Now is the best time to start your financial future and with the start of a new year you’re probably feeling refreshed enough to tackle such a project.
Here are 5 things you can do now to help you reach your financial goals whether they’re to buy a home, fund your retirement or anything else you might want. The great thing is that these are simple things you can do that you probably won’t even notice after a while but will be steadily working for you in the background.
- Increase your KiwiSaver to 10%. This will fast track your savings plan if you are looking to buy a house, if you are planning on retiring in the next few years or if you want to be sure you’ll have a comfortable retirement. Make sure it’s in a high growth fund – unless you’re over 60 in which case you should be looking at a conservative fund.
Remember, the difference between schemes can be significant. Using simple numbers (and I have used ASB’s KiwiSaver calculators), a 20 year old earning $50,000pa and making 3% contributions to a Cash Fund (the most conservative KiwiSaver Scheme type) is expected to have around $162,000 in KiwiSaver when they retire at 65. That’s $141 per week on top of Government Super, currently $424 per week, a total of $565 per week after tax for each of the 25 years until age 90. If they had invested the same amount in a Growth Fund they would have $275,000. That’s an extra $113,000 or 70% more or, in practical terms, an extra $239 per week. That’s weekly income of $663 per week after tax until age 90 or just on $100 per week more than investing in a KiwiSaver Cash Fund.
With 10% contributions the difference is even more pronounced so there can be significant gains to be made just by changing your type of KiwiSaver Fund.
The good thing too about increasing your KiwiSaver to 10% if you are under 40 is that you probably won’t have to think about saving for your retirement again.
- Start a regular savings plan. This may be as simple as making an automatic payment each payday to Sharesies, Hatch or Invest Now. This companies allow you to invest small amounts in the sharemarket. The amount could be $20, $50 or $200 per payday depending on your financial situation but the earlier you start the greater benefit you can achieve from compounding returns, that is, the return on the dividends and interest income you receive as well as on the money you contribute. While you can achieve returns from compounding interest on term deposits the current low interest rates mean that the returns will be low, and much less than sharemarket returns.
- Cut costs. Check your bank accounts online to see what you are spending your money on. And if you’re serious about improving your financial situation then ruthlessly cut costs even if only for a short period, for example, while you are looking to get the deposit together to buy a house.
Regardless of whether your financial goal is short or longer term easy gains may be made by consciously reviewing what you are spending your money on. Good examples of easy ways to cut costs is to look at your energy supplier and insurance provider and look at other options. You can usually do this on your laptop from the comfort of your own home. Do you need your car? If you only use it occasionally then using a ride share company such as Uber or Zoomy and hiring a car for longer trips may be much more cost effective. If you’re saving for something in particular then cut down on takeaways, entertainment and alcohol. Use leftovers – don’t waste food!
- Increase your income. For you this may be seeking promotion or adding qualifications to your CV to increase your salary. Or it could be by using equity in your own home to buy a rental property which will hopefully give you an income (but maybe not immediately) as well as a capital gain. Or it could be by running your own business where you can use the benefits of leverage by borrowing money, using machinery, employing people or selling products to provide you with greater revenue than you could produce through your own individual effort. Increasing income has greater scope to improve your financial situation than cutting costs, which can only be reduced so far.
- Invest in assets. You are looking for assets that you can improve or which will increase in value over time. Think about buying your own home (see 1. Above) and improving it by renovating, adding rooms or a deck, landscaping, or buying a rental property, investing in the sharemarket, or owning your own business or farm. Remember that purchases such as cars are usually depreciating assets as their value reduces over time – unless they’re a classic car that has been restored.
Regardless of your financial situation everyone has the capacity to cut costs to achieve their financial goals. But it does take some creativity and commitment.
The information in this blog does not purport to be financial advice and no reliance should be placed on it. It is of a general nature only based on my experience as a Chartered Accountant in practice and specific advice should be sought for your particular situation.