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Updates to “Stop Worrying About Money: A simple guide to creating a financially sustainable future for you and your family”. As at 1 April 2022

Government Super:

The amount of Government Super (Guaranteed Retirement Income) for a single person living alone after tax from 1 April 2022 is $463 (compared with $437 previously), an increase of $26 in the hand a week.

Top Tax Rate:

The top marginal tax rate increased from 33% to 39% on income over $180,000 from 1 April 2021.

Student Loan Repayment Threshold:

From 1 April 2021 repayments required on earnings of more than $21,268 pa (previously $20,280).

Boarders Weekly Standard Cost:

Increased from $191 to $194 for the 2020/21 income year. The 2022 rates have not yet been published.

Interest Rate on Student Loans:

The interest rate on student loans if you are living overseas is 2.8% from 1 April 2021 (previously 3%).

Interest Deductibility on Rental Properties:

From 1 October 2021 interest paid on mortgages taken out to purchase rental properties from 27 March 2021 (other than new builds) is no longer be tax deductible.

For the year ended 31 March 2022 therefore only the interest cost up until 30 September 2021 will be deductible for the year.

An example of the costs follows.

If you purchased a property for $500,000 at an interest rate of 4% on 1 April 2021, you would have total costs of $27,174 for the year excluding tax. You would need to receive rent of $543 per week to cover these.

Interest (4% of $500,000):	$20,000
Property Management Fee (8% of rent)	$2,174
Rates:	$2,000
Insurance:	$1,000
Maintenance:	$2,000
Total costs per year:	$27,174
Rent required per week excluding tax (based on 50 weeks)	$543
Tax at 33% based on only 50% of the interest being deductible for the 2021 year: Total costs to recover plus increased property management fee: Rent required per week (based on 50 weeks):	$3,300 $30,760 $615

But with only 50% of the interest being deductible for income tax purposes under the new rules for this year this means your costs will still be $27,174 but you will only be able to claim $17,174 against the $27,174 rental income. You’ll also need to pay income tax at around 33% on the remaining $10,000, a cost of $3,300. This now gives you total costs of $30,760 for the year (as the property management fee increases with the increased rent) and you’ll need to receive $615 per week in rent just to cover costs including the tax. This is a $72 or 13% increase in the rent each week.

For the following year when there is no interest deductibility then the rent would need to be $688 per week, an increase of 27% over the rent that would have been needed to cover costs if the interest was fully deductible. This rent level may be more than the market can bear in that area and for that price.

You may need to look elsewhere for a property where you can earn enough rent to cover the costs, and preferably to make a surplus. Or you may need to consider other options such as a multiple flat property, subdivision etc. or buying a new property as interest on loans taken out to buy new buildings are currently tax deductible.

If you decide to proceed or charge less rent than your costs, then any resulting loss will need to be ring fenced and offset against future rental profits.

If you bought a property before the new rules came in on 27 March 2021 then over the next 4 years you will move progressively to not being able to claim any of the interest costs. It is possible that within that period the potential rent increases required may not be able to keep up with the increased costs so you may be left unwittingly with a loss making business.

Miuwi:

It looks like this organization, set up to connect people who want to buy a property but can’t do it on their own, has been wound up and replaced with a facebook group: https://www.facebook.com/groups/2730176813903439

Sharesies:

No longer charges an annual subscription.

First home buyer assistance: Welcome home loan:

Eligibility criteria In the 12 months before you apply:

• you must have earned:

• • $95,000 or less before tax for a single buyer (previously $85,000), or

  • $150,000 or less before tax for 2 or more buyers (previously $130,000).

For more criteria and information go to https://kaingaora.govt.nz/home-ownership/first-home-grant/check-you-are-eligible-for-first-home-grant/

The price caps have also increased: https://kaingaora.govt.nz/home-ownership/first-home-grant/check-property-criteria/

Cost to set up a company:

Now $124.39 plus GST including name reservation (previously $142).

You’ve probably heard sayings like “The more you give the more you’ll get”, “Give and you’ll receive” etc.  It’s not clear exactly how it works but it does seem to work.  Most successful people like Bill Gates and Melinda French Gates are involved in philanthropy but you don’t need to be well off to make donations.

If you’re in a position to save then you’re in a position to donate cash to those in greater need if you want to.  And if you don’t have spare cash then you may have time that you can spare to help others instead.

Why?

People make donations for various reasons including because they want to help others, they want to share their wealth and good fortune, sometimes they feel guilty about what they have and, for many, it just makes them feel good.  Some people are quite public about their financial support, such as arts patrons or organization sponsors but you may prefer to be more low key or anonymous.

Who?

If this is a new journey for you and you’re not sure who to donate to, then think about the charities that you like or have some connection with, for example, a friend has cancer or your parent receives hospice care, you read about the work of Medecins sans Frontiers in war-torn countries, you want to contribute to your church, or you hear stories about the women saved by Womens Refuge.

How?

Often you can make donations via the organisation’s website or they may have set up a GiveaLittle page.

But the easiest way to make donations is to either regularly support organisations through automatic payments from your bank account, for example annually or each payday, or through Payroll Giving.  You can organize Payroll Giving through your employer’s Payroll section.  The big benefits of Payroll Giving are that it’s easy, and you get the tax benefit of the donation immediately. More on this later.  Or you may prefer to make one-off donations when you get a bonus or some event occurs that makes you want to make a donation. Or you could decide to donate your super when you become eligible.  There are many options.

How much?

Make the amount at a level that you feel comfortable with and that you can afford without getting into trouble yourself financially.  Some people recommend 10% but this can be a lot for many people.

Tax refunds

If you choose New Zealand registered charities then you qualify for a refund of one third of the amount you donated.  This means that the donation has only “cost” you two thirds of the amount donated.  You now have funds to donate again if you want!  For example, if you make a donation of $100 to a NZ registered charity then you can receive one third back from Inland Revenue.  The charity still gets $100 but it’s only cost you $67. That’s $33 that you can do something else with.  There are two riders to this.

First you generally have to apply for the refund.  You can do this by completing an IR 526 Donation Tax Credit Claim form or directly via MY IR and attach the receipt.  With Payroll Giving you receive the tax refund back into your paypacket in the period that you make the donation so you don’t have to separately apply to Inland Revenue.

Second you can only get a refund on donations up to the amount of income you’ve earned that tax year.  So, for example, if you earn $100,000 a year and you give it all away then you can receive up to $33,333 back, but if you earn $100,000 a year and you give away $200,000 then you will still only receive back $33,333.

Leading by Example

When people see other people making donations or children see their parents giving, they learn to give too.  This can be as simple as helping someone else do something.

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One Christmas we told our three children that their main Christmas present was that we were going to sponsor a child, and they could choose the child.  They chose someone who they thought wouldn’t be the first one chosen and that began our 12 year association with our sponsored child in Honduras.  The children practiced writing to him in Spanish and they were always humbled to hear the things that our small contribution to his Christmas and birthdays was able to buy each year.  All three of our children are now in their 20s and each has set up their own programme of regular donations.

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Donating Time

When you have the financial pressures of mortgages and student loans it can feel difficult to justify making cash donations.  But if you would really like to help others then volunteering your time can be just as rewarding to you and the donee.  This may be as simple as offering to help weed an elderly neighbour’s garden, sit on the Board of Trustees of your children’s school or the local swimming club or even to volunteer for a few hours each week at a nature reserve, SPCA, hospice shop or to deliver Meals on Wheels.

Giving to get?

So how does the giving cycle around to getting?  I’m not sure but the “feel good” aspect of giving probably reflects into everything else you do, making you more productive and think more positively.  This in turn allows you to make good decisions which help you save and earn more money.

Try it!

Updates as at 24 May 2021

Government Super:

The amount of Government Super (Guaranteed Retirement Income) for a single person living alone after tax from 1 April 2021 is $437 (compared with $424 previously) , an increase of $13 in the hand a week.

 

Top Tax Rate:

The top marginal tax rate increased from 33% to 39% on income over $180,000 from 1 April 2021.

  

Student Loan Repayment Threshold

From 1 April 2021 you will only need to start repaying your student loan from your earnings if you earn more than $20,280 pa (previously $20,020).

 

Interest Rate on Student Loans:

The interest rate on student loans if you are living overseas is 3% from 1 April 2021 (previously 2.5%).

 

Interest Deductibility on Rental Properties

From 1 October 2021 interest paid on mortgages taken out to purchase rental properties from 27 March 2021 (other than new builds) will no longer be tax deductible.

For the year ended 31 March 2022 therefore only the interest cost up until 30 September 2021 will be deductible for the year.

An example of the costs follows.

If you purchased a property for $500,000 at an interest rate of 4% on 1 April 2021, you would have total costs of $27,174 for the year excluding tax.  You would need to receive rent of $543 per week to cover these.

 

Interest (4% of $500,000):	$20,000
Property Management Fee (8% of rent)	$2,174
Rates:	$2,000
Insurance:	$1,000
Maintenance:	$2,000
Total costs per year:	$27,174
Rent required per week excluding tax (based on 50 weeks)	$543
Tax at 33% based on only 50% of the interest being deductible for the 2021 year:   Total costs to recover plus increased property management fee:   Rent required per week (based on 50 weeks):	$3,300     $30,760   $615

 But with only 50% of the interest being deductible for income tax purposes under the new rules for this year this means your costs will still be $27,174  but you will only be able to claim $17,174 against the $27,174 rental income.  You’ll also need to pay income tax at around 33% on the remaining $10,000, a cost of $3,300.  This now gives you total costs of $30,760 for the year (as the property management fee increases with the increased rent) and you’ll need to receive $615 per week in rent just to cover costs including the tax. This is a $72 or 13% increase in the rent each week.

For the following year when there is no interest deductibility then the rent would need to be $688 per week, an increase of 27% over the rent that would have been needed to cover costs if the interest was fully deductible. This rent level may be more than the market can bear in that area and for that price.

You may need to look elsewhere for a property where you can earn enough rent to cover the costs, and preferably to make a surplus.  Or you may need to consider other options such as a multiple flat property, subdivision etc. or  buying a new property as interest on loans taken out to buy new buildings are currently tax deductible.

If you decide to proceed or charge less rent than your costs, then any resulting loss will need to be ring fenced and offset against future rental profits.

If you bought a property before the new rules came in on 27 March 2021 then over the next 4 years you will move progressively to not being able to claim any of the interest costs.  It is possible that within that period the potential rent increases required may not be able to keep up with the increased costs so you may be left unwittingly with a loss making business.

 

Miuwi

It looks like this organization, set up to connect people who want to buy a property but can’t do it on their own, has wound up and been replaced with a facebook group: https://www.facebook.com/groups/2730176813903439

 

Sharesies:

No longer charges an annual subscription.

 

First home buyer assistance:

Welcome home loan:

Eligibility criteria In the 12 months before you apply:

• you must have earned:
  • $95,000 or less before tax for a single buyer (previously $85,000), or
  • $150,000 or less before tax for 2 or more buyers (previously $130,000).

For more criteria and information go to https://kaingaora.govt.nz/home-ownership/first-home-grant/check-you-are-eligible-for-first-home-grant/

The price caps have also increased: https://kaingaora.govt.nz/home-ownership/first-home-grant/check-property-criteria/

 

Cost to set up a company:

Now $124.39 including name reservation (previously $142).

 

 

The school holidays provide a perfect opportunity to help your children to be financially responsible and independent. Here’s some ideas for things you can do:

 

 

1. Start with the language you use around money. Make sure it is always positively framed and encourages them. Talk about subjects such as compounding interest, the cost of debt and credit cards, the effect of changes in mortgage interest rates, the choices provided by education and careers, and the effects of redundancy. For younger ones point out the cost of takeaways, seasonal foods compared with out of season foods, the comparative cost of toys etc.

 

2. Give them opportunities to be responsible – this may be by looking after a pet, cooking dinner (start with a simple scone base pizza with tinned spaghetti and cheese), keeping their room tidy or having a regular part time job where turning up and being on time is essential. These set habits, create skills and lead to financially responsible children.

 

3. Pay them for jobs – don’t just give them an allowance. Paying a monetary reward for effort helps them understand the value of money; in the real world we don’t receive money for nothing and this is a good lesson to learn early on. Jobs may be one-offs such as helping with a spring clean throughout the house these holidays or doing regular jobs such as clearing the dishwasher, putting out the rubbish and recycling, mowing the lawns, cleaning the bathrooms, vacuuming, cooking dinner, painting or water-blasting the fence etc.  Pay them appropriately for the jobs they do and let them enjoy choosing how to spend their money.

 

4. Don’t confuse paid jobs with household chores – of course everyone still needs to do their bit around the house such as making their bed, keeping their room tidy, cleaning up after themselves, and setting the table and clearing dishes.

 

5. Encourage them to get a part time job. They may be able to do other work for you especially if you own your own business. For example they may be able to do data entry, compiling and packing orders, delivering fliers, cleaning the office, social media etc.  Or you may have friends who have businesses that they can do paid work for.  Encourage initiative to write an ad for a community noticeboard or at the supermarket offering services around the office, babysitting, dog walking, mowing lawns etc.  Or encourage them to apply for part time work at the local supermarket or other nearby shops. Help them prepare a CV outlining their achievements and skills.  Employers will value their voluntary work and sports team contributions as much as their academic achievements.

 

6. Allow them to make purchasing decisions – this may be in the form of an annual clothing or transport allowance so that instead of you buying clothes for them, they can allocate the clothing allowance how they want. They may choose not to buy many clothes at all or just a few expensive pieces.  When our children reached secondary school we provided them with clothing and transport allowances but we still paid for school and sports uniforms.  We found school socks were worn with everything and their bikes used more often and one of our sons also used part of his clothing allowance plus some other savings to buy a laptop.

 

7. Role model saving – this comes in several parts. Show them by example that money can be saved by keeping fit and eating healthily.  Allow them to cook their own food and make their own lunches, plant some vegetables, tend and watch them grow.  For almost instant results toss some alfalfa or broccoli seeds onto a meat tray lined with a water- soaked paper towel, and then water daily.  Encourage them to save some of the money they earn – help them set savings goals – but as with all goal setting make sure the goals are achievable. Savings may be put into a piggy bank or their own bank account or, for longer term investment, a Sharesies account.  Let them watch the money grow.

 

8. Play Snakes and Ladders and Monopoly. Snakes and Ladders reinforces the notion of sometimes things not going according to plan.  Monopoly entrenches notions about relative costs, and the relationship between assets and income – but maybe put a time limit on it so it doesn’t end in tears. Older children may also be interested in playing a game of working out how much it will cost them to go flatting using TradeMe to cost out weekly rents, the cost of a bed and other furniture, weekly shopping, power etc.

 

9. Giving and serving – this needn’t be money but could be time such as baking for a neighbour, offering to do some jobs for an elderly neighbour or relative, becoming involved with scouts, guides (or their younger counterparts), or St Johns. This helps create purpose for children.

 

10. Above all avoid creating economic dependents. These are the children who have always been provided for financially and who will be expecting mum and dad to help them out financially throughout their lives and then leave them a healthy inheritance.  If they have a partner the partner may also be sharing in the benefits but may not be around for long.  If you have had a difficult life financially then it’s understandable that you will want to help your children so that life is easier for them, but remember, with all actions there are consequences.

 

 

So, if you want to raise financially independent and capable children, be conscious about using positive language around money and give your children every opportunity to earn their own money so they can start taking responsibility for their financial decisions.  The school holidays may be the opportunity to get a lot done around the house and the start of creating financially responsible children.

 

 

Given the proposed changes announced by the Government recently for residential property investment, is rental property still a good investment?

 

Rental property has always been, and continues to be, a commercial decision.  It’s a numbers game.  If the rental income more than covers the costs then it should be a good investment.  Forget about capital gain – this should just be a bonus (or an opportunity).  And remember it is a long term investment.  If your intention when buying the property is to make a capital gain, then any capital gain, regardless of how long you hold the property, will be taxable under existing Income Tax rules.  The new rules extending the bright line test from 5 to 10 years, will not change this.

 

So it is important that the income covers the cost and any capital gain is incidental.

 

Given that it’s a numbers game let’s look at the effect of the changes. The main change, other than the bright line test, is the removal of the deductibility of the interest cost from 1 October 2021.  If you are buying a property now then effectively your interest deductibility will reduce from 100% to 50% for the 2021 tax year, then 0% for subsequent years.  It is expected that interest will continue to be fully deductible for new builds so this may influence your decision about whether you decide to buy a new build or an existing property.

 

One of the significant benefits of investing in residential rental property is to borrow 100% of the cost, using equity you have in your own home or in another property, to provide the 40% equity currently required by banks to purchase a rental property.

 

If you purchase a property for $500,000 then, in the example below you can see that if you  borrowed the whole $500,000 for the property at an interest rate of 4%, you would have total costs of $27,174 for the year and you would need to charge rent of $543 per week just to cover your costs under the previous rules.  (Note that banks seem to charge more than residential interest rates for rental properties even when the rental property loan is secured over your own home.)

 

Interest (4% of $500,000):	$20,000
Property Management Fee (8% of rent)	$2,174
Rates:	$2,000
Insurance:	$1,000
Maintenance:	$2,000
Total costs per year:	$27,174
Rent required per week (based on 50 weeks)	$543
Tax at 33% based on only 50% of the interest being deductible for the 2021 year:   Total costs to recover plus increased property management fee:   Rent required per week (based on 50 weeks):	$3,300     $30,760   $615

 

But with only 50% of the interest being deductible for income tax purposes under the new rules for this year this means your costs will still be $27,174  but you will only be able to claim $17,174 against the $27,174 rental income.  You’ll also need to pay income tax at around 33% on the remaining $10,000, a cost of $3,300.  This now gives you total costs of $30,760 for the year (as the property management fee increases with the increased rent) and you’ll need to receive $615 per week in rent just to cover costs. This is a 13% increase in the rent.

 

For the following year when there is no interest deductibility then the rent would need to be $688 per week, an increase of 27% over the rent that would have been needed to cover costs if the interest was fully deductible. This rent level may be more than the market can bear in that area and for that price.

 

So you may need to look elsewhere for a property where you can earn enough rent to cover the costs, and preferably to make a surplus.  Or you may need to consider other options such as a multiple flat property, subdivision etc.

 

If you decide to proceed or charge less rent than your costs, then any resulting loss will need to be ring fenced and offset against future rental profits.

 

If you bought a property before the new rules came in on 27 March 2021 then over the next 4 years you will move progressively to not being able to claim any of the interest costs.  It is possible that within that period the potential rent increases required may not be able to keep up with the increased costs so you may be left unwittingly with a loss making business.

 

In that case your best financial decision may be to sell the property and be prepared to pay tax on any capital gain, depending on when you purchased it and how long you have owned it.  This may be a better option than having ongoing losses unless the property is making a reasonable capital gain either through inflation, demand or through cost effective improvements you’ve been able to make.

 

Residential investment property remains a viable investment option as long as the rental income is sufficient to at least cover the costs.

 

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.

 

 

1. 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.

 

2. 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.

 

3. 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!

 

4. 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.

 

5. 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.

You don’t need to have any starting qualifications to improve your financial education.  All you need is the will!  And that won’t cost you anything.

 

Financial education ranges from everything relating to understanding how interest and compounding interest works through to buying and selling on the futures market.

 

Don’t get bogged down in the terminology. Investing involves a lot of common sense, but a bit of education will really accelerate your financial successes and reduce your chances of large losses.

To educate yourself, you can start with the following:

• Read some books about investing, such as:
  • George S Clason. 1926. The Richest Man in Babylon. Penguin Books.
  • Dolf de Roos. 2001. Real Estate Riches: How to become rich using your banker’s money. Warner Business Books.
  • Anne Hartley. 1990. Financially Free: Think rich to be rich: a woman’s guide to creating wealth. Doubleday Australia Pty Ltd.
  • Martin Hawes. 2006. Twenty Great Summers: Work less, live more and make the most of your money. Allen & Unwin
  • John Kehoe. 2006. Mind Power into the 21^st Century: Techniques to harness the astounding powers of thought. Zoetic Books.
  • Liz Koh. 2008. Your Money Personality: Unlock the secret to a rich and happy life. Awa Press.
  • Robert Kyosaki and Sharon Lechter. 1997. Rich Dad Poor Dad: What the rich teach their kids about money that the poor and middle class do not! Warner Books Ed.
  • David Schwartz. 1959. The Magic of Thinking Big. Wilshire Books Co.
  • Thomas J Stanley and William D Danko. 1996. The Millionaire Next Door: The surprising secrets of America’s wealthy. Longstreet Press.

You will find many of these books in your local library.

• Read the websites of companies you are interested in. In particular, have a look at their annual report – there is usually a lot of commentary to accompany the financial statements so you won’t get bogged down in numbers. You can also check the Investor Relations section on their websites for further information and the NZX for company announcements.
• Read websites like this one or others about personal finance. A note of warning: there are a number of people making a living by creating financial information websites and filling them with content lifted from other websites.  As a reader you may have no idea how valid the information is, so only read information from websites you have come to trust or from names of people who are qualified to comment.
• Sign up for newsletters from Financial Providers (if you can) and the wealth divisions of banks. These weekly commentaries will provide you with lots of analysis on different companies.
• Go to company AGMs – you usually need to be a shareholder to be able to attend, but members of the NZSA are generally invited (see the following point).
• Join the New Zealand Shareholders Association (NZSA). This costs around $145 a year ($45 for a student). There are branches in most large centres that run monthly meetings with speakers such as chief executives or Board members of companies you are likely to want to invest in. I went to a Wellington meeting in February 2009 when Rod Drury, founder and former CEO of the online accounting software company Xero, was speaking. Afterwards, almost everyone who attended bought shares in Xero at around NZD1 a share, and no one has regretted it – the same shares are now selling at around NZD140.

The NZSA also run occasional education seminars for a minimal cost and may put together a course for you if you can get enough people to come along. The courses are run by experienced volunteers.

The NZSA has a share game that you can ‘play’ when you become a member, practising buying and selling shares virtually. It costs only $20 to play.

The NZSA also provide research reports on companies for members through Shareclarity (an independent equity research company), which is a huge benefit given that this is one reason investors use AFAs.

• Sign up to Sharesies (an online platform that aims to make investing accessible and easy for all) which allows you to buy into ETFs or individual shares in New Zealand and the US (Australian shares available soon). You can put small amounts into Sharesies when you like, and you can choose which ETF or share to put your funds into. The cost is an annual subscription of $30 a year plus there are built in purchase and sale transaction costs. This is a great gift for children (or grandchildren). Other options are Hatch which only invests in US shares and Invest Now which only invests in funds.
• Sign up for Hatch’s share investing course Hatch Investing Guide
• Join a newsletter group, such as Sharechat. Subscribe for free to their newsletters, which offer news, tips and research on companies to invest in.
• Set up or join a share club. These were popular in the 80s until the 1987 sharemarket crash. Today’s share clubs are a lot more sophisticated and build on the syndicate principal, that is, that the more funds you have to invest, the more options you have and the lower relative brokerage fees per transaction. You can use the facilities and information from an online club, such as Voleo, to support your own shareclub or join one of their online ones.

If you’re setting up your own club, make sure you have solid rules, which all members of the club have signed up to, that clearly set out how someone can join, the number of people required to form the share club and whether new members can join or whether they have to buy out an existing member (remember that could be too expensive after a few years of good investment returns), the amount and regularity of contributions, what happens to dividends (are they reinvested or paid to members?) and how members can get their money out. Understand the tax implications of the arrangement.

• Complete some courses or qualifications in investing. You would probably consider longer courses or qualifications if you were considering going to work in the industry but completing a three year degree in finance is not necessary to become an investor or improve your financial knowledge. If you would like to keep your day job, then you will probably find short courses quite useful. You will find such courses being run by investor companies such as Craigs Investment Partners or individual AFAs, through community high schools, summer schools at your local university or through other organisations such as the NZ Shareholders Association (NZSA).
• Beware of taking too much advice from friends and family about the latest and greatest new investment – if it sounds too good to be true, then it usually will be.
• Consider joining the Angel Association New Zealand. This is an association that works with the early-stage investment industry. It can give you access to start-up companies and because its resources are pooled, you don’t need to put in a large amount of money.
• Study price earnings ratios and monitor individual shares if you want to take a technical approach.
• Read widely and generally, for example the business pages in the newspapers or online to help you better understand the general market and monitor trends. You can then use your common sense and understanding of industries to help you make individual share choices.

Like all education, your financial education will be life long learning and a mix of more formal reading and actually doing.

My book, Stop Worrying About Money – A simple guide to creating a financially sustainable life for you and your family, may be a good place to start!

 

 

One of the most important things you can do for your children is to raise them as financially responsible and independent children.

 

Start with the language you use around money.  Make sure it is always positive and encourages them. Then provide opportunities for children to take responsibility for their financial situation.

 

By all means give them pocket money or allowance from a young age but always provide it in return for chores.  In the real world we don’t receive money for nothing and this is a good lesson to learn early on.

 

Empowering children to do small jobs for payment teaches them so many different things including reliability, commitment, and responsibility.

 

These might be jobs like washing the dishes or emptying the dishwasher (always a much coveted job in our household), putting out the rubbish and recycling, mowing the lawns, cleaning the bathrooms, vacuuming, cooking dinner, painting or water-blasting the fence etc.  In each case there is reward for effort, and this is how it works in the real world.  Pay them appropriately for the jobs they do and let them enjoy choosing how to spend their money.  Encourage them to save part of their earnings so they can buy bigger things in the future.

 

Of course everyone still needs to do their bit around the house such as making their bed, keeping their room tidy, setting the table and clearing dishes.

 

As children get older give them specific allowances so they can choose how to allocate their funds.  For example we gave our children clothing and transport allowances when they started secondary school.  That meant that if they walked or biked to school they could keep their bus fare.  They could choose to buy a few special clothing pieces or lots of cheaper ones.  We paid for school uniforms so we noticed our boys wore their school socks and track pants a lot!  One of our sons also used part of his clothing allowance plus some other savings to buy a laptop.

 

They may be able to do other work for you especially if you own your own business.  For example they may be able to do data entry, compiling and packing orders, delivering fliers, cleaning the office, social media etc.  Or you may have friends who have businesses that they can do paid work for.  Encourage initiative to write an ad for a community noticeboard or at the supermarket offering services around the office, babysitting, dog walking, mowing lawns etc.  Or encourage them to apply for part time work at the local supermarket or other nearby shops. Help them prepare a CV outlining their achievements and skills.  Employers will value their voluntary work and sports team contributions as much as their academic achievements.

 

Above all avoid creating economic dependents.  These are the children who have always been provided for financially and who will be expecting mum and dad to help them out financially throughout their lives and them leave them a healthy inheritance.  If they have a partner the partner may also be sharing in the benefits but may not be around for long.  If you have had a difficult life financially then it’s understandable that you will want to help your children so that life is easier for them, but remember, with all actions there are consequences.

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David and Sarah had been married for around 15 years.  He had worked as a financial adviser and she in her own business as a communications contractor.  When he was made redundant shortly after they were married David applied for a few jobs but then ended up staying at home while they had children.  For the next 14 years he made no effort to look for work, always promising that he would be contributing financially once his mother passed away.  After 15 years David left Sarah for another woman and Sarah saw nothing of the promised inheritance and his mother is still alive.  She feels she was taken for a ride and blames his mother (he was an only child) for creating David as an economic dependent.

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Many parents tell me they pay for all their children’s needs because they want them to spend their time studying and relaxing rather than being stressed having to find  a job as well.  If you have an expectation that this support will cease at some stage then you need to make this very clear to your adult child. Otherwise you will be funding them for the rest of their lives.

 

One way you can practically help is with a deposit or guarantee for their first home.  If you can afford it then that help is needed more when they’re in their 20s than when they’re in their 60s and you die.

 

Some children, especially those with special needs, will need to be provided for long term and this may best be done through a family trust.

 

So remember, if you want to raise financially independent and capable children, be conscious about the language you use around money and give your children every opportunity to earn their own money so they can start taking responsibility for their financial decisions.

A rental property will be a good investment if the rental income immediately covers the costs and if the property has the potential for capital gain.  Remember tax is payable on any capital gain on the sale if you sell the property within five years or if you’re in the business of selling or developing properties. So think of rental property as a long term prospect.

 

As with most large purchases, the value of a rental property will depend on the amount paid for it, its quality (including its location), and its income.

 

Many property investors would say that you make your money when you buy a property and this is definitely a good way to lock in an immediate capital gain.  But how do you do that?  There are several ways including the “Ds”, that is properties being sold as a result  of divorce, desperation, debt, dereliction, death, and division of existing land.

 

These may be properties that are being sold where a divorcing couple do not want to put any energy or money into tidying a property up for sale, where a business owner may want to quickly liquidate a property for funds to buy another business or expand, where someone needs to repay a debt, is no longer able to keep up their mortgage payments because they’ve lost their job, a bank mortgagee sale, a property that has been left derelict, and is maybe now being sold to cover unpaid rates, dilapidated so some may not see the property as worthwhile fixing up, death of a relative where the family want a quiet and quick sale without open homes etc.

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One of my clients had a friend who split up with her husband.  Originally from the US she decided that she wanted to go back to the US as soon as possible so offered the property to my client for a fraction of its value.  She was already well off and decided that by the time she’d spent money tidying it up, staging it and paying real estate agents fees, she would rather sell it to someone she knew for a much reduced price.  My client got an absolute bargain and has happily rented it out ever since.

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However you can still buy a good property at its market price and do well, usually because the property is in a good location or has potential for adding value.

 

For example, in recent years many Councils have passed by-laws reducing the size of land eligible for sub-division to encourage in-fill housing.  As a result homeowners may now be able to build an additional dwelling on site and can often gain resource consent if an even larger property would not significantly affect neighbours.  Such opportunities allow home owners to suddenly build an additional property without having any land cost, saving as much as $100,000 in some cases.

 

Or you may be able to make a 3 bedroom house into a 4 bedroom one by converting a laundry or dining room (think student flats in Dunedin) or by building into roof space.  Decks and landscaping don’t need to cost a lot but can add considerably to the rental value of a property.  Updating kitchens and bathrooms (have a look at Bunnings and Mitre 10) can cost-effectively increase the rental income.  Spending $40,000 on significant updating (kitchen, bathroom, flooring, doors, paint and adding a heatpump) can add $100,000 to the value of a property and $100-$200 per week to the rental income.

 

Pay careful attention to the quality of the property.  It’s usually worthwhile to get a builder’s report done to look at the earthquake strengthening position, weather tightness, methamphetamine use, sea levels, soil contamination etc.  Go in with your eyes wide open.  If you can’t do any of the work yourself then limit yourself to easily quantifiable work – otherwise you may end up with costs that can never be recovered on sale.  Get a rental assessment.  I’ve had more than one client buy a rental property from someone they knew who told them the property was under-rented, to later find out more than market rent was already being paid.

 

Location is a big factor in quality too. Good things to look out for are sun, access to public transport, proximity to schools, shops and playgrounds, and neighbours.  You may want to avoid proximity to landfills, busy roads, damp and dark locations, and isolation – although these may not bother some tenants. You’ve probably heard the refrain “Location, location, location”.  Certainly a good location will ensure an easier sale in the future.

 

Income:  The golden rule here is to make sure the rent covers the cash costs: interest on the mortgage, rates, insurance, maintenance, and body corporate and property management fees (if any).

 

In the example below you can see that based on borrowing the whole $500,000 for a property and an interest rate of 3% (conservative at the moment but allowing for a small increase) you’ll need to be able to charge $435 per week to cover expected costs.  This should be very achievable in larger cities, for example, for an apartment, and anything less is probably best avoided – otherwise you’ll be going backwards financially!  On the other hand any rental income exceeding $435 is a bonus!

 

Interest (3% of $500,000):	$15,000
Property Management Fee (8% of rent)	$1,740
Rates:	$2,000
Insurance:	$1,000
Maintenance:	$2,000
Total costs per year:	$21,740
Rent required per week (based on 50 weeks)	$435

 

 

Remember you make your money when you buy because a property is under-priced or has potential to increase its value. This is your chance to think creatively!

 

 

Should you be paying off your mortgage as quickly as possible, and then starting on a savings plan, or should you be setting up a savings plan at the same time as paying off your mortgage?

 

Different people will have different views on this and there is no right or wrong answer here – other than you should be doing something rather than spending!

 

Having a large mortgage, especially if you have a student loan, can mean you feel you have no money at all.  But then you may get a promotion or raise, or interest rates reduce and your principal is reducing so you suddenly have some more cash available weekly. What should you do with it?

By all means treat yourself to something.  Depending on the amount, this may be a holiday or new furniture for the house, or maybe just a night out at a special restaurant. While it will be very tempting to spend the extra on an ongoing basis, you will gain more by either further reducing your mortgage or starting a savings plan.

 

For me the choice is a numbers game and this is explained in more detail below.  Here’s some thoughts to help you choose whether to do one or both:

 

1. If you can earn more by saving then continue to pay the minimum off the mortgage and invest the rest. For example:
   1. If your mortgage is costing you 3% pa then if you can earn more than that after tax (usually a gross return of around 5%) then you are financially better off by paying the minimum off your mortgage and investing any surplus amount. It is unlikely that you can earn a 5% return from term deposits or bonds in the current market but you may be able to earn this level of return on the sharemarket.  For example the NZX50 Smartshares has increased by 9% in the last 3 months (or around 6-7% after tax) BUT this is not a predictor of future returns.  Similarly, if you have a high interest loan eg at 7% and you would earn less than this on term deposit or in the sharemarket, then you may decide to pay off your mortgage first.  This is a numbers game.
   2. If you can buy shares in the company you work in and the shares are increasing in value, then you may want to buy those.
2. If you already have a savings scheme underway, for example through KiwSaver, with significant contributions or a high contribution amount such as 10%, you may prefer to reduce the mortgage.
3. Put the funds into a revolving credit account to reduce mortgage interest payments.
4. Pay off a lump sum from your mortgage, unless there are break fees for early repayment. Usually you can pay off a limited amount without incurring fees.  If you pay that and still have surplus funds then use them to start a savings plan.
5. Your personal preference and comfort level. Some people would instinctively prefer to pay off their mortgage before starting a savings plan – and this makes sense if it keeps things easier for you to monitor and manage.  Others see their mortgage as a long term plan so would prefer to start a separate savings plan.

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Taylor’s $300,000 mortgage was split in two with $150,000 at 4.99% and $150,000 at 3%.  Appointment to a more senior role resulted in backpay of $10,000.  Taylor found that the NZX50 Smartshares had provided a return of 9.09% (after fees and taxes) for the last 3 months.  While there was no assurance that such returns would continue, Taylor was comfortable with the mix of shares and decided to put the backpay into the shares rather than paying off some of the mortgage, as the return from the shares over time was expected to continue and remain higher than the cost of either of the mortgages.  If Taylor was basing the decision on the return over the last year of only 3.62% (covering the COVID-19 impact period) they might have decided to use the $10,000 to pay off some of the mortgage.

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In the end though the decision as to whether to use increased income or a one-off lump sum to pay off the mortgage or start or add to a savings plan isn’t material; the important thing is to do something useful with the money so it is not frittered away.