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The Big Squeeze

the-big-squeezeThe Big Squeeze

New Zealand’s rate of inflation continues to be low, even though our economy is growing. Lower petrol prices, cheaper airfares and computer equipment are some of the biggest contributors to low inflation and have reduced the impact of higher prices for housing-related goods and services. However, this is not necessarily cause to celebrate. The way in which people spend and save is very much influenced by the rate of inflation. Rapid increases in prices can cause people to spend now rather than later in order to buy cheaper. Saving becomes less attractive because the purchasing power of money declines over time. On the other hand, when prices are falling, spending is delayed in order to buy cheaper. The economy then slows down and prices can fall even further.

While high inflation is not desirable, neither is deflation (falling prices). The aim of the Reserve Bank is to keep inflation at about 2%; not too high and not too low. The principal tool for achieving this target is the Official Cash Rate (OCR), which in turn has an influence on the interest rates set by banks for deposits and lending. In theory, a lower OCR should mean lower deposit and lending rates for savers and borrowers. This in turn encourages spending and investment, leading to higher inflation. However, the OCR is only one of several factors that determine bank interest rates, so a change does not always achieve the Reserve Bank’s aim.

With inflation only just above zero, there is a danger we will head into deflation and the Reserve Bank is likely to continue to drop the OCR. If this translates into lower bank interest rates, savers will be caught in a big squeeze between falling interest rates and rising inflation. This is an uncomfortable place to be for retirees.

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Planning with Uncertainties

UncertaintiesPlanning with Uncertainties

Making plans for your financial future is hard enough at the best of times, but when there are lots of unknowns it is even more difficult. There may be uncertainty around basics, such as what your income will be from one week to the next, or one year to the next, and around what your outgoings will be, such as when you transition from a working life to retirement. At a higher level, there may be uncertainties around which house, town or country you will be living in, or which career you will have.

There is always a temptation when there is uncertainty to not plan at all, because it is too hard. Yet planning is even more important when life is uncertain. The way to deal with uncertainties is to clearly separate them from the things that are certain.

Perhaps you have your own business or you work on commission, or work irregular hours. There is usually a base level below which your income doesn’t usually fall. That is the income level you should plan with. Regardless of what your income is, where you are living or who you are living with, there is a basic level of spending that covers the essentials of life. These are the expenses to start planning with. It is best to underestimate income and overestimate spending in order to err on the side of caution.

You may also have uncertainty around future plans for a sum of money you have on hand. Perhaps you are thinking of using the funds to renovate the house or set up a business. Think of the minimum time period in which your level of certainty will increase and invest for that time frame to get a better return.

As the uncertainty diminishes, plans can be adjusted accordingly.

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Protect Your Wealth

Protect Your WealthProtect Your Wealth

Creating wealth takes time, effort and discipline, and also a willingness to defer spending and take calculated risks. It is not always a straight line process. In fact, it can be a bit like playing monopoly. Every now and then you draw a bad card that costs you a lot of money or sends you straight to jail!

Wealth protection is just as important as wealth creation, yet it is often overlooked. Keeping wealth safe is not just a matter of making sure your money is kept in the bank or in other secure investments. Financial risk is only one of the many threats to wealth. In business, it is good practice to do a risk audit – that is, to identify the risks faced by the business and look at what methods are available to minimise or mitigate these risks. The same approach can be taken with personal affairs. The starting place is to note the key risks to personal wealth. Then consider the size of the potential negative impact associated with each risk, how likely it is to occur, and what can be done to reduce or eliminate the risk. Sometimes there is a cost associated with reducing or eliminating risk, such as insurance or legal costs, and this needs to be weighed up in relation to the extent and likelihood of possible loss. Clearly, a high risk of a large loss would probably justify the outlay of protective measures, while a low risk of a small loss may not.

Risks to personal wealth can include the risk of illness or death of yourself or a close family member, the risk of loss of property through theft or disaster, the end of a relationship, investment risk, and risks associated with being a business owner or director. Don’t ignore them!

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Getting Ahead in Your Thirties and Forties

Thirities and FortiesGetting Ahead in Your Thirties and Forties

Mid-life is a critical time for making the right financial decisions. It is a time when there are many demands and considerations to be juggled; partners and children, parents, career, personal goals, current lifestyle and future lifestyle. It can be a crazy time and it seems like there is never enough money to go around. The way to deal with the craziness is to work on some fundamental principles to build a solid base for managing income and wealth.

Take charge of where your money goes. Money has a habit of disappearing quickly when there are lots of competing priorities. Use multiple bank accounts to allocate your money to savings and different types of spending; your financial commitments (mortgage, rent etc), your household expenses (food, power etc) and personal expenses.

Have an emergency fund. Each payday set aside a small amount to build up a fund for when unexpected things happen.

Pay off your mortgage as soon as possible. Aim to pay off your mortgage at least ten years before your plan to retire. Set up a line of credit as part of your mortgage structure with the remainder on a fixed rate. The credit limit should be about the same amount as you can save over the next 1-2 years towards paying your mortgage off quicker. Aim to get the line of credit balance to zero over that time, then redraw the funds to pay a chunk off the balance of your mortgage when the fixed period expires. Repeat the process.

Contribute to KiwiSaver. Put in enough to be eligible for the maximum tax credit while you are focussing on repaying your mortgage. Once your mortgage is gone, either increase your KiwiSaver contributions or set up another retirement fund, contributing enough to enable you to achieve your retirement goals.

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Automated Advice and What it Means for You

Robo AdviceAutomated Advice and What it Means for You

Financial advice is on the verge of major change. There is pressure to reduce the distribution costs of financial products which will ultimately make them cheaper and more accessible for a wider range of people. This change will also potentially drive a wedge between product sales and financial advice.

A recent report from NZIER, Resetting Life Insurance, found that insurers paid average commissions of $221 million per year on new business of $123 million per year in the period 2012 to 2014. The report found that cutting commission costs by 25% would initially cut premiums by 3.5% with savings increasing to 6% over time. Some insurers are using online sales of insurance products to cut out the cost of commissions completely.

On the investment front, direct selling of model portfolios online is on the rise. So-called ‘robo advice’ allows DIY investors to work through online algorithms to determine a best-fit model investment portfolio for themselves, Buying direct from the product provider means they do not have to pay advice fees.

Adviser regulation is also moving to keep up with this trend. The next wave of change is likely to see more scope for advisers to provide ‘limited advice’ that does not require a full assessment of a client’s current financial situation and future goals. Limited advice costs less than comprehensive advice.

What this means going forward is that insurance and investment products will become more affordable to a wider range of people and purchasers of these products will have greater choice about the level of advice they receive and pay for. The onus will be on advisers to prove the value of the advice they give. The danger is that those who most need advice will choose not to pay for it and make bad product choices as a result.

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Back to School Means Money Woes

back-to-schoolBack to School Means Money Woes

Hard on the heels of the expense of Christmas and holidays comes the start of the school year; uniforms, stationery and school fees. Education in state schools is supposedly free, but these expenses, along with extra school activities are the responsibility of parents. School fees are a contentious issue. State schools cannot charge fees, but often insist that parents pay a ‘donation’ to cover the government funding shortfall. This donation is voluntary, and you should not be made to feel you have to pay it. State integrated schools, which own school buildings and land, can charge an attendance fee to help cover property costs. Private schools receive limited government funding and therefore rely on substantial fees to cover costs.

While school-related expenses are significant, they are not unexpected. The key to managing these expenses is to plan ahead to ensure the required funds are available. Some avenues of financial assistance are available and if it is a real struggle to find the money, check with the school principal. There may be ways to spread the cost over a period of time, to cut down the amount of stationery or uniform items specified, or to apply to charitable organisations. JR McKenzie Youth Education Fund provides funding for uniforms, stationery and other costs to families suffering hardship. This fund is administered through Rotary. Max e Grants, a joint project between OfficeMax and Barnados offers assistance to schools who can then distribute funds to disadvantaged children. Work and Income offer help with out of school childcare costs (OSCAR) and financial support through their Recoverable Assistance Programme, although an income and asset test is applied to determine eligibility. Budget advice is also available from the Family Budgeting Service to help get through difficult financial times. There is no need for children to miss out.

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De-Tox Your Finances in Five Easy Steps

DetoxDe-Tox Your Finances in Five Easy Steps

The benefits of cleansing your body by flushing out toxins are well known. The same principles can apply to your finances. It’s about getting rid of everything that weakens your financial position and therefore your ability to enjoy life to the full. Here’s how to de-tox in five easy steps:

  1. Face the reality of your position. Make a list of all your assets (house, car, KiwiSaver and other investments) and all your debts. The difference between your total assets and your total debts is your net worth. If you are managing your money well this figure should be higher than it is was at this time last year.
  2. Find out where your money goes. Go through the last three months of bank and credit card statements. Put the transactions into three categories: financial commitments (such as rent, mortgage, insurance), discretionary spending (eating out, entertainment, gifts and other non-essential items) and essential spending (food, transport etc). Look in particular at how much you are spending on non-essential items.
  3. Start saving. Decide how much you want to save each payday and set up an automatic transfer into a savings account for this amount on the day you get paid. Allocate your remaining income into each of the three categories above and set up a bank account for each one.
  4. Make good choices with your savings. Use your savings to progressively do the following:
  • pay off high interest short term debt
  • set up an emergency fund
  • save for short term goals such as holidays and home renovations.
  1. Get your financial affairs in order. Make sure you are in the right KiwiSaver fund, that you have adequate life and income protection insurance, your will is up to date and all your important documents are stored tidily in a safe place.
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Financial Abuse

white-ribbonFinancial Abuse

Domestic violence can take many forms and it is important to recognise that financial abuse can be one of them. Financial abuse may or may not be linked to physical abuse and can be hard to detect by others. Lurking inside what appears from the outside to be a normal relationship may be controlling and threatening behaviour which is psychologically damaging. Victims in such relationships are often too ashamed to speak about what is happening to them, and in some cases may not even recognise that the way they are being treated is neither normal nor acceptable. Financial abuse can occur across all socio-economic groups. It can take many forms:

  • Intense monitoring of money spent, which can be followed by criticism or punishment for spending without approval or not being able to account for where the money has gone
  • Excessive control of income or assets by one partner, leaving the other with either a small allowance or limited access to money
  • Threats of leaving knowing that the remaining partner has no means of supporting themselves
  • Forced career choice, including restricted work hours and forced refusal of promotions or training opportunities
  • Forced signatures on legal documents pertaining to borrowing money or purchasing significant assets, often involving significant financial risk
  • Spending large amounts of money without consultation, which may leave insufficient for necessities or increased financial stress
  • Denied access to financial records or certain bank accounts

Any person who believes they may be experiencing these forms of abuse should seek advice from someone they trust. None of these behaviours are acceptable in a relationship. Perpetrators of financial abuse usually have deep psychological issues, however they are unlikely to deal with these if their behaviour is tolerated by others. Family members, friends and employers should watch carefully for abusive behaviour and provide support

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Spending and Saving Conflicts for Couples

ConflictSpending and Saving Conflicts for Couples

There is no doubt that arguments about money are one of the key causes of conflict in relationships. When money is in short supply, arguments often revolve around differences in attitude towards spending and the distinction between needs and wants. The interesting thing about financial decisions is that they are never right or wrong. A good financial decision is one which is made in full consideration of the consequences of the choice that is made. Choosing to spend money now rather than saving it to spend later may lower your standard of living in the long term. On the other hand, saving money now to spend later means sacrificing current lifestyle for future benefit. Neither approach is right or wrong, they just have different consequences. Conflict arises where each partner has different views about the acceptability of the consequences. Here are some guiding principles which should help to resolve conflict:

  • Respect your partner’s views and acknowledge that different attitudes to spending and saving are not right or wrong
  • Focus on understanding the consequences of financial decisions
  • Agree on which decisions need to be made jointly and which can be made individually
  • Agree an amount of money (from income and/or savings) which each partner is free to spend or save as they wish on things that are important to him or her
  • Be clear on the difference between needs and wants and make sure the essentials are taken care of first
  • Ensure that you have plans in place to cover at least your basic long term requirements before making large purchases in the short term for lifestyle reasons.

Whether you are arguing over how much your partner spends on wine or cigarettes, or how much to spend on a new car or kitchen, these guidelines should help you reach an agreement.

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Starting Over

Starting Over

Life is full of ups and downs which have financial implications. How we respond to different circumstances and situations has a cumulative effect over time which can lead to significant differences between people in terms of their financial outcomes later in life. There are many things that go wrong in life – poor health, redundancy, business failure, death of a family member, or the end of a relationship. Often these events are interlinked. Death of a family member can lead to business failure and the end of relationship can lead to poor health or redundancy can lead to the end of a relationship. Significant adverse events are financially destructive. Mostly, they are not within our control, but we can certainly control how we respond to them.

Along with adverse events come grief, a sense of loss and, initially, denial. This manifests itself mostly as not wanting to let go of a previous lifestyle, particularly the family home but also small things such as expensive clothes or subscription TV that are no longer affordable in the short term. Reluctance to give these things up leads to a worsening financial situation.

Acceptance of being in a new financial situation is the willingness to let go of the past and to be able to contemplate travelling down a new path. It comes from digging deep within to discover what is really important in life and set new financial priorities.

It is only with acceptance that you can start over, gathering together the pieces, consolidating and rebuilding. Let go of the things that are no longer important or which are financially draining, gather together the assets that will work positively for you, rework your budget to include the things you value most. Take time to pause and strengthen your position before you move forward. Resilience is the key factor that determines success.

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