Rent or Buy?

Rent or Buy?

Property prices have fallen significantly over the last two years making houses much more affordable than they have been for some time. Despite this, buyers are still in short supply. The most logical reason for this is that buyers expect prices to either continue dropping or to at least stay flat for some time. This creates a dilemma for first home buyers and people moving towns; is it better to rent or buy in the short term?

 Whether you are buying a property to live in or to rent to someone else, there are two factors to consider. The first is the extra income you will have if you buy, either because you are no longer paying rent or because you renting to someone else. The second is the capital gain you can expect from owning the property. Property prices are not expected to increase significantly over the next 3-5 years. At the same time, rents are still low in comparison with property prices. If you can rent a property for an annual rent of 5% of its market value, why would you borrow money to buy when the interest rate is around 7% and there is little prospect of capital gain?

 In the short term, with no expectation of property prices increasing, renting makes sense unless you can buy a property well below market value. For first home buyers, this allows more time to save a bigger house deposit and for others who have sold, it is an opportunity to temporarily live more cheaply in the kind of house that might previously have been out of reach to buy.

 In the long term, it makes sense to buy a property for security and peace of mind and to ensure you don’t get left behind when prices inevitably rise again.

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Spring Clean Your Investments

Retirement Savings

Spring is in the air and it is a good time to take a fresh look at your retirement savings plans. There have been many changes in retirement savings in recent times that mean you should review any schemes you signed up for prior to the introduction of KiwiSaver in October, 2007. At that time, a new type of savings and investment product was introduced, called a Portfolio Investment Entity (or PIE). There are significant tax benefits to be gained from switching from an old-style product to a PIE.

Before you pull out of an old-style product, you need to check a couple of things. Check whether there are any penalties for early withdrawal and whether there is any insurance cover attached to your savings plan. You will need to make sure you can replace this cover, if still needed, before you stop your policy. There may also be additional bonuses you might be eligible for by staying with your old plan. With most of these old products, even if your funds are locked in until you reach a certain age, you will have an option of suspending your contributions indefinitely, so that you can keep them going to maintain your insurance cover, get your bonuses or avoid paying huge withdrawal penalties, while putting your new savings into a more modern product.

Your first choice for a new retirement savings product should be KiwiSaver, but only put in the minimum contribution to get the maximum matched tax credit ($1,040 per year) as your funds will be locked in until you reach retirement age. Your next choice is a diversified Portfolio Investment Entity. Over a long period of time, the difference between a good retirement savings plan and a bad one can make a huge difference to your retirement nest egg.

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Make Money While You Sleep

Make Money

If financial freedom is something that you strive for, then no doubt you’ve pondered on how to get there by creating multiple streams of income. Many people dream of being able to sleep soundly at night, knowing that money is rolling effortlessly into their bank accounts, enabling them to retire earlier, work less, or achieve their other goals faster. For some, the dream is a reality; for most it is a wish that is unlikely to be fulfilled.

 When you have a job, you are exchanging time and effort for money. There is a physical limit on how much time and effort you have available, and therefore your income is limited. With alternative income streams, you may have unlimited potential to increase your income.

 The number of ways in which you might develop multiple income streams is limited only your imagination. The internet has opened up a whole new world of opportunities. Some of the things you can do from home are:

  • Start an internet blog or chat room and earn money from advertising on the site
  • Write a book or an e-book
  • Write articles in magazines or on websites for money
  • Turn hobbies into income streams, for example by teaching classes or selling products
  • Set up an online business
  • Invest in a property or share portfolio
  • Rent spare rooms in your house

 If you own a business, franchising, licensing and developing new product or service lines are obvious ways to diversify your income.

 To make time for a new opportunity, consider reducing the hours you work in employment. If your opportunity requires a significant investment of money or resources, make sure you seek specialist advice before proceeding but also remember ‘nothing ventured, nothing gained’. Don’t be afraid to give it a go!

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How to Rebuild your Wealth After a Recession

Rebuild your Wealth

Coming out of a recession is like emerging from winter into spring. There are opportunities for new growth if you get rid of the dead wood and prepare for the new season. If you have lost your job or lost income there are four steps you should take to rebuild your wealth.

Focus on Survival

The first priority is to make sure you are living within your budget. A lower income means your expenses need to be lower as well. Find ways to make ends meet and make your dollars go further. You may have to adjust to a lower standard of living for a while.

Have a Clear Out

Get rid of your financial dead wood. Make paying off your debt a top priority. If your debt has become unmanageable, make arrangements with debtors to pay it off over a period of time

Sell off household ‘stuff’ that you don’t need to free up cash. Get rid of investments that aren’t producing a good return. For some, it might be a case of selling up assets and starting again.

Consolidate and Strengthen your Financial Base

Start saving so you have money to call on if needed. Review your goals and the resources you have available for meeting them. Reflect on the lessons you have learned from the recession and decide what you will do differently for the next one.

Rebuild

Look at ways of increasing your income, for example by up-skilling or retraining to get into a new field. Find businesses which are growing and see what kind of skills they need.

In investment markets, look for early signs of where the new opportunities are – for example investing in emerging markets such as China.

Take the chance to be a leader; it is the early bird who catches the worm.

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Don’t Just Retire: Reformat!

Dont’ Retire: Reformat!

The word ‘retirement’ conjures up a range of confusing or even contradictory feelings for people these days. Once upon a time, retirement was a defined day, usually marked by a birthday, after which any form of paid employment ceased immediately. A combination of factors, including the end of compulsory retirement and increased longevity, mean that people are now working well past the age of eligibility for their pension. For some, this means just continuing on with their career as it was, either full time or part time, but an increasing number are seeing retirement as an opportunity to do something completely different in life. What better time in life to experiment, with a modest standard of living guaranteed by pension income, no mortgage payments and no dependent children to worry about?

There are many famous examples of people who have started businesses late in life, including Ray Croc, founder of McDonalds and Colonel Sanders, founder of KFC who had both celebrated their 65th birthdays before they created their global empires. For some, the motivation to try something new is driven by the desire to have a higher income in retirement, while for others, it is all about the excitement of trying new things; perhaps things they have always secretly wanted to do.

There is a great little book called ‘Don’t Just Retire: Reformat’ written for such people by Dr Lynda Falkenstein (Niche Press, 2005), full of ideas for how to reinvent yourself in retirement. Lynda suggests three important questions to ask yourself: If you could, with a wave of a wand, be doing anything you want, what would it be? What is it that gives you the greatest personal joy and fulfillment? What are you doing to ensure ‘it’ is an enduring feature of the rest of your life?

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Guide to Retirement Villages

Retirement Villages

Retirement villages are a great option for people who want a degree of independence in retirement but with the added benefits that come from communal living. There can be significant differences between retirement villages in terms of facilities and costs and it pays to do your homework before signing an agreement so as to avoid making costly mistakes.

There are four basic legal titles commonly used for retirement villages; licence to occupy, unit title, cross lease and lease for life. The type of title will largely determine how much it costs you to buy and live in your retirement unit. There are three types of cost that you will need to consider; the initial cost of buying your unit, the costs of living in your unit and the costs involved with selling your unit.

In many cases, the initial amount you pay gives you the right to live in your unit, but does not buy the unit itself. While you are living in the village, you will need to make regular payments to cover such expenses as rates, gardening, maintenance and healthcare. There are differences between villages as to what these ongoing fees cover. When you sell your unit, you may be required to pay for refurbishment of the unit to a certain standard as well as marketing and selling costs. In some cases, you may have no control over the sale process and when you sell you may not get the benefit of any capital gain on the unit.

Before you purchase, the retirement village must give you certain legal documents which set out your rights, benefits and costs and you are required to get independent legal advice on these before signing an agreement.

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Make your Mortgage Manageable

Avoid a Mortgagee Sale! 

Mortgagee sales are on the increase as a result of the recession and the property market downturn. If you are struggling with your mortgage payments how can you avoid having to sell your house? Here are a few tips that could help.

 One of the first things you should do is talk to your lending institution or a mortgage broker. Your lender should be willing to work with you to find solutions to your repayment problems so as to avoid a mortgagee sale.

 Most lenders offer repayment holidays of up to 90 days, which may be enough to let you build up your reserves or pay off other short term debt so as to reduce your weekly outgoings. Another option may be to convert your mortgage to an ‘interest only’ mortgage. This will have the effect of reducing the amount of your repayments because you are not paying back principal. Yet another option is to extend the term of your mortgage, say from 20 years to 25 years, which will also have the effect of lowering your repayments. All of these options should be seen as short term solutions because ideally you should pay off your mortgage as quickly as possible.

 A mortgage broker may be able to help you shop around for a mortgage at a lower rate of interest, however bear in mind that depending on your circumstances, there may be penalties involved in repaying your existing lender, so get this information from your lender first.

 Selling your house because you can’t keep up the mortgage payments should be a last resort. Real estate agent fees, legal fees and removal costs will eat into your deposit, and there is always the uncertainty of whether property prices will move ahead by the time you can afford to buy again.

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Money Conflicts

Money Conflicts

According to the experts, arguments about money are one of the main causes of conflict in relationships and are also one of the key reasons why relationships end.

Differences between couples over how money is spent, saved or earned arise largely from different attitudes towards money and risk, and different money values. Very often these attitudes and values stem from childhood, but not in a predictable way. For example, someone who endured frugality in childhood may be frugal as an adult or may conversely be keen to ensure their own children have everything they want. The starting point for resolving money conflicts is to explore the differences in values and attitudes.

There are two key questions that should form the basis of discussion:

  • What things were said or taught to you about money in your childhood and how have these affected your attitudes towards money?
  • What is the purpose of money in your life?

Sayings from childhood, such as ‘money is the root of all evil’ can often instil a negative attitude towards money, which is a sure way to avoid attracting it into your life. The purpose of money in your life will depend on what you value. Perhaps security is important to you, or it might be helping your children with education costs. For some, the purpose of money is to be able to have fun and interesting experiences. Having a conversation with your partner about your attitudes and values will help uncover the points of conflict. The next step is to find ways of resolving the differences, which usually requires a logical analysis of the issues and some degree of compromise.

As with most other conflicts in relationships, money conflicts can generally be resolved with good communication and an understanding of each other’s perspective 

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UK Pension Transfers

UK Pension Transfers

Immigrants from the UK and New Zealand residents who have worked in the UK usually find themselves leaving behind their locked-in pension funds when they arrive in New Zealand. This can present a number of difficulties.

Once you become eligible for payments from your fund, you will need to pay tax on those payments as well as bank transfer fees. You will also be exposed to exchange rate changes so that the amount you receive as a pension will fluctuate over time. If you pass away with your money still in a UK scheme, your spouse is likely to receive a pension worth only half of what you would have received, whereas New Zealand retirement schemes pay the whole benefit to your spouse or dependants. UK pension funds are classed as Foreign Investment Funds by Inland Revenue which means that if you are a New Zealand tax resident you may have to pay tax on the investment gains.

UK pensions can be transferred to New Zealand but can only be transferred to a Qualifying Recognised Overseas Pension Scheme (QROPS) without incurring tax. Up to 40% of any money you transfer may go into an unlocked fund and can be withdrawn before retirement age without tax liability if withdrawn more than six years after leaving the UK. By contrast, some UK pensions allow you to take 25% of your funds after the age of 55 without paying tax. Being able to withdraw funds can help with changing circumstances such as marriage, birth of a child or change in employment status.

Having your funds in New Zealand means it is easier to obtain information on how your investment is performing. The transfer is best done with the assistance of a financial adviser to avoid unnecessary penalties and to be aware of your options.

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The Eight Worst Credit Card Mistakes

Credit Card Mistakes

Credit cards are one of the most useful yet also one of the most dangerous modern financial inventions. Use them wisely and you can make money from them. Use them unwisely and you can lose everything you have. The worst mistakes you can make with your credit card are:

 

  1. Paying only the minimum balance. You will lose the interest free period on new purchases and it will take a long time to repay your debt.
  2. Having too many cards. It is much harder to keep track of your total debt when you have multiple cards.
  3. Using cards for non-essentials. Getting into debt to buy luxury goods will set you back financially.
  4. Not getting the best deal. There are big differences between cards when it comes to interest rates and features. Choose the card that is right for you.
  5. Forgetting to pay or paying late. You will add to your interest bill and your credit rating may be affected.
  6. Having too high a credit limit. The higher your limit, the more you may be tempted to spend and the harder it will be to pay off your bill each month
  7. Being tempted with low interest offers. Look at the fine print before you accepting an offer to get a new card at a low interest rate.
  8. Refinancing without reducing your limit. Increasing your mortgage to repay your card will reduce your interest if you are maxed out, but only if you stop spending on your card.

To use your credit card to advantage, set the limit to a level that you can afford to pay off every month by direct debit. For emergencies, have a second card with a higher limit which you keep hidden in a safe place (not your wallet or purse!).

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