9 steps to financial success
1. Set Clear Goals
If you don’t know where you are going, it is very difficult to get there.
Most people are familiar with setting goals at work or in sport. Managing your money is no different. You need to be clear about what you want to achieve, and those goals need a timeframe and a rough dollar value.
For many people, the big goal is having enough money to live comfortably through retirement. Once that is clear, it becomes possible to work out how much money is required, when it is needed, and how much needs to be saved along the way.
You may also have shorter-term goals, such as paying off a mortgage, saving for travel, or helping children through education.
Goals change as life unfolds. People change careers, health changes, family situations change, and sometimes priorities change as well. Because of this, your goals and your plan need to be reviewed regularly to make sure they still reflect what matters to you.
2. Control spending and eliminate high interest debt
When you first start earning money, or get a big promotion, it’s exciting to be able to spend money that you didn’t have before. Part of the Moneyworks philosophy is that you should always celebrate. But it’s also important to know when to stop celebrating and get back on track with what you are trying to achieve.
Controlling spending doesn’t mean never spending. It means being aware of how much you are spending, and on what. Of course you should have luxuries, and even the odd vice or two. But if you really want to stay in control of your finances, you need to set some rules for yourself about how much you are prepared to spend on those things.
One of the best ways of controlling spending, and something a number of our clients do very successfully, is to use different ‘jam jars’. In practice, that usually means having different bank accounts for different purposes. Now that there are bank accounts available with no monthly fees, this is a very achievable solution.
You might put aside a set amount each pay for travel, or for a specific goal. If you find yourself having to ‘raid’ that account, it usually means the balance of spending isn’t quite right yet. And if it really is an emergency, try to replace the money as soon as you can.
Eliminating high interest debt should be one of the first steps when you are putting a financial plan in place. You should not owe money on your credit cards past the due date. The interest rates charged on credit cards are high, and if balances aren’t cleared regularly they can keep you stuck in a cycle of having no spare money.
Borrowing money on hire purchase to buy a vehicle or a TV is also a common trap. The best way to buy new things is to save up until you can afford them. If that isn’t possible, look carefully at interest free cards or finance.
And always read the fine print. Once an interest free period ends, the interest rates can be very high. Make sure you have a clear plan to repay the loan in full before that period finishes.
Investment returns and interest rates do matter
To achieve your retirement savings goals, and to get through retirement, you need to understand how investment returns actually work.
It’s also important to understand how to compare the assumptions behind any articles or commentary you are reading. You need to make sure you are comparing like with like, otherwise the numbers can be very misleading.
The first step is to start thinking about investment returns after tax, after fees and after inflation.
Inflation means your money will be worth less, and buy less, in the future as prices rise over time. Taxes reduce the return you receive because you are legally required to pay them. And for most of the investments that will get you to and through retirement, there will be fees involved. What really matters is what your return looks like after all three of these have been taken into account.
For our clients, Moneyworks advisers always talk in after tax, fees and inflation returns when we are doing retirement savings analyses and working out how long someone’s money is likely to last. In practice, these returns often sit somewhere between about 1.00% and 2.50% per annum. The right return is different for each person, because it depends on their tax rate while they are earning, and later when they are no longer earning.
The second step is to understand just how much difference an extra 1.00% return (after tax, fees and inflation) can make over time.
The table below shows the difference that 1.00% per annum makes if you invest $50,000 for 30 years.
After tax, fees and inflation return | Amount you will have in 30 years, if you invest $50,000 |
|---|---|
0.00% pa | $50,000 |
1.00% pa | $67,392 |
2.00% pa | $90,568 |
3.00% pa | $121,636 |
4.00% pa | $162,170 |
Assumptions: $50,000 invested for 30 years with these after tax, fees and inflation returns, compounding.
The third step is to understand how much additional risk you need to take to achieve higher returns.
For example, if you are investing in a term deposit earning 3.50%, there are no fees payable. But if your tax rate is 33.00%, your after tax return is 2.35%. If long-term inflation is around 2.00%, that leaves you with an after tax, fees and inflation return of about 0.35% per annum. It doesn’t even make it onto the table above. If your tax rate is 17.50%, the after tax, fees and inflation return is still only around 0.68%.
What this means in practice is that you will need to save more money to fund your retirement if your investments are delivering very low real returns, compared with someone who is able to achieve higher returns over time.
On the other hand, to achieve a return of 4.00% after tax, fees and inflation, the total return you would need to earn at a 33.00% tax rate is around 10.80% per annum, on average. That requires a very aggressive and high-risk investment profile, and we only have one or two clients who are genuinely suited to that level of risk.
For most people who are Balanced investors, a more realistic target is an after tax, fees and inflation return of around 2.00% to 2.50% per annum.
Responsible Investing, Ethical Investing, ESG factors or Sustainable Investing
When people talk about responsible, ethical, ESG or sustainable investing, they’re often talking about the same underlying idea using different language.
For us, and for many of our clients, an important starting point is understanding that their investments are not doing harm. That doesn’t mean expecting perfection, but it does mean paying attention to how businesses operate, how they treat people, how they manage environmental impacts, and how they are governed.
Research increasingly shows that companies which take environmental, social and governance factors seriously are often better placed to manage risk and deliver sustainable returns over time. This approach differs from the historic focus on short-term profits at any cost.
Along with our clients, we care about where money is invested and how those businesses behave. Ethical and responsible investing is not a separate add-on to the financial plan. It is part of how investment decisions are made and reviewed over time.
Moneyworks and our advisers are members of the Responsible Investment Association Australasia, and are Certified Ethical Financial Advisers through RIAA. These standards help inform our approach, but judgement and ongoing review remain essential.
4. Spread your investment risk (or diversification)
Or, don’t put all your eggs in one basket.
To get your money working over time, you need to spread it across different types of investments. That means different asset classes, different regions, and different companies. The aim is not to eliminate risk, but to avoid having all your risk in one place.
Most diversified portfolios, including KiwiSaver funds, are built using three main asset classes:
Fixed interest and cash
Equities (shares)
Property
Each of these behaves differently at different times. When one is doing poorly, another may be holding up better. How much you hold in each depends on your risk profile and how important the money is to you.
Fixed interest and cash includes more than just term deposits. It also includes things like government bonds, listed bonds, bank bills and other interest-bearing investments. These tend to provide more stability, but lower long-term returns.
Equities is simply another word for shares. When you own shares, you own a small part of a company. Shares tend to be more volatile in the short term, but over long periods they have provided higher returns than cash or fixed interest.
Property includes more than just your home. We don’t treat your home as an investment, because you have to live somewhere. Property as an investment can include residential property, but also office buildings, retail property, warehouses and other commercial assets. Property is typically less liquid, which is why many people gain property exposure through managed or listed investments where money can be accessed more easily.
Diversification also means investing beyond New Zealand.
New Zealand is a very small part of the global economy, and our share market reflects that. If you limit your investments to New Zealand only, you are limiting your exposure to many large, global businesses that people use every day and that generate earnings all over the world.
Spreading investments internationally reduces reliance on any one economy and increases access to a broader range of growth opportunities.
Finally, diversification applies to how investments are managed.
Different fund managers invest in different ways. They have different styles, different areas of expertise, and different views about markets. No one manager gets everything right all the time.
Good diversification means not relying on a single investment approach or decision-maker. It also means understanding what fund managers actually do, how they make decisions, and whether their approach is consistent and disciplined.
Diversification is not about complexity for its own sake. It is about building resilience into your investment strategy, so that no single event, market, or decision has too much influence over your long-term outcome.
5. Protect your assets and income
This is the role of insurance in your financial plan.
The type and amount of insurance you need changes over time. When you are younger, have debt, and have people relying on your income, insurance is often critical. As you build up assets and reduce debt, the need for some types of insurance reduces, and in many cases disappears altogether by retirement.
Our goal with clients is not to keep insurance in place forever. It is to use insurance as a tool while it is needed, and then gradually reduce cover as financial independence grows.
In our view, the main types of insurance, in order of priority, are:
Fire and general insurance
Income protection and or trauma insurance
Life insurance
Health or medical insurance
Funeral insurance
Redundancy insurance
Fire and general insurance
Most people are familiar with this type of insurance. If you have a mortgage, you are legally required to have house insurance. You may also have contents insurance, car insurance, boat insurance, or business-related cover such as professional indemnity or public liability insurance.
This is a specialist area of insurance that we don’t operate in directly, but we can refer people to good insurance brokers.
A couple of practical points are worth making. You generally get what you pay for. The cheapest policy is not always the best. And it is usually sensible to have your house and contents insurance with the same insurer. Policy wording differs between companies. One insurer may treat floor coverings as part of the house, another as part of the contents. If something goes wrong, you want certainty that everything is covered.
Income protection and trauma insurance
These are often called “living insurances”, because they pay out while you are still alive.
Income protection provides a regular payment if you are unable to work due to illness or injury. Trauma insurance provides a lump sum payment if you are diagnosed with one of the specified serious medical conditions covered by the policy.
Not everyone can get income protection insurance. Some occupations are excluded because of the nature or risk of the work, and you need to have an income to protect.
Income protection policies typically cover up to 75% of your income, usually based on your highest consecutive 12 months of earnings in the last three years. They do not cover redundancy.
The cost of income protection depends on several factors:
your age
your gender
your occupation
your income
your health
the wait period, being how long you can wait before payments start
the benefit period, being how long payments will continue once a claim is accepted
Longer wait periods and shorter benefit periods reduce premiums, but this is an area where people need to think carefully. If you are unable to work for two years, are you realistically likely to be back at work at that point? Saving a small amount on premiums can come at a high cost later.
There are significant differences in the quality of income protection and trauma policies. Some trauma policies cover only a small number of core conditions with restrictive wording. Others cover a much wider range of conditions and are easier to claim on.
It is also important that policies keep up with changes in medicine and the environment. Some insurers update policy wording over time so existing policyholders benefit from improvements. This matters.
Income protection insurance in New Zealand works alongside ACC, and understanding how the two interact is important.
Life insurance
Life insurance is insurance you have for people you love.
If you have dependants or debt, life insurance can be critical. If you don’t have dependants, you may not need it at all.
Life insurance is generally more straightforward than other types of cover. While there are differences in policy features, most products are relatively similar. If life insurance is the only cover you are putting in place, cost-effectiveness often matters more than bells and whistles.
To work out how much cover you need, you need to think about funeral costs, repaying any debt, and whether income needs to be replaced for someone else. As assets grow and debt reduces, the need for life insurance usually reduces as well.
Health or medical insurance
Health insurance is a “nice to have”, not a core requirement for most people.
If you can afford it, it can be very useful. But it is important to understand its role. If you become too unwell to work and can’t afford to pay the premiums, the insurer will not keep the policy going for you. That is why we rank income protection and trauma insurance higher in priority.
There are big differences in quality. Cover for everyday doctor visits and prescriptions often amounts to little more than swapping dollars. Many people get better value from major medical and specialist cover.
The cost will depend on the excess you choose. A nil excess is much more expensive than a higher excess, and what is appropriate depends on your situation.
Funeral insurance
Funeral insurance can be useful if you do not yet have a complete financial plan in place.
For most of our clients, we prefer to set aside funds within their assets to cover funeral costs. In some cases, a small life insurance policy can provide better value and flexibility than a dedicated funeral insurance product.
Redundancy insurance
Redundancy insurance is a specialist and relatively expensive form of cover.
It must be put in place well in advance. You cannot take it out if restructuring is already on the horizon. Benefits are usually limited, often to around six weeks of income.
For many people, building a proper financial plan and holding emergency cash is a more effective way of managing redundancy risk.
6. Use legal and tax structures to your advantage
Over the years, tax laws in New Zealand have changed, and for most people there are now limited tax advantages in using different legal structures, such as family trusts, purely to reduce tax.
Where tax structure does still matter for investors is through the use of PIE investments (Portfolio Investment Entities).
Income earned through a PIE is taxed at your Prescribed Investor Rate (PIR), which is based on your income over the previous two years. The main PIR rates are 10.5%, 17.5%, and 28.0%. Importantly, the PIR is capped at 28.0%, even if your personal marginal tax rate is higher.
At present, personal marginal tax rates in New Zealand rise above this level, with higher rates applying as income increases. This means that, for many investors, using PIE investments can reduce the tax paid on investment income compared with holding the same investments outside a PIE structure.
Your PIR does not automatically change as soon as your income changes. If your income increases and puts you into a higher tax bracket, you can continue to use your existing PIR until you have been in the higher bracket for two full income years. This timing difference is important to understand when thinking about after-tax returns.
Wills
For reasons we still don’t quite understand, the task that often takes clients the longest to complete is making sure they have an up-to-date will.
If you die without a will, you die intestate. This means your assets are distributed according to the Administration Act, not according to your wishes. The Act sets out rules about who receives what, and in what order, regardless of what you may have intended.
Administering an estate under the Administration Act can also increase legal costs, reducing the amount ultimately passed on to beneficiaries.
We strongly recommend that you have a will in place, and that it is reviewed and updated as your circumstances change.
Enduring Powers of Attorney (EPAs)
We also strongly recommend that people of any age have Enduring Powers of Attorney in place.
There are two types:
Property, which allows someone to make decisions about your financial affairs if you lose capacity. This can include paying bills, managing investments, or dealing with insurance claims.
Personal Care and Welfare, which allows someone to make decisions about your care, treatment, and living arrangements.
People often associate these documents with elderly parents, but they are just as important earlier in life. Consider a situation where you are seriously injured and unable to make decisions for yourself. Without EPAs in place, no one automatically has the legal authority to act for you.
In those circumstances, the courts may need to become involved, which takes time, costs money, and adds stress at an already difficult point.
Family trusts
Family trusts have been widely used in New Zealand, but their role is changing.
The Trusts Act 2019 increased trustee responsibilities and made trusts more transparent. Trustees now have clearer duties, and there is greater emphasis on record keeping and disclosure. There is also no guarantee that assets held in a trust will be protected from future asset testing.
There are still valid reasons for having a family trust. These can include protecting assets in complex family situations, managing assets for a child or family member with a disability, or addressing specific relationship property concerns.
However, there are generally limited, if any, tax advantages from using a family trust. If a trust is relevant for you, it is important that it is set up for the right reasons and managed properly, with minutes, resolutions, accounts and documentation kept up to date.
7. Have fun. Have discipline and patience.
It is important to have fun and celebrate along the way. There is no point saving everything for the future and not living now. But there is a balance.
We regularly remind people to celebrate milestones. Paying off the mortgage. Reaching a particular investment level. Hitting a savings goal. Those moments matter and should be acknowledged.
At the same time, you do need discipline. Achieving financial goals doesn’t usually happen because of one big event. It happens because of regular saving over a long period of time.
While it would be easier if we all won Lotto or received a large inheritance, the reality is that most people who reach retirement in good shape do so through good old-fashioned hard work and consistent saving.
And it does work.
One of the reasons KiwiSaver has been so effective is that the money comes out before you see it. You don’t really notice it not arriving in your bank account. When we meet with people each year, we often work on gradually increasing how much they are saving. It might only be an extra $50 a month. On its own that doesn’t feel like much, but when people look back at their retirement savings analysis a few years later, they can clearly see the difference it has made.
As you get closer to retirement, this is the time to become more aware of how much you are spending, and whether that lifestyle will be sustainable once you stop earning a regular income.
Where possible, upgrade vehicles and appliances, do the maintenance and touch-ups to the home if you plan to stay there long term, but try to do these things from cashflow rather than dipping into investments.
Once you stop earning, it becomes harder to adjust spending on the fly. That is why awareness and small decisions made earlier can make a big difference to how comfortable and secure retirement feels.
8. Seek good advice – If it looks too good to be true it usually is.
If it looks too good to be true, it usually is.
Of course we are going to say this, because it is what we do. But over the years, we really have seen the difference good advice makes.
A good adviser lives and breathes what is happening in the investment, insurance and financial planning worlds. We follow trends, watch where problems tend to emerge, and keep an eye on legislative changes that can have a real impact on people’s lives and finances.
Because we work with many clients, we develop a feel for what is realistic and what isn’t. That experience matters. It means we can usually tell early on whether a goal is achievable, and we can also model different options to test what might work better in practice.
Experience also brings perspective.
Between us, we have more than 80 years in the financial industry. Over that time, we have seen some very good investments, and some very bad ones. We have learned lessons the hard way as well. Those lessons mean we are much better at spotting where the risks really sit, even when something looks attractive on the surface.
One of the most important questions we ask is not just “how do you make money from this”, but “how do you get your money back out”. That is where many poor investments and scams fall over.
Which brings us to a simple rule we come back to again and again: if something looks too good to be true, it usually is. No matter how convincing the salesperson is, no matter how polished the presentation sounds, and no matter how urgent they make it feel.
Good advice isn’t about chasing the next big thing. It’s about helping you make decisions that stand up over time.
9. Regularly review your plan
If the only two steps you ever take are setting your goals, and regularly reviewing your plan, you will already be ahead of many people who haven’t done even that.
The reason regular reviews matter is simple. Things change.
For many people, life changes frequently between the ages of 25 and 45. Careers shift, relationships change, children arrive, income moves around. After that, things may settle a bit, but changes still tend to happen every few years right through to retirement.
Just as importantly, financial solutions change all the time.
Insurance products evolve. Investment options change. KiwiSaver providers come and go, and performance moves around. Every year there are new products, updated policy wordings, fee changes, and legislative changes that can affect outcomes.
We often meet people who did absolutely the right thing at the time. They set up insurance, superannuation or investments based on what was available then. The problem is not what they did. The problem is that things didn’t stand still.
Locked-in superannuation that no longer suits. High-fee investments that have underperformed for years. Insurance policies that cost more than newer options might today. KiwiSaver managers that consistently lag their peers.
None of that means a bad decision was made at the time. It simply means it hasn’t been reviewed.
Your financial plan should be checked regularly to make sure the pieces are still right for you and still working the way you expect them to.
As a guide, a full review every couple of years is sensible. If you work with an adviser on an ongoing basis, that review is often annual. At the very least, plans should be reviewed every five years.
Regular reviews help you stay aligned with your goals, adapt to change, and keep your money working for you over time.
Moneyworks NZ Ltd
P: 0800 225 621
E: contact@moneyworks.co.nz
7c Hall Street, Cambridge 3434
Licensed Financial Advice Provider - FSP 15281
Regulatory Information: Moneyworks is a Licensed Financial Advice Provider (FSP15281), and AML Reporting Entity and is supervised by the Financial Markets Authority.