and policies have on the global economy? Where is the New Zealand dollar heading? Will interest rates keep rising? In amongst all these uncertainties and more there is a large bunch of people wondering if their retirement funds are in jeopardy and whether they will be stuck in the workforce for much longer than planned. The reality is; there is no such thing as certainty (other than with regard to death and taxes); there are only degrees of uncertainty. So when it comes to making good financial decisions, a key skill is learning how to manage uncertainty.

There are natural instincts that come into play. Some people react to increased uncertainty by becoming highly cautious, some aren’t bothered at all, and some see uncertainty as an opportunity to make gains by taking risks. How you respond to uncertainty will have a significant impact on your financial outcomes.

The coming year is shaping up to be a very uncertain one. The key to being a successful investor is to learn to overcome emotions and make sound investment decisions based on objective analysis. An objective approach starts with determining your goals and the time frame for achieving them. If you have long term investment goals, don’t get distracted by short term changes in the market. Review your attitude towards risk and ensure your investment strategy is a good fit. Find the right balance between risk and return so you can achieve your goals while taking an acceptable level of risk. Stay diversified. Markets can change quickly, and moving all your investments into one asset class increases your risk.

Confident investors have a long term plan that they stick to. Just keep calm and carry on!

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Taking Care of Your Young Family

Taking Care of Your Young Family

Becoming a parent is one of life’s most exhilarating experiences and it changes things forever. Along with the joy comes the responsibility of ensuring a safe and nurturing environment for your children and the challenge of guiding them not only to be successful in life on their terms but to be good human beings.

Parenting is a serious business. There are responsibilities that come with the role of parent but unfortunately there is no instruction manual. One of the first lessons for a new parent is learning to put the needs of another person before theirs. This applies to physical, emotional and financial needs. Children are expensive and part of being a good parent is going without so children can have the necessities of life.

A study done by IRD in 2009 estimated that a middle income family with two children spent around 30% of their household income on their children. With three children, spending rises to 40% of income. So what happens when that income suddenly disappears? Tragically, just under 1800 people a year between the ages of 20 and 50 die and an even greater number become seriously ill and unable to work for a period of time. The consequences for the families of these people can be dire. There are three key ways in which parents can protect families.

  1. Make a Will. Dying without one leads to costly delays in making your financial assets such as personal bank accounts, KiwiSaver and life insurance claims available to your family.
  2. Buy life insurance, taking into account your overall budget
  3. Consider buying income protection or critical illness cover, especially if you are on a high income.

Your future income is your biggest financial asset. Make sure you protect it, for the sake of your family.

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Set Your Happy Goals

Set Your Happy Goals

It’s that time of year again, when we start with what feels like a clean slate; the whole year before us and the prospect of good fortune ahead. The pace of life is much slower during the holiday period, giving us time to reflect and think about what is important to us. It is as if we are all being given another chance to get things right. It’s the same chance we had this time last year, and every year before that. So why don’t things go according to plan? Despite the best intentions, life takes over. We get busy, and in the process of keeping up with the business of life, we let go of the great aspirations we had at the start of the year.

The key to being able to keep on track is to think about your ‘why’. The ultimate human goal is happiness. Every person finds happiness in different ways, and once you understand what truly makes you happy, you will find the motivation to succeed at your goals. Billionaire Richard Branson had it right when he said “Most people would assume my business success and the wealth that comes with it have brought me happiness. But I know I am successful, wealth and connected because I am happy”. Branson asks all his employees “What is your happy mantra?” When asked about his personal mantra for happiness, Branson said “The way I see it, there is a reason we are called human beings and not human doings. As human beings we have the ability to think, move and communicate in a heightened way. We can co-operate, understand, reconcile and love. That’s what sets us apart from most other species. So in 2017, don’t forget the to-do list, but remember to write the to-be list too”.

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A Wake-up Call for Retirement

A Wake-up Call for Retirement

New Zealand must wake up to the fact that our aging population means NZ Superannuation will become increasingly unaffordable. The number of people over the age of 65 will double in the next thirty years and the net annual cost of NZ Superannuation will triple over the next twenty years from $11 billion to $36 billion. The Commission for Financial Capability has recently released the recommendations from its 2016 review of retirement income policies. Retirement Commissioner Diane Maxwell is now calling for the age of eligibility for NZ Superannuation to be increased to 67 by 2034, and for the age of access to KiwiSaver funds to be decoupled from NZ Superannuation.

New Zealand is lagging behind other countries in making changes to retirement age. Australia, the UK, and many European countries have taken steps to improve the financial sustainability of their pension schemes, most commonly by raising the retirement age. John Key refused to discuss the possibility of making changes while he was in office. That obstacle is no longer there and we need to start the debate.

The Commission is also recommending a number of changes to KiwiSaver, to make this a more effective vehicle for retirement saving. These include increasing the minimum contribution from 3% to 4%, allowing people to make contributions at a higher percentage than currently, and allowing people over the age of 65 to join.

To help fund NZ Superannuation, the Commission recommends that Government resume contributions to the NZ Superannuation Fund. Presently, new migrants are eligible for NZ Superannuation after 10 years, and the Commission recommends increasing this to 25 years. As well, the Commission recommends removing the option for non-qualifying partners of superannuitants to also receive a pension.

The bottom line is we all need to take more responsibility for our own retirement.

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Choosing the Right KiwiSaver Options

Choosing the Right KiwiSaver Options

Joining KiwiSaver is a no-brainer and there are now around 2.6 million members. There are three key decisions to be made when joining; the contribution rate, the investment option and the provider. It’s best to make the decisions in that order. Your contribution rate should be set at the rate that gets you closest to an annual contribution of $1,042 which will then give you the maximum annual tax credit of $521. If you want to save more, save into a diversified fund which is not locked in.

The key determinant of your investment option is your investment time frame. The range of options is usually something like Defensive, Conservative, Balanced, Growth and Aggressive. The longer your time frame, the more you should invest in growth assets (property and shares). Aggressive funds have the highest exposure to growth assets and Defensive funds have the lowest. While growth assets are more volatile in the short term, they will give a higher return than income assets (cash and fixed interest) over the long term. Note that your investment time frame doesn’t finish on the day you retire; it finishes on the day you decide to spend your money. Many retirees are choosing to leave their KiwiSaver invested as a reserve fund for later in retirement. This means that even at age 65, they might still have a long investment time frame before they spend their funds.

Once you have decided on the best mix of growth and income assets, you can compare providers to see which ones have the best performance, after the deduction of fees, for that kind of fund. Don’t be hung up on fees alone; there is nothing wrong with paying more in fees if the provider produces a better performance net of fees. It’s the bottom line that counts!

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Give Money for Christmas

christmas-moneyGive Money for Christmas

Whatever your age, Christmas is a stressful time of year, and much of the stress is caused by financial pressure. It seems rather silly that so much precious money is spent on gifts that may not give lasting pleasure, if any at all. Economists would argue that spending money on gifts for others does not give the most satisfaction (or utility, in economic jargon) per dollar spent. That’s because it’s not easy to judge how much the other person will appreciate the gift.  Despite that, we still give gifts as an expression of love, gratitude or concern for someone’s wellbeing. Yet there are lots of reasons it’s good to give money instead of, or as well as gifts.

To start with, there are plenty of people who could do with a bit of extra cash at Christmas to pay for necessities rather than luxuries. For students with low incomes and big debts, elderly people struggling to pay their bills, and children who are saving for something they really want, money is a welcome gift. You can use a gift of money as a way of teaching children about money; that is, explaining to them the need to set aside money for later, or to save for a goal. You could even give a small investment of shares or a managed fund to teach children how investment markets work.

Giving money doesn’t have to be boring. Check online for creative ways to give money. There are plenty of ideas for how to use notes and coins to make decorative gifts, such a money bouquet, a money Christmas tree, or a box of money ‘chocolates’.

Christmas is a time to think about giving to those who are most in need. Include a charity on your Christmas list to spread the good cheer!

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Pension or Lump Sum?

pension-or-lump-sumPension or Lump Sum?

Many retirees are in a position where they need to decide between taking a pension or a lump sum on retirement. Workplace pension schemes may offer options of a lifetime pension, a lump sum or a combination of the two. A part lump sum option also applies to members of the old Government Superannuation Fund Scheme and to people who have transferred a UK pension (under certain conditions). In addition, you can now use a lump sum to purchase your own annuity providing a regular monthly payment for life. In all these situations, the key question is “Should I take a pension or a lump sum?”

The answer will depend on your personal situation. The advantage of a pension is that it provides a known amount of income for the remainder of your life. This helps take away the uncertainty of how long you are going to live and what investment returns will be. If you live longer than the average person, the total value of the payments you receive will be more than the value of the lump sum invested (plus returns). The key disadvantages with a pension are that you cannot access the capital sum invested, and if you die before the average life expectancy, any funds not already paid out to you will be forfeited. To avoid these situations, you can invest a lump sum in a variable annuity which allows partial access to capital and has a residual value at the end of life.

The key factors for considering your options are your life expectancy – based on your health and family history of longevity – and your ability to access large lump sums if required. If you have a decent lump sum in addition to a pension or an annuity you may have the best of both worlds.

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