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My saving and investing
“Money’s only something you need in case you don’t die tomorrow.”
Carl Fox (Martin Sheen) Wall Street
Research in America found that when incomes are the same, those with a plan save about twice as much as those who don’t have one.
The trouble is most of us start yawning when we hear the word “plan”, so call it a recipe, a concoction or a purpose. Call it a get-out-of-jail-free card if it’ll help you get started saving.
Now you’ve got over the “p” word, the next step is getting over the “b” word – budget. Before you work out how much you are going to save you need to know where your money is going and how much you are able to save.
Then arrange for that amount, however large or small, to be automatically deposited into a savings account every time you get paid. Try to forget about it until you really need it.
Before you know it, you’ll have tucked away enough to cushion yourself in case of an unforeseen event, like losing your job, fixing your car, the roof blowing off or the oven blowing up.
How to get started:
- The Sorted budgeting tool enables you to see exactly what you spend your money on each month and the amount that is left over. If the answer is none, you can play around with some of the numbers and see where you can trim your spending and give yourself some wriggle room to save.
- You could start by aiming to put aside a month’s expenses (then try to build it to 2-3 months’ worth) so you don’t have to panic if things go wrong. It’s enough to give you some breathing space while you get back on track. Keep this money in an account that is easy to access quickly, but away from your other bank accounts – out of sight and out of mind.
- Now look at your medium-term goals and start saving for those. It may be an overseas holiday, your children’s education or a new car. You’ll need this money in 2-5 years, so keep it in an account that is harder to access and gives a better rate of interest or return.
- Long-term goals include saving for a house deposit or retirement. You can probably accept some investment risk because you won’t be touching your money for at least 5-10 years – or longer, depending on your age and when you want to retire.
- If you want to save for a particular goal, use the savings calculator: tap in how much you want to save, set a date and it will tell you exactly how much you’ll need to set aside each week.
New Zealanders like nothing better than to confound expectations, and we’ve certainly done that with KiwiSaver.
When it began nearly 10 years ago, the experts predicted 1.4 million of us would sign up in the first five years, then the numbers wouldn’t change much after that.
How wrong they were: more than 2.6 million have worked out that it’s a great way to save and the number continues to climb.
What we aren’t doing so well is making the most of the KiwiSaver benefits. There are three key areas to consider:
- Your contribution rate and whether it is high enough to get you where you want to be when you retire. The KiwiSaver savings calculator can show what a difference saving 4% instead of 3% of your earnings will make to your savings nest egg. Or talk to your provider about what changes you could make.
For example, a 20-year-old on $40k p.a. would end up with an extra $38,564 in their KiwiSaver when they reached 65 if they increased their rate to 4%.
- The fund you are in (eg conservative, balanced, growth) and whether it suits your stage in life. Conservative funds are lower risk but tend to earn you less, while growth funds may go up and down more but are more likely to give a better return over the long run.
- The government contribution, which is sometimes called a member tax credit (MTC). Too many of us don’t get the full government whack each year, which is up to $521 annually to reward us for saving.
Go through these simple steps to make sure you get the most out of your hard-earned savings:
- Keep going! If you have stopped contributing for some reason, then think very seriously about restarting your payments. By saving $20 a week you will get the full $521 tax credit from the government every year. But even if money’s tight and you save less than that, you will still get 50 cents for every dollar you save.
- If you don’t know who your provider is, find out by calling Inland Revenue.
- If you don’t know what fund you’re in, ask your provider.
- Don’t set and forget, but don’t change your fund on a whim either. Give your KiwiSaver a little attention once a year to see if you are on track and the fund you are in is working for you. If it isn’t then talk to your provider, or use the KiwiSaver fund finder tool, to compare all the funds out there that are available to you.
Don’t under-estimate the value of KiwiSaver even if you are self-employed or a contractor. You will not only reap the benefits of saving a little over a long-time, but also receive a boost to your funds every year from the $521 government money.
Generally, as we get closer to retirement and the time when we will want to access our money, many investors slowly move from high-risk, high-return growth funds to less high-performing conservative funds.
But if you don’t need the money as soon as you retire, then it could be a good idea to get some advice about whether that’s the right choice for you.
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“Debt is normal. Be weird.”
We’ve been borrowing money since the dawn of civilisation – literally. Back in 3500 BC, poor farmers in ancient Mesopotamia would borrow from rich merchants. If they couldn’t pay them back they’d sell their wives or daughters to settle the debt.
We don’t think you need to do anything quite that drastic, but it will make a big difference to your retirement years if you can wipe out your debt before you stop working.
And the sooner you can do that, the easier and more effective your planning for retirement will be.
The biggest debt most of us will have is the mortgage on our home. In Auckland the median house price is nearly ten times the median income. For the rest of New Zealand it is still a hefty six times.
That means many of us will have to borrow substantial amounts to get on the property ladder. The trick is to pay it off as quickly as you can.
Here are some things you can do to help:
- Make the term as short as possible. The Sorted mortgage calculator shows what a difference it can make to the total amount you’ll pay.
- Have a clear understanding of the interest rate you are paying and negotiate for the lowest rate you can.
- Take some time to consider the best type of mortgage for your circumstances. The options include:
- Table loan: this is the most common type, with regular payments and a set end date.
- Revolving credit loan: this works like a giant overdraft. If you’re well-organised you can pay off your mortgage faster. But you need to be disciplined.
- Interest-only loan: you only pay the interest, not the principal, so the payments are lower, but you still owe the full amount you borrowed when the loan period ends.
- Don’t try selling your relatives.
Homeownership rates are declining – 63% of people live in their own home – and for growing numbers of people, renting is the only option.
This means you don’t have to pay for rates or house insurance, so you could try to save the equivalent amount, or better still more, so that when you stop work you have enough put aside to continue to cover your rent and have a reasonable lifestyle.
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“All I ask is the chance to prove that money can’t make me happy.”
Personal debt in New Zealand has reached more than $15.5 billion and that doesn’t include mortgages. If you break that down, it is the equivalent of every man, woman and child owing $3,500 each.
The debts can be personal loans, hire purchase, credit cards or money owed to payday lenders. That’s a lot of money going in interest that you could be putting to another use. So what can you do to bring your debt down?
- If you have a number of debts at different rates, try to pay off the one with the highest rate first.
- Use the Sorted debt calculator or get specialist advice about how to balance the demands on your finances.
- You could consider consolidating your debts (taking out a new loan to wrap all your existing debts together and paying them off at once), but there are some risks spelled out in this guide. The key point is to find out the total cost of consolidating before you sign up, so you don’t end up paying more than you would have with separate debts.
- If you’re struggling to keep up with repayments, talk to the person or organisation that loaned the money as soon as possible. They may be able to work out a new repayment plan and help you avoid penalties for late payments.
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“Fun is like life insurance; the older you get, the more it costs.”
Frank McKinney Hubbard
Have you heard the one about the motorist who drove home to the wrong address and crashed into a tree that he didn’t have?
Or the snail that ate its way through an elderly man’s carpet?
Fortunately, both people were insured, though they probably didn’t expect they’d be making claims like that when they took out the paperwork.
And that’s the thing about insurance: you never know what might happen to you or your belongings. And when it does, your savings for the future could be eaten up alarmingly quickly if you don’t have any cover.
Making sure your most important assets are covered is a vital part of any financial plan, including preparing for your retirement.
Insurance can be split into two areas: general and personal.
- Before you buy a house, make sure you can afford to insure it too.
- Check it is insured for the right amount – enough to rebuild if the worst were to happen. Use this online calculator to help you work out the cost.
- You’ll need separate cover for your contents and your car and don’t forget travel insurance whenever you book an overseas trip. Covered has more information about all types of general insurance.
- The Insurance Brokers Association can help you find an insurance broker, who will be able to offer the widest variety of products.
- And if you have a complaint or problem you can’t resolve with your insurer then get in touch with the Insurance Council to find out the next step.
- When you are arranging a home loan, consider whether your life insurance is adequate to cover it and so protect your family if something should happen to you.
- As your circumstances change it is important to review your level of cover to make sure you are not under or over-insured: life insurance is important when you have a high level of debt, but as you get older and your debt reduces you don’t need as much cover.
- Other types of personal insurance to consider include cover for health, trauma, and income. Life-info.org.nz offers a guide to these and information about maintaining your policy and making a claim.
- Shop around when your insurance is due for renewal, but make sure you are getting the same type of cover, and consider the financial strength of the insurer and their record for settling claims.
Insurance isn’t the only paperwork you need to organise. You may be astounded by the number of New Zealanders who do not have a will, let alone one that is up-to-date.
Are you one of the 50 per cent of adults without one? Poor decisions can be made when people are at their most vulnerable after a bereavement. Making sure you have a will helps avoid this and protects your family at a difficult time.
If you die without a will, all your assets do not automatically go to your partner or your children. The government has a formula to divide them up.
If you die with more than $15,000 in your KiwiSaver account, the provider will need a letter of administration from the courts before they can release it. This usually costs $2,500 and can take up to eight months to process.
While you’re sorting out your will, ask your lawyer or trustee company to help you arrange enduring powers of attorney, in case you become unable to make decisions for yourself.
- Making a will doesn’t have to be complicated: you can talk to a lawyer, find out more from the NZ Law Society, or even buy a will kit from a stationery shop and do it yourself.
- Consider setting up an enduring power of attorney. This legal document gives someone else the power to act for us if we lose the ability to make decisions ourselves. There are two types: one for property and the other for personal care and welfare. Age Concern has a downloadable booklet with more information.
- Don’t let snails in your house.
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“It is more easy to be wise for others than for ourselves”
Francois Duc de la Rochefoucauld
They say advice is like mushrooms: the wrong kind can prove fatal.
While we wouldn’t go that far, it can certainly wreak havoc with your savings and mess up your plans for life after work.
The trouble is, most of us are more likely to get advice from our friends, colleagues, even the man we sat next to on the bus, than from a qualified financial adviser. You know, someone who actually knows what they are talking about.
Professional advisers can help you work out what your goals are, what kind of risk you can stomach, and then match your needs with suitable products and services.
They should give you a disclosure statement, which tells you how they get paid, what their level of education is and the services they provide.
The Financial Markets Authority has a list of authorised financial advisers and links to other organisations that can help, but how do you know who to trust?
Here are some questions to ask when looking for an adviser:
- Can you give me personal advice that takes into account my situation or just give me general advice?
- Can you recommend products from any company or just from a few companies? (If your adviser only offers a limited range ask why and whether they can still offer advice on products you already have.)
- Have you helped other people with the same sort of goals? (Some advisers may be experienced in retirement planning, others in property investment or helping young families).
- Do you belong to a professional body like the Institute of Financial Advisers or the Professional Advisers Association? (These have codes of conduct their members are expected to follow.)
- How are you paid? (Some advisers charge a fee for their work, others charge a commission or may receive sales-related incentives.)
- What sort of research do you use to find the best product for me?
- How, and how often, do you update me on my insurance and investments so I know I am still on track?
- What are the total costs of your service, initially and ongoing, and what happens if I stop using you – is there a penalty?
Here are some more helpful tips:
- Financial advice can be most valuable during times of change, eg when you marry, divorce, receive an inheritance or are approaching retirement.
- Financial advisers can help you prepare for a more enjoyable retirement by working out what you need to do today for tomorrow and help develop a plan to get there.
- Be open and honest about your tolerance for risk: if you are nervous about investing, it’s okay to say so.
- It is important that you trust and feel confident in the person you have chosen to give you advice. If you don’t feel that way, then look for someone else.
- If you’re confident about doing your own homework this Sorted site has calculators and tools to help you plan, budget, work out your mortgage repayments and prepare for retirement.
- You can also get information from your bank, insurance companies, and superannuation funds.
- Think about leaving mushroom harvesting to the experts.
Scams can come in all sorts of ways - in an email, on the telephone, in the post, even someone knocking on your door - but they all have one thing in common: they are trying to con you out of your money.
What’s more, scammers are forever coming up with new ways to defraud you, and they’re pretty clued up on technology.
Some try to befriend you first, becoming part of a group that you belong to, such as a church group or community organisation.
So it pays to bear a few things in mind:
- Never invest solely on the recommendation of a member of your group. They may have been fooled into believing that the investment is legit. It’s important to check for yourself.
- If an investment seems too good to be true, it probably is. Be wary of promises of unusually high returns!
- Avoid any investment that is said to have no risks. This is a classic sign of fraud. There’s always a trade-off between risk and return – higher returns come with higher risks.
- Get it in writing. Be particularly suspicious if you are told to keep the opportunity a secret. (That’s usually to keep the authorities from knowing.)
- Take advice from an authorised financial adviser who is independent from your group and can focus on your interests.
- Do your own research. Not just to cover yourself, but to look out for your group, too. And don’t feel pressured to rush into an investment before you have a chance to really look into the “opportunity”.
Pre-warned is pre-armed – know the “red flags” and common scams by checking consumerprotection.govt.nz.
And if you think you’ve been scammed, report it to Scamwatch. Your report might help others avoid being caught out.
Remember that anyone, of any age and ethnicity, can be a victim of a scam, so keep an eye out for your family and friends.
How to avoid being scammed:
- Look after your personal details in the same way you would your wallet and other possessions.
- Be cautious – if you get an unsolicited call or email and the caller or writer requests personal information, it may be a scam. Hang up and verify who they are independently.
- Banks, corporate businesses, government departments like Immigration New Zealand or Inland Revenue never email, call or SMS customers to ask for money. If you receive a request like that, it’s a scam.
- Don't reply to, click on any links, or open any files in emails unless you are sure you know whom they are from and what they are about. Don't call any numbers in spam emails.
- If you get a cold call from someone claiming you are entitled to a grant, refund, have won a holiday or have a virus on your computer, hang up immediately!
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