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Asset Rich, Cash Poor

Empty PocketsAsset Rich, Cash Poor

It is well known that having a lot of money tied up in assets, especially property, while being on a low income is an uncomfortable place to be. However, it is not an uncommon scenario, particularly for young couples and the elderly. It’s not easy to get the balance right. If you have a high income but don’t have significant assets, it’s probably because you are spending too much of your income rather than saving or investing. If you have significant assets but a low income, you’ve done a good job of accumulating wealth but you’ve probably reached a point where some of that wealth needs to run down so you can spend more. Somewhere in between is the right balance – building up a store of wealth while having enough free funds to enjoy a good lifestyle.

Being asset rich and cash poor is a problem that usually centres around property – the family home, a farm, an investment property portfolio – or a business. For young people buying their first home, the balancing act is to buy a home that is comfortable enough to live in, but not so expensive that mortgage repayments compromise lifestyle or the ability to reduce debt quickly. For the elderly, having a comfortable home is also important, and as well having access to funds for maintaining the home, supplementing pension income and covering unexpected expenses. A good rule of thumb for retirement is to have a debt free home and investments of around half the value of your property. Ideally these investments should be relatively liquid so you can run down your capital over your lifetime.

Set this as a target to guide you to make the right choices between spending, saving and investing throughout life so you don’t end up asset rich and cash poor.

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Reduce Your Cash Flow Risk

CashFlow2Reduce Your Cash Flow Risk

Conversations about financial risk focus on investment and finding the right balance between risk and return. While these are important conversations for investors, there are other aspects to financial risk which can be just as significant. Your income and expenses, or in other words, your cash flow, are just as affected by risk as your investments, but in a different way. An investment loss will impact your future life whereas a cash flow loss impacts your ability to enjoy life here and now. The factors underlying cash flow risk are much more personal rather than being market-driven, however they are more within your direct control.

Most of us can get by from one week to the next based on our expected income and expenses, but life doesn’t always go according to plan. There are a number of risk factors that increase the possibility of major drop in income or a blowout in expenses.

Swapping the steady income of an employee for an uncertain income as a contractor or business owner increases your financial risk. However, along with the risk comes the potential to earn significantly more. Staying with a steady job is not necessarily risk-free though. Working for a business that is not in good shape increases the possibility of redundancy. Failure to learn new skills can lead to loss of employment or promotion opportunities. Poor diet and exercise and high stress levels can lead to long term illness and loss of income. Separation and divorce cause financial chaos. Failure to keep up with regular maintenance, whether it’s your teeth, your car or your home eventually catches you out with big, unexpected bills. Insurance and emergency funds are two ways of reducing risk, but so are choosing the right career, upskilling, and taking care of your wellbeing and your relationships.

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Money and Power

CrownMoney and Power

At a political and economic level, we all know that those who control the money have the power. In personal relationships, it is no different. Control over money can be used in either a beneficial or detrimental way by one person to control another. The way in which money is managed in a relationship very often signals the underlying nature of the relationship.

In some instances, one partner may refuse to participate in managing money within the relationship. This can be for a variety of reasons. Sometimes it is because the person wishes to retain complete financial independence and do what they like with their own money whether the other person likes it or not. At the other end of the spectrum, it can be that one person is afraid of managing money and is happy to leave it all to the other person. There are many variations in between.

An unhealthy relationship with regard to money is one where a partner is kept in the dark on money matters despite being keen to know, where one person refuses to talk to the other about money or to reveal key information such as their income, or where one person is forced to sign financial documents without understanding the meaning of the documents or the consequences of signing. Sometimes, where there is significant wealth involved, it may be held in companies or trusts involving third parties without full information being disclosed to the shareholders or beneficiaries.

In a healthy relationship there is full disclosure between partners of financial information, there is a willingness of both partners to participate in managing financial affairs and there are agreed financial goals which are achieved through co-operative behaviour and sharing of financial resources. Ideally, partners should aspire to having similar levels of financial literacy.

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How Do You Compare?

CompareHow Do You Compare?

A survey of around 1000 New Zealanders over the age of 18 undertaken on behalf of the Commission for Financial Literacy and Retirement Income in May this year shows some interesting statistics about how people use their money. These surveys have been undertaken every six months since November 2011 and show fairly consistent results.

Spending and Debt

Only fifty six percent of people spend less than they earn. We are still great users of credit, with twenty one percent of people having a retail purchase agreement. However, we are reasonably responsible with debt given that ninety five percent of those who repaid their purchase agreements in the last year did so within the interest free period. Of those with credit cards, fifty eight percent pay them off each month.


More than two thirds of people say they have access to three months of income as an emergency fund, and seventy one percent of people have put money into savings within the last three months. However, the focus is on short term savings, with only twenty nine percent saving for long term goals. Only fifty one percent of people contributed to KiwiSaver in the last three months.


KiwiSaver is the most popular form of investment, with fifty three percent of people surveyed being members. Around two thirds of people have other investments, with thirty one percent having bank term deposits, eighteen percent having managed funds, eighteen percent investing in property, twenty percent investing in shares, sixteen percent investing in their own business, and eighteen percent investing in some other way.

These statistics are useful to compare your own financial behaviour with the rest of the population, however there is considerable room for improvement for everybody when it comes to saving, especially long term saving and membership of KiwiSaver.

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Money Management for Couples

HandsMoney Management for Couples

The question of who takes responsibility for managing financial affairs and setting goals and priorities in a relationship is one that has a number of different solutions. The start of a relationship can mean a loss of financial independence that is difficult to adapt to. As a result, some couples choose to split bills in half rather than having a joint account. Financial independence is maintained with this arrangement, but money management becomes complicated, inefficient and time consuming. In some relationships, one partner takes prime responsibility for managing money, occasionally to the extent that the other partner has little information on the overall financial situation. Managing money jointly is desirable but can lead to conflict where partners have different values and attitudes towards money. Without good communication, joint management can lead to a situation where neither partner is ensuring money is managed effectively or where each partner is competing with the other for the use of money for their own priorities. Here are some useful tips for managing money as a couple:

  • Each partner in a relationship should have access to an agreed amount of money for which he or she is not accountable to the other, so as to have a degree of financial independence
  • Simple money management systems are usually more effective than complicated systems
  • Goals and priorities should be agreed jointly and take into account the different attitudes and values of each partner
  • Specific responsibilities for sharing money management tasks should be clearly defined so that joint responsibility doesn’t become no-one’s responsibility
  • There should be full disclosure of all financial information to each partner, regardless of who has taken responsibility

As with any aspect of a relationship, managing money is something that requires an understanding of each other’s needs and good communication.

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5 Money Tips for the Self Employed

PlumbersVan5 Money Tips for the Self  Employed

Owning a business is a great way to build your wealth. Use these five money tips to make the most of your opportunity.


 Tip # 1 Join KiwiSaver

Being self employed doesn’t preclude you from joining KiwiSaver. If you are not a PAYE employee of your business, your contributions will be made directly to your chosen KiwiSaver provider. By contributing around $87 per month, you will be eligible for the kickstart of $1,000, an annual tax credit of $521 and other KiwiSaver benefits.

 Tip # 2 Have a financial safety net

A high percentage of new businesses fail within the first two years and at the other end of the spectrum, older businesses can fail due to changes in markets and technologies. Reduce your financial risk by holding some of your wealth outside your business. In the worst case scenario, you will have financial assets to rebuild from.

 Tip # 3 Separate business and personal money

One of the keys to successful business management is keeping a close eye on the cash flow and the performance of the business. Small business owners often make the mistake of mingling their business income and expenses with personal income and expenses, making it difficult to monitor performance.

 Tip # 4 Pay yourself a regular amount

To successfully manage your personal finances it helps to have certainty about what your income is. Paying yourself a fixed amount on a regular basis from your business will make this easier. Adjust the amount up or down after a period of time if your average business income changes.

 Tip # 5 Have an exit strategy

From the day you start your business, your plan should be to maximize the price it can be sold for. You will need a clear plan of how you are going to add value to the sale price and how or to whom it might be sold.

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The Importance of Cash Flow

The Importance of Cash Flow

Whether you are running a business or managing the household finances, cash flow is critical. The difference between cash coming in and cash going out in any given period of time is the net cash flow. If it is positive, your cash balances will increase and if it is negative, your cash balances will decrease.

The easiest way to grasp the concept of cash flow is to think of a water tank. Imagine a pipe at the top of the tank pipe bringing water in from an external water supply. At the bottom of the tank, imagine a pipe taking out water to be used for a multitude of purposes. The water in the tank will rise and fall depending on whether more water is coming in than going out.

Cash flow is easy to manage when the flows are constant. It is not so easy where there is large variation in cash flows, for example in small or expanding businesses, in households where income comes from self employment or from commission, and in property investment. Without careful management the tank can run dry, with disastrous consequences.

The principal tool for managing cash flow is planning. With a cash flow forecast, that is a month by month analysis of estimated money coming in and estimated money going out, you can estimate the net cash flow and the impact this has on cash balances. You can then put strategies in place to cover the periods when there is likely to be a large negative cash flow – for example, altering the timing of payments, borrowing funds, finding additional sources of income or cutting down on expenses. Many businesses, property investors and households have come to grief when the tank runs dry and there is no contingency in place. Don’t be one of them!

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Talking About Money

Talking About Money

Good communication is important in any relationship and one of the most vital subjects to discuss is money. It is surprising how many couples get together without having a frank and open discussion on how money will be managed in the relationship, only to find that fundamental differences in this area become a significant cause of friction. It is not uncommon for different attitudes towards money to lead to a complete breakdown in a relationship. To avoid potential conflict, here’s how to get talking about money:

  • Before you talk to your partner, you should each have a clear understanding of what money means to you and the purpose of money in your life so you can share these thoughts with each other
  • Set a time, not just for one meeting, but for a series of regular (eg monthly) meetings to discuss your financial situation. Meet at a time when feelings are neutral rather than angry or stressed, when it is quiet and you have the energy to focus on the discussion.
  • In your discussion, be willing to see things from your partner’s point of view and show a willingness to compromise so that each of you can have your needs met.
  • Don’t be critical or judgemental of your partner’s views. There is no right and wrong when it comes to managing money. The most important thing is to make decisions based on a full understanding of the consequences of those decisions.
  • Set shared goals and priorities for your money and hold each other accountable to achieving them.
  • Make it a team effort to manage your money rather than relying on one person to manage everything.

If you have conflict over money, your relationship will struggle to survive. Use good communication to maintain harmony.

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How to Recession-Proof Your Finances

How to Recession-Proof Your Finances

 There is a direct link between how confident people feel about their financial situation and how much they spend. This was evident in the property boom that occurred prior to the Global Financial Crisis. When property prices were rising, home owners felt wealthier and had the ability to borrow more. Funds borrowed were spent on more property, (investments, home improvements or bigger homes) or non-essential goods and services. Debt levels increased sharply.  When property prices fell, confidence levels dropped and banks became nervous about lending. Low interest rates have been the saving grace for those burdened with debt.

Since the Global Financial Crisis, low economic growth has led to increased unemployment which in turn has increased the level of caution. Lower confidence usually means less spending, lower retail sales, less money circulating through the economy and continuing low economic growth. A recent survey by Dun and Bradstreet foreshadows low levels of retail spending this Christmas, with more than two thirds of those surveyed saying they plan to spend less money on non-essentials than they did last Christmas. The survey also shows that one in four people would be unable to survive for longer than a month on their savings if they lost their job tomorrow and only four percent could last for seven to twelve months. Those who either experienced or observed the Christchurch earthquakes have learned the importance of having financial reserves to draw on in times of crisis.

The higher your financial reserves, the more resilient you will be to changes in the economy and unexpected events. Instead of lurching from spending spree to cutback, keep your spending on an even keel. When times are good, build your reserves instead of increasing your spending. That way, your confidence will increase and you will be less affected by economic downturns.

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Is Your Boss Short Changing You?

Is Your Boss Short Changing You?

Financial literacy is still a major issue in this country, particularly with regard to retirement savings. A recent online survey by ASB showed a huge gap for most people between the retirement income they want and what they will actually achieve at their current rate of saving. It seems most people have little understanding of how much money they need to save for retirement. Employers are in a good position to help educate their employees about retirement saving and ensure they are receiving the best possible advice on KiwiSaver contributions. Under current legislation, personalised advice on retirement savings should be given by an authorised financial adviser, however employers can provide employees with generic information on retirement savings and make arrangements for employees to receive personalised advice from an adviser at either the employer’s or employee’s cost. The financial literacy problem is not just about saving for retirement, however, it is also about how to save for more immediate goals such as buying a house, paying off a mortgage or taking an overseas trip. Most employees would benefit from education in simple budgeting techniques.

There are good reasons why employers should have a role in improving the financial literacy of their employees. It could be argued that employers have a moral obligation to ensure their employees are able to make informed decisions about whether they join KiwiSaver, the level of their contributions and their choice of fund. Otherwise, employees may be short-changed by missing out on employer contributions and Government tax credits. An equally compelling argument is that people who feel they are in control of their money are happier than those who feel as though they are living from payday to payday and not achieving their goals. Happy, contented people are easier to manage and more productive in the workplace.

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