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Fear of Missing Out

Fear of Missing Out

There is something about human nature that makes us wired to believe that anything which is scarce or available only for a limited time is something we must have, despite the price. It’s called FOMO – Fear of Missing Out – and it is without doubt the biggest driver of poor financial decisions. Everywhere you look there are examples of selling tactics that prey on our FOMO insecurities.

Advertising copy is the biggest culprit. How many times do you walk past a shop window or read an online advertisement that uses words such as: ‘limited edition’, ‘available for a limited time only’, ‘selling fast’, ‘only a few left in stock’? These descriptors are all designed to tap into our fear of missing out.

This same fear drives people to bid higher at auctions – whether it is an online auction for a pair of shoes on Trade Me, or an auction for a more expensive item such as a car or a house. Rational decisions can go out the window if bidders believe there will never be another pair of shoes, car or house as suitable or affordable as the one they are bidding on. To a rational observer this belief is complete nonsense.

Rapid inflation also drives FOMO. While inflation for most goods and services is now less than 2%, we have had double digit annual increases in property prices, combined with a shortage of real estate listings. For first home buyers in particular, the fear of missing out on their first step on the property ladder has caused many to take on more debt than they are comfortable with.

Financial decisions are best made without fear and emotion. Eliminating fear of missing out is simply a case of believing that in time, you will find what you desire at the right price.

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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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What to Expect From Your Financial Adviser

What to Expect From Your Financial Adviser

Financial service providers are regulated by the Financial Markets Authority (FMA). Part of the FMA’s role is to educate consumers of financial services and for that reason they have released a checklist of things you can expect from your financial services provider. Providers include financial advisers as well as KiwiSaver providers, fund managers and superannuation schemes. When dealing with a licensed provider, the FMA believes you are entitled to:

Competence. Your adviser should have the skills and experience to offer you the right product or service for your needs and should tell you if there are any limits to what they can provide and why.

Be treated honestly and fairly. Your adviser should balance their business with yours and tell you about any conflicts of interest, such as being paid a commission by a third party.

Be informed. Your adviser should help you understand your options and weigh up the pros and cons before you make a decision. They should keep in touch with you and help sort out any problems.

Know how much you are paying. Your adviser should tell you how much you will be paying now and in the future for their products and services.

Have problems and complaints dealt with properly. Your adviser should tell you how to make a complaint and be able to respond constructively. They also need to give you contact details for their dispute resolution scheme.

As a consumer of financial services, you need to make sure you ask the right questions to ensure you are receiving the information and treatment that you are entitled to. If you don’t get the right answers, walk away. If you are an existing customer and feel your entitlements have been breached, you can make a complaint to the provider or to their dispute resolution scheme.

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Money Management for Newlyweds

Money Management for Newlyweds

Relationships aren’t like they used to be a generation or two ago. The path to a ceremony is a more gradual one, with couples typically living together beforehand and sharing expenses. Women, through both necessity and choice, continue to earn an income after marriage and are confident in managing their own money. The result is that young couples are increasingly managing their financial affairs separately. Making a life-long commitment should be a trigger to review how money is managed within a relationship. Over a lifetime, a degree of financial interdependency can arise, especially if there are children. The ideal outcome is that each partner’s needs and wants are both respected and protected and money is managed effectively within the relationship to achieve common goals.

It is very common for partners to feel differently about how much money should be spent now rather than saved to spend later and how much money should be kept on hand as a slush fund in case of unexpected expenses. Some people are uncomfortable using credit cards, while others feel nervous about having debt. To avoid ongoing arguments about money, there needs to be agreement on these money basics. It is very important that each partner continues to have access to money of their own. There are two ways to achieve this. Incomes can be paid into a single account for joint expenses and goals with a transfer to each partner for personal spending. Alternatively, incomes can be paid to separate accounts with a transfer to a joint account for expenses and goals. It’s really a matter of deciding how much of each respective income should be used for joint purposes. In a healthy, committed relationship, allocating a high percentage of income to joint expenses and goals enables money to be used more effectively.

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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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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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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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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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Being Prepared

being-preparedBeing Prepared

There’s nothing like a week of earthquakes, floods and gales to make you realise the importance of being prepared for disaster. It’s not only environmental conditions that create disaster; there are personal disasters too, such as serious illness, loss of a family member or loss of a job.

A disaster of magnitude has financial consequences, whether it is loss of property, a temporary loss of income, loss of the ability to earn income, or increased costs. Preparing for a disaster starts with asking the ‘What if….” question. What if I am involved in a serious earthquake? What if I suffer a serious illness or injury and I am not able to work again for several months or even years? Try and imagine yourself being in that situation today to identify what you need to do to be prepared.

  • Is your home and business insurance up to date? The Earthquake Commission provides insurance for homes, land and contents for natural disasters. However, to make a claim from the Commission you need to have a current home or contents insurance policy.
  • If you run a business, do you have business interruption insurance? You can arrange cover for lost income or expenses if your business is not able to operate as usual.
  • Do you have adequate life insurance and income protection insurance? If you were to lose your life or suffer a serious injury or illness, your family may be left in a dire financial situation.
  • Do you have an emergency fund? The rule of thumb is to be able to easily access three months of living expenses.
  • Do you have all your insurance details to hand? Scan your policy details and keep them on a flashdrive in your emergency kit or other safe place so you can quickly make a claim.
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