Ask Mum Now - hints and tips and solutions » Money Matters

How to Pay Off your Mortgage Faster

admin — Fri, 10 Feb 2012 00:51:34 +0000

One of the best ways to get ahead financially is to pay off your mortgage as soon as possible. The first step towards doing this is to create more surplus income; that is, the difference between what you spend and what you earn. This means either cutting back on your expenses or finding ways to increase your income.

Next, look at how your mortgage is structured. There are a number of factors to consider, including the term of the mortgage, the frequency of repayments, whether the interest rate is fixed or floating, and the type of mortgage you have. The most common types of mortgage are table mortgages where you pay back both principal and interest, lines of credit (or revolving credit) and interest-only mortgages.

There are two ways to use your surplus income to pay off your mortgage quicker. The first, and easiest way, is to increase both the frequency and the amount of your repayments. If your interest rate is fixed, check with your bank as to how to avoid paying penalties for earlier repayment. The second way is to use a combination of a small line of credit and table mortgages which have either a fixed or floating rate. Save as much as you can into your line of credit in the knowledge you can draw down the funds again if necessary. Once the balance in your line of credit is zero, draw all or most of the funds down and pay off a chunk of your table mortgage. If your table mortgage has a fixed interest rate, the repayment should be done when the fixed rate period ends. This process can be repeated until your mortgage is gone.

The keys to success are good saving, structuring your mortgages correctly and staying focused on achieving your goal.

Liz Koh is an Authorised Financial Adviser. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847. For free eBooks, go to www.moneymax.co.nz and www.moneymaxcoach.com

Time and Money

admin — Mon, 06 Feb 2012 22:49:43 +0000

In the harsh world of economics, the value of a person is not difficult to quantify. In simple terms, the value of a person at a given point in time is based future earnings, which is the number of hours the person is able to work for the remainder of their life, multiplied by the hourly rate the person is capable of earning.

There is a common saying; ‘time is money’ and there is no doubt the two are inextricably linked.

The corollary is that the income you earn from personal effort is determined by how you manage your time as well as by how you manage the hourly rate you earn.

Without getting too complicated, let’s look at this in a bit more detail. One of the first things to be aware of is that people are more likely to waste time than money. The irony is, because time is money, wasting time is equivalent to wasting money. Unfortunately, time is limited.

If your income comes only from personal effort, there is an absolute limit to what you can earn in your lifetime. Super wealthy people are those who find ways to make money without being dependent on personal effort, for example by setting up a business which makes money out of other people’s effort, borrowing to invest, or selling intellectual property.

If you earn a high hourly rate, spending your time doing things that someone else can do at a lower hourly rate is not effective use of your time and lowers your potential income.

If you earn a low hourly rate, it is worth spending time to look at ways of increasing your hourly rate through study, training or finding alternative work.

The ultimate winning strategy is to find ways of making income without using personal effort.

What is your Why?

admin — Fri, 03 Feb 2012 03:07:14 +0000

Setting your financial goals is not a simply a process of deciding how much money you need. Examples of common financial goals are:

To save $5,000 over the next year
To save $500,000 for retirement
To have a passive income of $50,000 a year

Goals such as these are unlikely to be achieved. That’s because money has no intrinsic value; its value comes from what it is used for.

Unless you are clear about what purpose money serves in your life, you will never be motivated to accumulate it. Finding your purpose is simply a matter of asking yourself ‘why’.

For example, the reason why you have a goal of $50,000 passive income a year might be ‘to achieve financial independence’ . Now ask yourself why financial independence is important.

The answer might be ‘to have financial security’. In turn, the reason why financial security is important may be ‘to provide for my family’.

The trick is, to keep asking yourself ‘why’, until such time as your discover what is fundamentally important to you. Ultimately, you may uncover higher level objectives such as pride, satisfaction and personal fulfillment.

These are the things that will motivate you to achieve your financial goals.

For most people, lasting satisfaction and fulfillment come not from possessions but from intangibles such as relationships with family and friends, good health, or broadening your life experience through education and travel.

When you truly understand what motivates you and what you want to achieve in life, rewrite your financial goals to include how much money you need and why, for example, ‘to achieve financial security and independence through having a passive income of $50,000 a year’. Writing your goals in this way makes them much more meaningful and powerful and more likely to be achieved.

Get to Know your Investments

admin — Tue, 31 Jan 2012 03:03:52 +0000

It is not uncommon for investors, particularly those in superannuation or retirement savings schemes, to be unfamiliar with how their money is being invested. All too often, there is disillusionment when the investment does not perform in line with the investor’s expectations.

In most cases, this is not because the investment has been a poor performer, but because the investor either had unrealistic expectations of the investment or did not understand the nature of it.

An investment portfolio or retirement savings scheme needs to be treated like a member of the family. It needs to be understood, nurtured and brought back to health when it isn’t doing very well.

Having a stranger in your house brings about a degree of tension and discomfort, whereas with someone you know well, you know what to expect and what actions to take. Get to know your investments so you feel comfortable with them.

This means giving them attention rather than putting them into the bottom drawer. Read the investment statement and the performance reports you receive.

If you don’t understand them, ask questions and spend time on them so you do. If you are invested in managed funds, make sure you understand what kind of assets the funds invest in.

Stay in tune with what is happening in each of the main investment sectors (fixed interest, property and shares) and the global economy. This doesn’t mean you need a degree in financial analysis or economics; it just means you need to take an interest in financial matters in the news and to have discussions with other people who are experts, such as your financial adviser, or friends with particular expertise.

Each week, take time to learn something new about investing, perhaps by reading a book or going to an investing website or blog.

Financial Advice for Kids Leaving Home

admin — Sat, 28 Jan 2012 03:02:39 +0000

There are times as a parent when you look forward to the day your children head off into the world to make their own way. When that day comes, it often comes with worries about how your children will cope with life as adults, and in particular whether they will succeed financially.

Here are three basic principles to teach your children before they leave home.

Set a limit for spending on non-essentials. Money that we spend falls into two basic categories: what we spend on essentials (things we need, like housing and food) and what we spend on non-essentials (things we want but don’t really need, such as dining out or movies). The best way to keep a limit on spending on non-essentials is to have a separate bank account for it. Each week transfer a set amount into that account and keep your spending within that limit.
Put aside money for unexpected expenses. There are some essential expenses that occur infrequently, perhaps only a few times a year. Often these expenses are unexpected, such as medical or dental costs, or car repairs. Spending all your income every week means you won’t have money on hand to cover these costs. Transfer money each pay day into a savings account to cover unexpected expenses.
Stay out of debt. By following the two principles above, you should avoid being forced into debt to cover essential spending. The worst kind of debt is money borrowed to buy non-essentials such as new furniture, televisions and computers. This kind of debt is usually short term with high interest rates and the high repayments can prevent you from being able to set aside money for unexpected expenses.

Encouraging your children to use these principles should set them on the path to financial success.

How to Make Smart Financial Decisions

admin — Fri, 23 Dec 2011 20:57:41 +0000

Life is full of financial decisions. Whether you are deciding how much to spend on your holiday, how to finance your car purchase, which house to buy, or how to invest your nest egg, the consequences of your choices can have a lasting impact on your financial future.

Sometimes the way things work out is a matter of luck, but rather than leave your life to chance, here’s how to be smart with your financial decisions.

Set your emotions aside. Decisions made in a state of excitement, nervousness, fear or greed are often regretted. Financial decisions should be based on cold, hard analysis of the information at hand. If you are not sure what to do, sleep on it, get more information or seek advice.
Look at the worst case scenario. If things don’t go according to plan, will your financial situation still be secure? How much can you afford to lose?
Look at the best case scenario, but don’t make it too optimistic. Make your best case scenario your most realistic one.
Do your financial calculations so you can see in black and white what the implications are. Read the fine print so you know exactly what costs are involved and how your decision will affect your financial situation in the long term.
Write down the pros and cons on a piece of paper and consider alternative options.
Make sure you understand exactly what you are committing to, especially when it comes to signing documents.
Get professional advice. It’s not always possible to know all the aspects of a financial decision or how to accurately predict outcomes. A professional adviser can help you ask the questions you didn’t know to ask and learn from the mistakes others have made.

Grow Rich Gratefully

admin — Mon, 19 Dec 2011 11:21:37 +0000

One of the most important lessons learned by our forebears in the Great Depression was to be grateful for whatever you have. There is nothing like experiencing disastrous financial times to make us painfully aware of the potential for future hardships.

Focussing on what you have rather than what you don’t have increases feelings of happiness and contentment and reduces the urge to spend.

Our forebears combined their grateful attitude with a strong work ethic and avoidance of debt. Despite the difficult times they were able to use these values to gain financial security and independence.

Today’s beliefs and values are very different.

Top of the list is an attitude of self-entitlement; that we deserve a certain standard of living regardless of how hard we work or how much we earn. This attitude is responsible for people spending more than they earn or, even worse, committing theft or fraud to obtain the standard of living they feel they deserve.

Next on the list is a belief that what we want is what we need, or failure to clearly distinguish between wants and needs. What were once considered luxuries (for example televisions and mobile phones) are now considered to be necessities.

In today’s society, spending has become an antidote for unhappiness or dissatisfaction with life. Unfortunately, it has only a temporary effect. The joy of a new purchase turns to remorse when it’s time to pay the bills.

Your ability to create wealth is directly linked to your beliefs and values. The best way to get rich is to:

Be thankful for what you already have.
Be clear on the difference between wants and needs.
Be prepared to work hard.
Find happiness in friends and family rather than shopping malls.

Follow these principles and grow rich gratefully!

Food for Thought – The True Cost of Lunch

admin — Wed, 14 Dec 2011 10:49:01 +0000

People who complain about not having enough money to enjoy life are often guilty of spending their money on things that aren’t important to them but which make them feel good for a few brief moments. The classic example of this is money spent on takeaway food and drink, especially lunches and coffee breaks at work.

If you spend $10 a day on lunch, that’s $50 a week. If you ‘brown bag’ your lunch and instead invest $50 a week for a return of 3% per annum compounded, here’s what you can do:

After one year, you will have around $2,638; enough for a holiday in Australia
After five years, you will have around $14,021; enough for a trip to Europe
After ten years, you will have around $30,310, which would go a long way towards a deposit on a house or your children’s education costs
After twenty years, you will have around $71,222; enough to buy a brand new luxury car
After thirty years, you will have around $126,443, which might allow you to retire much earlier than age 65
After forty five years, you will have around $247,513 which, combined with your KiwiSaver funds, could allow you to live a very comfortable life in retirement.

I am reliably informed by several ‘brown baggers’ that the best way to take care of work lunches is to cook extra for your evening meal and serve it into a container that you can freeze or refrigerate for the next day or later. If you don’t have a microwave at work, stock up on easy to prepare cold food that won’t go soggy if prepared the night before. Do a quick internet search for ideas for lunches that taste good and help you save to enjoy life.

Five Secrets to Happiness in Retirement

admin — Fri, 25 Nov 2011 05:16:49 +0000

The average person spends about a quarter of their life in retirement so it’s worth thinking about how to make those years enjoyable. Here are five simple principles that can help you find happiness and avoid misery in what should be the best time of your life.

Retire slowly

These days, most people choose to work less for an extended period rather than retire. There are some real advantages with this approach. Firstly, you can gradually adjust to a lower income rather than going ‘cold turkey’ from full pay to a pension, and secondly, you are able to save more money for when you are no longer earning.

Don’t be afraid to start spending

After a lifetime of saving, it can be hard to flick the reverse switch and start spending. Being over cautious with your money can detract from your ability to enjoy your retirement. Plan to use your retirement capital as well as the income you receive from the capital. If you don’t spend it, your kids sure will!

Find enjoyment through friendships

The best indicator of happiness in retirement is not the size of your bank balance but the number of people who come to your birthday party! Being happy is not about money, it is about having friends.

Get sorted and simplify your affairs

Get your affairs in order (wills, trusts, powers of attorney) so you don’t have to worry about paperwork at an age when it becomes confusing. Simplify your investments or get someone to look after them so you can be free from worry.

Look after your health

Being in good shape is one of the most important contributors to an enjoyable retirement. Exercise, diet, keeping active and having regular medical, dental and eye checks will help you live a longer, more enjoyable life.

Employee Share Plans

admin — Mon, 21 Nov 2011 04:46:53 +0000

Many companies, both large and small, now have employee share plans. In theory, it is a win-win for company and employee. The company is able to reward and motivate staff without having to pay cash and the employee is given an opportunity to acquire shares on favourable terms.

There are a number of different schemes including:

Options – a right to purchase shares in future at a fixed price
Employee share loans – the employer provides a loan with or without interest to buy shares
Partly paid shares – the employee acquires the shares at market value but pays only a small part of the price initially with the rest being called up by the company at a later date.

There are several factors that influence whether a share plan is a good thing to participate in. You may be liable to pay tax on the benefit you receive from the share plan, and any liability arises on the date that you acquire the shares. You may have to find cash to pay this tax.

It is important to also consider the effect on your cash flow. Would it be better to receive cash instead? If you want to use your shares to pay off your mortgage or as a deposit on a house, you run the risk of the shares dropping in value at a time when you need to sell them.

Another consideration is the extent of your exposure to shares in one company. By investing all your savings in the share plan you run the risk of being badly affected if the company fails or does not produce an adequate return.

Employee share plans are a great idea, but you need good advice so you understand the risks and obligations as well as the potential returns.