Children, Money and the School Holidays

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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

  1. 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.

 

 

Is residential rental property still a good investment?

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.

 

The New Year and a New Financial You

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.

 

  1. 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.

 

  1. 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!

 

  1. 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.

 

  1. 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.

Increasing your financial education

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 21st 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!

 

 

Raising Financially Capable Children

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.


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.


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.

Is a rental property a cost effective investment?

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.


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.


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!

 

 

Pay off your mortgage or save?

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.

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.


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.

 

Independent People and Money

My 24 year old daughter hauled me up last week, telling me that my previous article “Women and Money” seemed to focus on women either in relationships or coming out of relationships and wasn’t really relevant to her. She was right. In my practice I was usually seeing situations where things had gone badly, usually because of a relationship breakup, and I was brought in to help pick up the pieces or set things up so that the pieces didn’t fall apart.

So today my thoughts are for people who define themselves as independent, whether they’re single or in a relationship. And some of those thoughts are the same as for those mentioned previously. These are some essentials:

• Make sure you have qualifications and a career that you can fall back on if you decide to do something else in between. Matt worked as a quantity surveyor for a number of years before he decided he wanted more control over his life so spent several years sailing round the world before he came back to NZ and was able to work again as a quantity surveyor. Although he started back at a lower level job he was quickly promoted. When applying for jobs he emphasized the skills he had obtained from his sailing that he felt added to his experience in QS.

• Spend less than you earn. The only borrowing you should consider is a bank loan to buy a property. If you want to buy a car then save up for it, or maybe add it to your mortgage if it’s essential. If you don’t earn enough for the lifestyle you want or feel you should be having then get a different job that pays more. You might have to get some more experience or qualifications so start thinking about these things now. You may also need to change your job regularly so that you are moving each time up the ranks and expanding your experiences along the way. Never under-sell yourself in a job interview.

• Contribute to KiwiSaver either at 3% if you want to explore other investment options to retire earlier than 65, or 10% if you are getting closer to retirement, want to buy a house, or want to rely on KiwiSaver solely for your retirement and want to just forget about it.

• Buy your own home. This not only provides a roof over your head but can be the basis for future investing activity, for example, the security for buying a rental property. It is harder on your own but still possible. Put 10% into KiwiSaver, save as much as you can for a deposit, think laterally about where and what you might buy (eg first home in the outer suburbs, small apartment on leasehold land, a doer-upper, a two bedroom flat and rent one room out) or consider buying with someone else. If you don’t know anyone then ask among your own friends or work colleagues. It doesn’t need to be forever. If you buy with someone else make sure you have a written agreement about deciding the priorities for maintenance and what to do if someone wants to sell their share. If the mortgage is going to cost you significantly more than the rent you’re currently paying and you’re happy where you are then consider renting the property out or getting in flatmates. Remember though that you may not be able to get your KiwiSaver out or get any Government assistance if you are buying an investment property.


Kyle and Tom were best mates from kindy and in their mid-twenties were each keen to buy a house. They couldn’t afford to buy anything much individually so in the end they decided to go in together and bought a four bedroom house in an outer suburb. Although Kyle had a higher deposit they bought half the house each with Tom having a slightly higher mortgage. They got in flatmates for the other two rooms. They set up a long term maintenance plan, a separate bank account for the rent and joint outgoings (rates, insurance and maintenance), paid their own share of their mortgages, and made an agreement re division if one wanted out. They had a few niggles when Tom couldn’t afford to spend as much on maintenance as he had a higher mortgage to service but they resolved this by re-jigging the maintenance plan and Tom agreeing to put in more of his own labour to get some of the work done.

Five years later Tom and his partner decided to buy their own place together. As previously agreed Kyle and Tom got in an independent valuer and they were both happy with the valuation. The property had increased considerably in the time they’d owned it, partly due to renovation and improvement work they’d done but also because of general property value increases in the area and inflation. Kyle decided that he would rather buy Tom’s share than sell the property and he’s still there 5 years later. While they remain good friends, Kyle is happier being in control of the property but is pleased that they bought when they did as he couldn’t have afforded to buy in that area now. Tom is also happy as he ended up with a higher deposit for the property that he and his partner bought than he would have had if he hadn’t bought the first property with Kyle.


• Keep a financial buffer or emergency fund to weather financial storms such as a health crisis or redundancy. The amount should be enough to cover costs for 3 months and rather than having it in cash, it could be in the form of a revolving credit mortgage or investments that you can sell relatively quickly.

• Think about your financial goals. For me this was about having financial independence, that is, always having the earning capacity to earn enough to live off so that if things got really dire (for example, no work) then I could take a lower paid job, lower my spending and living expectations and still be OK. I would be happy to take an unskilled job if required. That’s at the lower level. At the higher level it might be to retire early, reduce to part time work early on to spend more time on hobbies or with friends or family (young and/ or old). It’s worthwhile thinking about these things early on so that you can be heading steadily in the direction you want. It’s much harder to decide at 50 that you want to retire at 55 if you haven’t started setting money aside or to decide at 30 that you want to retire at 35 when you have a large mortgage, single income and a young family. But these things are all doable if you think about them before hand and make some plans early on. Decide what you want, cost it out, then work out how you’ll get there. Most bank websites have calculators for the amount you’ll need in retirement and the amount you have. They’re a great place to start. So does the www.sorted.org.nz website. Don’t get hung up on the numbers being precise as investment returns will vary over time anyway.

• Understand and accept your financial personality and do what allows you to sleep at night. But stretch yourself a little, especially as you start exploring your investing capability and interests. Remember there is no return without risk. Put everything into term deposits at the bank and your KiwiSaver funds into a Conservative, Defensive (Default fund) or Cash Fund and you will make a small return based on interest rates which are at a historic low, or allow yourself to trust in long term returns and invest in a high growth fund if you’re under 40 or a growth or balanced fund if you’re over 50. If you feel comfortable with property then invest in rental property, especially if you are scared of shares and don’t understand them. I can understand that. I’m not an architect or engineer so I will never want to build a house on a steep hill in Wellington for fear of earthquakes and slips but I feel comfortable with shares because I understand them so I’m happy to invest in them. If you want to try shares then you could start with Sharesies by putting in only small amounts regularly spreading it across different shares to reduce your risk or across Exchange Traded Funds (ETFs) which provide a cross -spectrum of shares. Invest more as your understanding and confidence builds. That’s probably the stage that you want to talk to a financial adviser.

• If you do have a partner keep on top of the whole financial situation. Don’t defer to your partner just because they might be an expert in the financial field. Always know where your money is and any mortgages that you have entered into. Be particularly aware of any business loans or guarantees. Prefer to be a shareholder in a family business rather than a director unless you want to be hands on: remember control equals liability. If you’re a director then know everything that’s going on in the business: this is not a passive role. Keep any personal money or inheritances as separate relationship property in case things fall apart.

• Acknowledge that sometimes luck plays a part but, as they say, opportunity comes knocking every day, you just need to see and act upon it. Timing also makes a difference. But the sooner you start the more time you’ll have to make money and recover from any downturns.

• Enjoy being in control of your financial situation.

Women and Money

Are women worse off financially than men? More often than not. Why? Not only do they tend to earn less on average but they often don’t work for as many years. This impacts their total earnings and their superannuation or retirement savings.

Over my years in accounting practice I’ve seen a lot of very successful women – and many whose lives could have been easier with different financial circumstances.

The key things to remember are:

  • Make sure you have a career of your own before you have children. Usually this will involve getting some sort of qualification.
  • If you have children, or take extended time out travelling, keep your work skills up. This may be through volunteering at your local pre-school or having a part time or full time job. In particular, keep your computer skills current and maybe take the time to learn new skills.
  • Have your own KiwiSaver and continue contributing if you have a career break.
  • If you’re in a relationship, know your joint financial situation:
    Have access to all the bank accounts and investments.
    Understand your assets and liabilities. This might be your house and the amount of current mortgage. Know the amount and keep on top of it.
  • Know the income you both earn and make sure it goes into a joint account.
  • Understand your financial personalities and if money is a constant source of disagreement for you both then set budgets for contentious matters. For example you could each agree a clothing allowance or an activities allowance.
  • If you have different financial approaches or personalities then make sure you each receive an allowance from the joint account each week that you can spend on whatever you like. It may be a small amount, $50 or $100 but you can do what you like with it. You may decide to invest yours.
  • If you divorce, engage a good lawyer (use word of mouth) to ensure you get the best possible settlement. Don’t give in too easily.

One client, who was married to a medical specialist, continued to work part time while raising their three children. They divorced when the children were still in primary school. She was so upset and humiliated by the whole situation that she accepted what he offered as a divorce settlement, a position she sorely regrets given the impact on the standard of living for both herself and the children.

While it rankles with her that he takes the children on overseas and skiing trips while she works extra hours, she is pleased the children are getting those opportunities. However if she had gone to the family court instead of accepting his settlement offer, it is likely that she would have received more both via ongoing financial support for the children (maintenance) and a higher than 50% share of their assets given his much higher earning capacity.


Andie had been happily married to her husband for 20 years. She had stopped working a few years earlier as she was experiencing problems with RSI and arthritis and her doctor recommended that she significantly reduce her work or stop it completely. After discussion with her husband it was agreed that she would stop work completely as he earned enough for them both. Then her husband announced that he was leaving her for someone else. Andie didn’t know what to do. Suddenly she had no income and didn’t want to sell up and leave the home she had been living in and loved for the last 20 years. She had poured so many hours of herself into it, redecorating it just the way she wanted. Although she received a share of his future income she had to buy him out of the house. He agreed to lend her the money to do that as she was unable to borrow from the bank.

In spite of her immense grief Andie sat down and worked out a plan to recover financially. She let everyone she knew know that she was available for house sitting and then rented out the house. She then used the equity she had in the house to purchase a rental property which needed a lot of work and which she did up with some help from builders, plumbers etc. She stayed there part of the time she was renovating it and while she wasn’t house-sitting. She completed the work quickly and then rented out that property, had it revalued and bought another rental property. The three properties covered the mortgage and provided her with a small income but her costs were minimal. After two years she was able to move back into the property she owned and loved and had the income from two rental properties to keep her afloat. She kept doing some house sitting and rented out her house on Airbnb while she was away.

From a very low base she was able to make the most of her situation and create her own financial independence relatively quickly – but it required a lot of compromise on her part.


In summary, always maximise your earning capability, be on top of your financial situation and, if you’re in a relationship, make sure that your financial approaches are working to improving your long term situation, not ruining it.

Do you still need your family trust?

This is a question I am increasingly being asked these days, mainly because the new Trusts Act 2019 comes into effect from 30 January 2021.

There is no record of the number of trusts in New Zealand although it is estimated that there are around 450,000; that’s nearly one for every 10 New Zealanders. There is still no register although all trusts will now have to have an IRD number.

Some of the main requirements coming from the Act are:

• Increased financial reporting (that is annual financial statements or accounts for every trust even though the trust might just own the family home).

• The need to advise beneficiaries that they are beneficiaries of the trust (this shouldn’t be a surprise for most beneficiaries but might be a good time to tidy up the list of beneficiaries. For example, your daughter’s ex- partner may be listed (even if not by name) and this may no longer be appropriate. This tidy up of beneficiaries will require a variation to the trust deed.

• The need to provide beneficiaries with financial information if requested. This is a potential minefield but one that has been anticipated by the law makers who have allowed that trustees can resolve not to provide the information if they believe that it is not in the best interest of the beneficiary(ies), it is commercially sensitive information or other relevant reason. They will need to be able to justify their decision on reasonableness grounds.

• Trustees cannot profit from being a trustee. This means they can’t receive any personal benefit from the trust (such as living in the family home) so technically trustees can’t also be beneficiaries. To get around this you will need to vary the trust deed to allow the trustees to live in a trust asset – the family home.

• Some disputes between trustees and beneficiaries can now be resolved by mediation or arbitration. This will save significant cost and time as not all disputes will have to go to court now.

• There is now greater ability to delegate trustee powers for example for investment decisions.

Most solicitors I’ve spoken to are recommending that a professional trustee (such as a lawyer, accountant or trustee firm) be appointed as co-trustee to ensure that the new legal requirements are being met. This will be a big change for many mum and dad trustees who have had a family trust for a number of years but may not have been having annual meetings and preparing accounts.

There will inevitably be increased compliance costs with the new legislation.

So, should you keep your trust going or is this a good time to consider winding it up?

In making this decision you will need to consider the reason or reasons that you set it up in the first place. Generally there are four main reasons that trusts are set up:

1. Creditor protection

This is relevant if you own your own business or there is any chance you might be sued as a director of a company. If this is a possibility then owning your major assets such as your family home and an investment portfolio in a trust keeps those assets separate for your family. By divesting or selling your assets to a trust, you are giving away ownership of the assets to the trustees. You can’t legally continue to treat the assets as your own.

However, recent case law shows that judges can be reluctant to accept that assets are completely separate to the owner if the assets were clearly only put in trust to avoid paying creditors or if the judge feels that you have enough control over the trust assets to use them to pay creditors. To reduce this likelihood, appoint an independent or professional trustee, clearly document major decisions and operate the trust as if you are truly holding the assets in trust for the beneficiaries.

If you are no longer in business then the creditor protection provided by a trust may no longer be relevant for you.

2. Relationship property issues

Trusts are frequently used to keep property as separate relationship property. This means that as long as the property is kept separate and not intermingled with joint property then it can remain as separate relationship property. Trusts are often used for this purpose when couples separate. Putting the assets distributed on their split into a separate trust for each partner means they can be kept separate as long as the assets aren’t mixed with a new partner’s property. This works really well for an investment portfolio or a rental property as long as joint funds are not used for example to pay off the rental property mortgage.

Parents also often set up separate trusts for their children (often referred to as inheritance trusts) to leave any inheritance or their own trust distributions to ensure the funds are kept intact for their child and then grandchildren.

If this is the only reason you are keeping a trust then you may prefer to just use a “pre-nup” or contracting out agreement if or when you start a relationship with a new person. Remember though that many people find this conversation difficult and a trust means they can avoid the conversation. This is especially important when one partner has substantially more assets than the other.

If you want to leave assets to your children or their trusts, you can also easily do this through your will.

3. Rest home subsidies

For many years some people used trusts to squirrel away their assets to reduce their liability to pay for rest home care. At the moment, the amount of assets an individual can hold and still be eligible for rest home care subsidies is $236,336.

In the past individuals would religiously “gift” $27,000 a year of their assets to their trust to avoid paying gift duty to Inland Revenue. Gift duty was collected by Inland Revenue on gifts of more than $27,000 per person. However the rate of gift duty was reduced to 0% in 2011 although the rate could be raised quickly at any time.

Work and Income uses different criteria and has the ability to disallow any gifts of more than $6,500 per couple for each of the last five years. This means that they could refuse your application for rest home care subsidies. MSD also has the power to review a trust’s documentation to work out the true gifting position and whether the beneficiary is entitled to any distributions from the trust.

Setting up a trust now purely to reduce rest home care costs does not work – even if it may have in the past.

4. Estate and tax planning

Trusts have traditionally been used as estate planning and tax minimization vehicles.
In the days when estate duties were significant, trusts were often established to own family assets. Distributions could be made to beneficiaries to minimize any estate duty or to legitimately provide for unequal distributions for some beneficiaries such as handicapped children.

The income produced, for example, from a farm or investments, could also be distributed to trust beneficiaries on lower tax rates as long as the distributions were made to them.
Even with the reduction in estate duties to 0%, the principles remain the same and there are still opportunities to make different distributions to beneficiaries according to need or to minimise income taxes by allocating trust income to beneficiaries.

With distributions to minors under 16 years of age being taxed at the same rate as trusts (33%) there may now be limited cost effective opportunities to use trusts to minimize taxes. However there may still be opportunities to allocate income and assets according to need.

Some trustees may now be concerned that they may find it difficult to provide financial information as it may demotivate beneficiaries from finding work and encourage them to demand an income from the trust. Or trustees may find it difficult to justify unequal distributions to beneficiaries for fear of their decision being challenged in the courts. In these cases winding up the trust and holding the assets in your own name means that you will have no accountability to any beneficiaries any more and can keep your financial information quite private from children and other potential beneficiaries.

If you decide that the original reasons for retaining your trust are no longer relevant then you may decide to wind up your trust before the new trust law comes into effect in January. There will be some cost particularly in conveyancing if there is a physical or real property involved so you may want to get this process under way by talking to your solicitor as soon as possible.