Creating a significant amount of wealth during your lifetime cannot be done by saving alone and usually requires the use of other people’s money. Borrowing money from others to invest in businesses and property is referred to as a leveraged investment strategy. Leveraged investments are capable of producing significant wealth, providing the funds invested produce a return greater than the cost of borrowing. Most commonly, this strategy is used for investing in property. The problem with leveraged investments is that while they magnify the effect of good investment returns, they also magnify the effects of bad returns. A leveraged investment strategy therefore requires a solid foundation to avoid financial ruin. The basic building blocks are:

• Money management skills. If you can’t manage your own money properly (i.e. you don’t know where it goes and you can’t save) then you aren’t going to be able to manage borrowed funds well either.
• A financial buffer.  Borrowing up to the maximum limit with no room to move means you could easily come unstuck if things don’t go to plan. Have unused credit or savings to fall back on.
• Consistent income from more than one source. Diversification is a key word for investment strategies and being reliant on only one primary source of income, such as a single salary, can be disastrous.
• Risk protection. Borrowing money increases your financial risk. Put insurance cover in place to cover adverse events. Make sure you have the right ownership structures so your personal assets are protected if investments fail.
• A store of wealth. Don’t risk everything you have. As you create wealth, set some aside in safe investments so that if your risky strategies fail, you don’t lose everything.

Building on these foundations won’t eliminate risk but will certainly reduce it.

Financial advisers have traditionally received their income from upfront and ongoing trail commissions paid on insurance policies and investment products they have sold. These commissions, while paid by the product provider to the adviser, are funded from the profits made within the products. In effect, the owners of those products therefore pay, albeit indirectly.

If you are not paying a fee for advice, then it is probable that your adviser is receiving a commission. Upfront commission is paid when the product is purchased, and this can be a significant amount. This is usually followed by an ongoing trail commission, paid at regular intervals to your adviser. If you choose to cancel your insurance policy or cash in your investment, there is usually a ‘claw back’ of the upfront commission. Sometimes this is paid by the adviser (which is why they may be very reluctant for you to cancel or withdraw) and sometimes this is paid by the client (for example, as an exit fee if an investment is cashed in). The point of trail commission is to provide financial reward to your adviser for ongoing advice given to you. Find out how much commission you are paying by contacting either your adviser or the supplier of the product. Given that this is being paid by you (indirectly), you need to be sure you are getting the service you are paying for. Advisers often sell their clients to other advisers, and it may be that the person receiving commission from you is someone other than the person who sold you the product; someone who may be a complete stranger to you. If you are not satisfied you are receiving adequate advice, ask your adviser to rebate the commission to you, or alternatively find an adviser who truly earns the income received.

People who consider themselves ordinary often wonder if it is possible to ever achieve the life of their dreams. Such people fail to understand two really important points. The first point, which almost goes without saying, is that ordinary people live ordinary lives, while extraordinary lives are lived by extraordinary people. The second point is that anybody, even ordinary people, can choose to be extraordinary. Being extraordinary is about having the right attitude to life and being prepared to do things differently than you have done before. Your ability to create wealth has very little to do with your level of education, your income from employment or your family circumstances and everything to do with your attitudes and behaviours. People who live extraordinary lives have certain things in common. They are confident, with a positive, optimistic attitude towards life. Rather than sitting on the couch they actively engage with the wider community, using their networks for ideas and support. The more widely they engage with others, the more contacts they have and the more ideas and support they receive. Extraordinary people are creative, and constantly looking for opportunities. They do their homework on new ventures but they are not afraid to take risks. Neither are they afraid of either failure or success. They set themselves clear, far-reaching goals that might seem impossible to others. To live an extraordinary life means letting go of living an ordinary life. Sometimes, that means letting go of property, people, or employment if these are things that hinder progress. Being extraordinary means having the courage to let go of what is familiar in order to make way for new things that open up new possibilities.

If you have the desire to live an extraordinary life, do you have the courage to change and let go?

It is said the biggest financial risk anyone takes in their lifetime is the risk of running out of money before they run out of life. Everybody reaches the starting line for retirement in different financial shape. There are those with little in the way of savings because they decided to spend while they were still young enough to enjoy it, or because they were unable to earn enough to save. There are those who squirreled small amounts of money away and have a small retirement nest egg. Others come to the starting line with significant amounts through having been regular contributors to a subsidized superannuation scheme or through being the beneficiaries of a large inheritance. What you have at the starting line of your retirement life will determine your standard of living for the next twenty or thirty years. Those with little or no savings will have their standard of living determined for them by the controllers of the public purse strings, with inflation being their constant enemy. For those with money to invest, the challenge becomes one of making what they have last the distance. There are three stages of retirement; the ‘live it up’ stage when you spend money on enjoying life, the ‘fix it up’ stage during which your car, house and body need maintenance, and the ‘wind it down’ stage when you need to pay for care. Invest your money in three ‘tranches’; one for each stage. The first amount should be invested in stable, income producing investments for five or ten years, while the second and third amounts can be invested for ten to twenty years with low to moderate exposure to growth assets (shares and property) to help protect against the effects of inflation. This will reduce the risk of outliving your money.

The last ten years or so has without doubt been a difficult time for investors. We’ve seen the bursting of the ‘dotcom bubble’ in early 2000, the Japanese financial crisis, the effects of terrorism on market confidence, the Global Financial Crisis, the collapse of finance companies and the property market, and more recently the downfall of European economies. In the midst of this turmoil, investors sought a safe haven in the banks only to see interest rates fall. Of the four traditional asset classes of cash, fixed interest, property and shares, none has been left unaffected by adverse events.

It is little wonder then, that there is increased interest in investing in gold and silver bullion. Internet marketers have raced to develop online ‘shops’ for precious metal investments. Promoters disseminate information which taps into the two key drivers of investment behaviour: fear and greed. Their key messages are:

‘Invest in gold and silver, because we are on the verge of a global financial collapse’

‘Precious metals are much safer than any other form of investment because you can hold them in physical form’

‘Get in quick, because prices are going up fast’.

History shows that investments made on the basis of fear or greed are susceptible to failure because they lead to irrational behaviour, such as buying or selling at the wrong time or investing too heavily in one asset class. Fear and uncertainty make a great breeding ground for scaremongers who have an ulterior motive; to line their own pockets. Including precious metals in your portfolio, either in physical form or in paper form through an exchange traded fund, can help diversify your investments, but the two golden rules apply: don’t put too many eggs in one basket and be aware that high returns imply high risk.

How Good is your Credit?

Credit scoring is a widely accepted means internationally of assessing a person’s credit worthiness. It is used by lenders not only to assess whether lending should be approved but also what limit should be put on the amount of credit. Depending on which country you live in, credit scoring can be done on either a negative reporting basis (reporting only negative events such as missed payments) or a comprehensive basis (which also includes reporting on good events such as a track record of not missing payments). In the US, borrowers are given a credit score; the most common one being a FICO score which is used to determine the likelihood of a borrower defaulting. Data for the scores most often comes from lenders and debt collection agencies, who share information amongst themselves. In some cases, credit scoring can disadvantage those who save hard and never borrow; simply because they can’t demonstrate a track record of borrowing and repaying on time.

In New Zealand, Veda Advantage has been calculating VedaScore Ratings since 2009. Everyone on their books is given a rating between minus 330 and 1000. From 1 April, 2012 there will be a change in how credit information is collected which brings us more into line with other countries. The key difference is that credit rating companies will now be able to hold comprehensive information on people, that is, both positive and negative information. Access will be given to permitted users who contribute to the database, including banks, finance companies, insurance companies, phone and power companies. Positive information can include: the type of credit you have, who it is with, your credit limit and your 24 month repayment history. Everybody is entitled to request information on their credit rating. Click here to get your free credit file from Veda Advantage.

A common problem many families face is getting elderly parents to spend money on their personal health and welfare and on their accommodation. This can cause immense frustration and in extreme cases, a breakdown in family relationships. Children and grandchildren become burdened with concern for the welfare of their elderly family members and with having to provide care the elderly refuse to pay for.

Financial conflicts most frequently arise over the costs of:

• House cleaning and nursing care
• Home maintenance
• Moving to a smaller, maintenance free home or a rest home
• Purchasing aids for disabilities

Elderly people who won’t spend money have usually had experiences early in life that have resulted in a deeply engrained saving mentality. These experiences include war, depression, poverty and business failure. With age, frugality can become more entrenched. After a life time of doing without, it is not easy to start spending, which frugal people consider to be wasteful.

In some cases, elderly who won’t spend have more money in the bank than they can possibly spend in their remaining lifetime. While their reluctance to spend is not logical, it is understandable when psychological factors are taken into account.

Elderly people must at all times be treated with respect and as far as possible be allowed to make their own financial decisions. It is appropriate to intervene if there is danger to their wellbeing or if they are showing signs of senility or dementia. A doctor or counsellor can sometimes be more successful at intervening than a family member.

If you have elderly parents, encourage them to set up Enduring Powers of Attorney for their welfare and property so you can make arrangements on their behalf if they become mentally incapacitated. This should be done with the assistance of a solicitor.

There are numerous examples of celebrity relationships with a large age gap between partners (Michael and Catherine, Woody and Soon-Yi, Calista and Harrison) and such relationships are increasingly common throughout society. The success of any relationship relies on good communication and negotiation of differences so the needs of both partners can be met. Financial issues due to age differences are among those that need to be resolved.

As a general rule, risk aversion increases with age. Attitudes towards risk and investment time frame are key determinants of investment strategy and it may be that with an age-gap couple, each requires their own portfolio. Older partners are often in a position to teach the younger ones good financial skills and habits, as well as providing financial security.

The retirement of one partner can present issues. The younger partner may be forced to keep working in order to bring enough income into the household, or alternatively, may feel pressured to give up work in order to spend time with the aging retiree. Being reliant on the younger partner’s earnings can be disastrous if either partner becomes ill and needs care.

It is typical for an older partner to become concerned about the long term future of the younger one and be reluctant to spend his or her retirement savings. An older partner may also worry about what will happen to their wealth in the event that the younger one enters a new relationship later in life. Where there are children from previous relationships, there can be conflict regarding the availability of inheritances, as often the surviving partner takes precedence over the children, who may be of a similar age.

None of these issues are insurmountable with the right advice, and in the end, it is love which is important; not money.

Getting on top of your money issues will be a lot easier in future with the new look Sorted website. Sorted has built a huge following of people keen to make their money work better for them and is recognized internationally as being at the leading edge of resources to help improve financial literacy. The revamped website is simpler, less cluttered, and more straightforward to use. In the same way that ‘slip, slap, slop’ helped make us think about protecting ourselves from sunburn, Sorted is encouraging us to ‘think, shrink, grow’ to get our financial affairs in order.

Think is all about making plans; setting your goals, developing your budget, and making sure you are prepared for unexpected events. The next step is to Shrink your debt; that’s paying off your credit cards, hire purchase, store cards and your mortgage. Finally, Grow is what you need to do to save and invest to achieve your goals. There are calculators to help you quantify your potential to save, show you how to get rid of debt faster, and work out how much you need to save to achieve specific goals.

Life events such as leaving school, entering a relationship, having a baby, being made redundant or retiring are often triggers to make new plans and revise budgets. Sorted provides a guide to these events that links back to the calculators. By registering on Sorted, you can save your calculations and bookmark information that is of relevance to you.

Those looking for a more sophisticated and detailed approach to planning their finances may find Sorted a little lacking in depth. However, its value lies in its simplicity and ease of use. It outlines a basic framework which can form the basis of more detailed discussions with your financial adviser.

One of the most significant financial decisions a young couple can make is when to start a family. Worries about money are one of the key reasons why couples delay having children. Being financially prepared for the first baby can help reduce the stress that sometimes comes with what should be a joyful occasion. There are three categories of cost to be considered:

1. One-off costs, such as a car safety seat, pushchair, backpack or front carrier, nappy bag, changing table, baby’s bath, bassinette and cot, mattress and bedding, nursery decorations (eg mobiles), baby monitor, feeding equipment (breast pump, bottles, cups, plates, sterilizer), safety gates, activity equipment (jumpers, swings and play mats).
2. On-going costs, including disposable nappies, infant formula and baby food, clothing, medical costs, toiletries, toys, pre-school education and childcare
3. Related costs, for example the cost of ante-natal and obstetric care, clothing for pregnancy, books on pregnancy and child care, and home heating costs. The birth of a child can also be a trigger for preparing a will and increasing your life insurance cover.

Within the first year of baby’s life, you can expect additional costs to be several thousand dollars. A certain amount of financial assistance is available for new parents, including 14 weeks of Government funded parental leave and Working for Families Tax Credits. Financial stress can be reduced by setting a budget for baby. Ask other new parents how much they typically spend and look at ways of reducing the cost, such as buying second hand equipment, or borrowing from friends. While both partners are still working, try and live on the equivalent of one income. Not only will this give you time to adjust to living on less; it will also help you save for the additional costs so you can enjoy your baby.