Ask Mum Now - hints and tips and solutions » financial management

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

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.

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.

Time for Prudent Investment

admin — Mon, 10 Oct 2011 09:10:39 +0000

Investment markets have taken a pounding in recent weeks as investors grow increasingly nervous about developments in the USA and Europe. Economic growth has slowed sharply in these regions and the slow-down is more widespread than previously forecast. Adding to this are fears of an imminent default by the Greek government which could have a flow on effect on other indebted countries and the banking sector. These factors increase the risk of a return to recession, especially in America and Europe, and that would not be good for investment markets.

It has always been expected that following the Global Financial Crisis the return to growth would not be a straight line process. There will be periods of both good and bad news. Think of a person with a life threatening illness, who is on the path to recovery in intensive care but suffering the occasional medical setback. The medium term prognosis for the global economy is good but it is still in intensive care. What is needed now are strong, sensible and credible policies from politicians to bring back confidence and increase certainty. Fundamental change is required.

In amongst all this turmoil, New Zealand is not so badly off. Exports are doing well, wages have gone up, the Rubgy World Cup has given us a boost and the housing market appears to be bottoming out. However, economic recovery won’t be strong and could be held back if the rest of the world deteriorates further.

The medium term outlook for investing in growth assets remains positive, but in the short term volatility will prevail. For investors, prudence is the key word. That means having a bit more in cash than usual and waiting for signs of the next upturn. Market volatility will create opportunities to make money, but just be cautious.

Get a Life

admin — Wed, 28 Sep 2011 08:21:30 +0000

Following recent financial crises, there is a growing realisation in society that friendships, family and hobbies are more important than money. People are slowing down; they are making less money but having more fun. There are lots of ways this can be achieved. Here are a few examples of strategies that work:

Ask your employer to be more family friendly. Many companies now have a documented policy for being a “family friendly workplace”, so if yours doesn’t, ask for one!

Set up your own business. Women in particular have chosen this option for increased flexibility in work hours and the ability to work from home.

Manage your time better to reduce your work hours, for example by reading on the train and cutting back on non-work related activities (eg personal phone calls) during work hours.

Change your work hours. Work the same hours but in fewer days so that you can have one day off a week or maybe just work fewer hours for less pay. Some couples have found that if they each work reduced hours they still have an adequate income but more leisure or family time.

Review your priorities. Don’t try and achieve everything at once. Do you really need a bigger house, a new car and an overseas holiday all in the same year?

Downsize your life. Buy a smaller house with a smaller mortgage, make do with your old car for a couple more years and send your children to a good public school rather than paying for a private education.

These are just a few of the ways in which people are succeeding to balance their lives. You can choose to work long hours and feel as though are going nowhere, or you can choose to get a life.

8 Steps to Financial Freedom (Part 2)

admin — Mon, 26 Sep 2011 08:17:03 +0000

Last week we looked at the first four steps you need to take if you want financial freedom; something that most Kiwis aspire to. They were: (1) Spend less than you earn; (2) Join a subsidised superannuation scheme; (3) Pay off short term debt and (4) Set up an emergency fund. Here are the last four steps that will help you be financially free:

Step Five – Buy at least one house

To have a comfortable, secure retirement, it helps if you own your own house. The sooner you buy one, the more time you will have to pay off your mortgage.

Step Six – Pay off your mortgage

Your mortgage usually has a lower rate of interest than other debts, so focus on getting rid of your high interest debt first. Pay off your mortgage faster by making fortnightly rather than monthly payments, voluntarily increasing your repayments and making lump sum payments.

Step Seven – Set up a savings and investment portfolio

You’ll need two streams of saving; one for short and medium term goals such as holidays, a new car or home renovations and one for longer term goals such as retirement. Although strictly speaking it is better to pay off your mortgage than invest, it is good to get into the savings habit early so that once your mortgage is paid off, you find it easier to save.

Step Eight – Protect your wealth

It’s important to protect the wealth you create from adverse events that might destroy it, such as premature death, illness, relationship breakdown and taxes. As well as insurance, good estate and tax planning will help preserve your wealth.

Achieving financial freedom is not rocket science, it just requires determination, focus and a commitment to follow these eight simple steps in a logical sequence.

8 Steps to Financial Freedom (Part 1)

admin — Tue, 13 Sep 2011 08:37:16 +0000

Living from payday to payday is nobody’s idea of an ideal life. What most Kiwis aspire to is to have a comfortable life free of financial stress. There are eight simple steps that will help take you on your way to financial freedom and here are the first four:

Step One – Spend less than you earn

The ability to spend less than you earn is the one thing that separates wealth creators from those who stay trapped in the cycle of living from payday to payday. Decide how much you want to save each payday to achieve your goals, and set a budget that will enable you to live on what is left.

Step Two – Join a subsidised superannuation scheme

One of the best returns you will ever get on your money is to enrol in KiwiSaver. You will be eligible for a $1,000 Government kickstart, a tax credit of up to $1,040 per year and an employer contribution. Some employers offer subsidised schemes that have equal or greater benefits when compared with KiwiSaver.

Step Three – Pay off short term debt

Short term debt, such as credit or store card debt, usually arises because you either have unexpected bills or you are spending more than you earn. Stop paying interest and make getting rid of short term debt should be one of your top priorities.

Step Four – Set up an emergency fund

Life doesn’t always go according to plan. Setting money aside for unexpected events, such as a drop in income through redundancy or sickness or increased expenses such as car repairs and dental bills, will help you keep out of debt and avoid paying interest.

Next week we look at the final four steps that will take you to your goal of financial freedom.