9 steps to financial success
1. Set Clear Goals
Simply, if you don’t know where you are going, it is very difficult to get there.
You are likely to have goals in your work (they may be called Key Performance Indicators), and if you participate in sport, your goals might be to win a trophy or a competition, or just to get faster on that run than you were last week.
Managing your money is no different. You need to work out what you want to achieve. And those goals should have a time frame and dollar value associated with them.
For most of our clients, the big goal is having enough money to have a financially comfortable retirement. We can work out how much money that will require, and when, and then work backwards to work out how much needs to be saved and by when.
You might have a goal to repay your mortgage, to save for a trip or a new car, or to provide a certain level of education for your children.
Of course, with the realities of life, those goals regularly change. Our spending habits change as we go through the different stages of life, we may decide we want to work for longer than we initially thought we would because we are enjoying ourselves.
As a consequence – as outlined in step 9 – your goals and your plan need to be regularly reviewed to keep up with those changes.
2. Control spending and eliminate high interest debt
When you first start earning money, or get a big promotion, it is exciting to be able to spend money that you didn’t have before. And part of Moneyworks philosophy is that you should always celebrate. But it is important to know when to stop celebrating and get back on track to achieving your goals.
Controlling spending doesn’t mean never spending. But 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 do want to have control over your finances, you should set rules for yourself about how much you can spend on those vices and luxuries.
One of the best ways of controlling your spending (and a number of our clients do this), is to have different ‘jam jars’ – well actually, bank accounts for different reasons. Now that there are bank accounts with no monthly fees available – this is a very achievable solution.
Put aside a certain amount each pay for travel, or for a particular goal. If you have to ‘raid’ that account, it means that you don’t have the balance of spending quite right yet, or if it really is an emergency, try and replace the money as soon as possible.
Eliminating high interest debt should be the first step when you are developing your financial plan. You should not owe any money on your credit cards past the due date. The high interest rates that are charged can keep you in a cycle of having no money, if you don’t repay the balance in full each month.
Borrowing money on hire purchase to buy a vehicle or TV is also a trap. The best way to buy new things is to save up until you can afford to purchase the item. But if that is not possible, look around for interest free cards and finance.
Make sure that you read the fine print, once the interest free period ends, you could end up paying very high interest rates, so make sure that you repay the loan before the interest free period ends.
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 work.
It is important to know how to compare the assumptions in any articles that you are looking at, and make sure that you are comparing like with like.
The first step is to start thinking about investment returns after tax, after fees and after inflation.
Inflation means that your money will be worth less and buy less in the future, as prices go up each year. Taxes reduce the return to you as you legally have to pay taxes. For many of the investments that you will use to get you to and through retirement, you will have to pay fees. It is important that you understand what your returns are after these three items.
For our clients, Moneyworks advisers always talk in after tax, fees, and inflation returns when we are doing our retirement savings analyses, and working out how long their money will last them. These returns range from 1.00% to 2.50% - and each return will be personal to each client as it will depend on their tax rate when they are earning and then when they are no longer earning.
The second step is to understand how much different an extra 1.00% (after tax, fees and inflation) return can make to how long your money will last for.
The table below shows you how much difference 1.00% per annum will make if you have $50,000 invested 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 have to take to get those returns.
For example, if you currently invest in a term deposit for 3.50% - there are no fees payable, but if your tax rate is 33.00% - your after tax return is 2.35%. Long Term Inflation is around 2.00%. Therefore, a term deposit will give you an after tax, fees and inflation return of 0.35% - not even on this table. (If your tax rate is 17.50% - the after tax, fees and inflation return is 0.68%).
What this means is that you will have to save more money to provide for your retirement as your money won’t be working for you, than if you get extra returns from your investments.
On the other hand, to get a return of 4.00% after tax, fees and inflation, the total actual return that you would need to get (at a 33.00% tax rate) is actually 10.80% (on average each year). This is a very aggressive and high risk profile – we only have one or two clients that fit into this category.
If you are a Balanced investor, then you should be looking at a return after tax, fees and inflation of around 2.00%pa - 2.50% pa.
Responsible Investing, Ethical Investing, ESG factors or Sustainable Investing
Helping our clients to understand that their investments are 'not doing bad' is important to us at Moneyworks. Research studies are increasingly showing that businesses that care about the Environment (E), Social (S) and their Governance (G) (ESG), are able to increase their returns to investors over time.
ESG or responsible/sustainable/ethical investing is a different approach to the historic focus on short term profits at all costs, and along with our clients, we care that the businesses that we invest in care about these factors.
Moneyworks and our advisers are members of Responsible Investment Association Australasia (RIAA) and are all Certified Ethical Financial Advisers through RIAA.
We look forward to sharing our knowledge, understanding and learnings with you, along with a personalised ethical investment analysis in your financial plan and annual reviews.
4. Spread your investment risk (or diversification)
Or – don’t put all your eggs in one basket.
To get your money working for you, you need to have different investments, asset types and different investment providers. Your KiwiSaver fund will be diversified in the ways that we have outlined below. (unless you are in a particular asset class like International Equities).
Three main asset classes:
Fixed Interest/Cash
Equities
Property
Each of these asset classes will perform differently in different markets, so it is important to have an exposure to each type. How much of each one you will have in your investment strategy will depend on your risk profile.
‘Fixed Interest/Cash’ includes term deposits, but also includes listed bonds, government stock, bank bills and other types of fixed interest.
‘Equities’ is just a flash word for shares - where you own a proportion of the company.
‘Property’ is not just your home (which we don’t include as an investment as you have to have somewhere to live), or other residential investment properties, but also includes investments in office blocks, retail (shops), wholesale (warehouses). Making sure that you can access your money when you want, we use managed funds and listed property investments, so that you know that you can move your money easily and get access to it when you need it.
Diversify between New Zealand and Overseas companies. The Gross Domestic Product of New Zealand is worth only 0.14% of the total world GDP. Our financial markets are similarly just as tiny. By limiting your investments to only New Zealand, you are limiting your returns from companies that are truly global (and that you might use in your day to day life like Microsoft, Apple, Lululemon, Nike) and have more growth potential.
Use different fund managers. A fund manager is someone like Milford, or ANZ, or Fisher. These might be names that you have heard of. There are many fund managers (or investment managers) available for you to invest in, but very few offer ‘retail’ investments in New Zealand. The best way to invest with these outstanding fund managers is through a WRAP (Wealth Retirement Accumulation Platform) through a financial planner.
Fund managers live and breathe their investment research and investment decisions. They visit companies to find out what is happening, they often know about things that have happened before the media finds out – if they are good at doing their research.
Each fund manager tends to have a niche that they are specialists in. For example, Capital invests in global shares, Nikko AM NZ is a leader in New Zealand Fixed Interest. Therefore, the skill is in understanding what the fund managers are doing, how they work, what systems, processes, checks and balances they have in place.
As a team, we spend many hours visiting our existing and potential fund managers, participating in webinars, reading research and documentation (as well as the rest of the research that our team does), to work out which are the most suitable fund managers to recommend to our clients. Our fund managers are monitored consistently so that we are quickly alerted to any glitches or changes.
5. Protect your assets and income
This is the role of insurances in your financial planning. The kinds of insurances that you will need will change over your life, when you are younger, with debt and financial dependents, you are likely to need life insurance cover, as well as more complicated ‘living insurance’ covers.
If you have no dependents, you may not need any life insurance, and our goal with our clients is for them to build up financial assets, to start reducing the level of life insurance cover in the years prior to retirement with the goal that there is no need for life insurance by the time that they retire.
This is a list of the main insurances – listed in order of priority in our opinion:
Fire & General Insurance
Income Protection and/or trauma insurance
Life insurance
Health/Medical Insurance
Funeral Insurance
Redundancy Insurance.
Most people are aware of the need for Fire & General insurance – if you have a mortgage, you will be legally required to have house insurance. You may also have car insurance, home contents insurance, boat insurance, professional indemnity or public liability insurance. This is a specialist area of insurance that Moneyworks don’t operate in, but we can refer you to a top quality insurance broker.
Some general pointers – you generally get what you pay for, cheapest is not necessarily the best. Secondly – make sure that you have your house and house contents policy with the same insurer. The policy documents from different insurance companies can have different wordings. One company might say that your floor coverings are part of the house, another might say they are part of the house contents. If your house burns down, you will want to make sure that everything is covered. By having the two policies with one insurer, you have a higher degree of certainty that they will be covered.
Income protection and/or trauma insurance
These are also called ‘living insurances’. They pay out when you are still alive, but can’t work because of ill-health or injury. For more information, go to our articles here. For our clients, we recommend a combination of these insurance covers.
Not everyone can get income protection insurance, a number of occupations are not able to be covered because of the nature and risk of the work or of the income.
To have income protection insurance cover, you need an income to protect. These policies will pay up to 75% of your income (generally based on the highest consecutive 12 month income in the last 3 years), if you are unable to work because of illness or injury (not redundancy).
The cost of the income protection cover will depend on the following: Your
Age - the older you are, the more expensive the policy will be
Male/Female – female income protection cover tends to be more expensive than males (whereas male life insurance cover is generally more expensive – is it because men don’t go to the doctor until it is too late?)
Occupation – the more active and hazardous your work, the more risk the insurer has so your cover will be more expensive. A builder will be more risky for an insurer than an office worker.
Income - the higher your income, the higher the benefit needed, therefore more risk to the insurer, so the premium will be higher, as the payouts are likely to be higher.
Health - (there might be extra payments required as a loading, or a pre-existing condition might be excluded)
Wait period - (4 weeks, 8 weeks, 13 weeks, 26 weeks). This is how long you can wait before you get a payment. To work this out, you need to work out how much sick leave, annual leave you have, how much you have saved that you can live off and how much other income is coming in to your household. The longer you can wait, the lower the premium.
Benefit period (to age 70, to age 65, 5 years, 2 years) This is how long the benefit will be paid after you become sick. The longer the benefit is, the more expensive the policy is. However, think carefully about taking shorter benefit periods, if you are off work for 2 years, are you likely to be going back to work? You don’t want to save a few dollars and then find that you don’t have any income after 2 years, and you still can’t go back to work.
There is a big difference in the quality of income protection cover, and Moneyworks uses an independent research company to assess the quality of cover, as well as our own ongoing research. Your income protection insurance will work in conjunction with ACC in New Zealand.
Trauma insurance protects you for a lump sum that you choose. This can be between $10,000 and several million dollars. If you are then diagnosed with any of the conditions that the policy covers, you will get an insurance payout.
There is a big difference in quality of cover, from basic policies that cover 6-10 core conditions, but with wording that is difficult to claim on, to extensive policies that cover a number of conditions with wording that is easier to claim on.
It is important that your policies keep up to date with changes in medicine and the environment. We recommend that our clients use products from insurers that have ‘policy wording passbacks’ to make sure that their policies continually stay fit for purpose.
Life insurance is something that you have in place for people you love. While there are some differences in quality of life insurance, most products are similar and if this is the only insurance that you are going to have in place, the most cost effective cover for you is probably the best.
To work out how much life insurance cover you need, you need to calculate the cost for a funeral (about $15,000 these days), how much you need to repay any debt and how much you will need to replace your income for your survivor (if that is relevant. Not everyone needs life insurance and as you build up your assets and get rid of your debt, the level of life insurance that you need will reduce.
Health/Medical insurance
This is a ‘nice to have’ and if you can afford to have it, then we recommend that you do. However, if you only have health/medical insurance and you become too unwell to work, and can’t pay your premiums, the insurer isn’t going to feel sorry for you and continue to pay the premium. This is why we have ranked income protection/trauma insurance higher on this list of priorities.
If you can afford to have health/medical insurance, again there is a big difference in the quality of cover. We meet very few people that get value out of having cover for doctors/prescriptions etc, it tends to be a ‘dollar swapping’ exercise.
Most people can get good value by having major medical and specialists insurance cover. The price will change depending on how much excess you can afford to pay – nil excess will cost a lot more than a $1,000 excess. But again, this will depend on your situation. Moneyworks uses independent research to keep up to date with the features, benefits and pricing of these insurance covers for our clients.
Funeral insurance
If you don’t have a complete financial plan, this may be an option that you wish to have. For Moneyworks clients, we prefer to work with them to set aside funds from their investments to pay for a funeral.
If you want to look at funeral insurance, you might find that full life insurance policy is better quality (we have arranged this for several of our older clients instead of funeral insurance – where is it more relevant than putting aside some of their assets.)
Redundancy insurance
This is a relatively expensive insurance cover and a specialist cover, and you can’t put it in place if you are anticipating that restructuring in your workplace is going to mean that your role will be dis-established. It needs to be in place well in advance, and the benefit is usually only 6 weeks of the insured benefit. For many clients, it is better putting in plalce a full financial plan and ensuring that you have emergency cash in place.
6. Use legal and tax structures to your advantage
Over the years, the tax laws have changed so that there aren’t many benefits from different legal structures (like a Family Trust) to optimise tax.
However, if you are investing, using a PIE (Portfolio Investment Entity) is beneficial to reduce your top tax rate. The tax on a PIE is called the PIR (Prescribed Investor Rate), and is based on your previous 2 years income. If your income has increased over the last two years and put you in a different tax bracket, you can retain your lower PIR rate until you are in the correct tax bracket for 2 full years. In addition, your marginal tax rate may be 30.00% (Income from $48,000 - $70,000) or 33.00% (income above $70,000), but the PIR is only 28.00% for a PIE investment.
For some reason the activity that takes the longest for our clients to do is to ensure that they have an up to date will in place. If you die without a will, you die intestate. This means that your assets will be distributed according to the Administration Act, which may not be what you want to happen with your assets. There are certain rules about who gets how much and in what order. Administering an estate under the Administration Act will also use up money in legal fees. We strongly recommend that you have a will, and that it is up to date.
We also strongly recommend that our clients have Enduring Powers of Attorney in place (at any age). There are two types of Enduring Powers of Attorney (EPA’s), one for Property (where someone has the power to make decisions on your property, like claiming on an insurance policy, selling a property, managing your money) and one for Personal Care and Welfare (where someone has the power to make decisions about your care and support).
You may be familiar with these documents for an elderly relative, but it is important for you as well. Imagine that you are married, you are in a car accident, your spouse dies, and you are in a coma. No-one then has legal status to make these decisions for you, which is why we recommend that you have these documents in place for you as well. If you don’t have these in place, the courts get involved, taking time and money to resolve the issues.
Family Trusts have been popular legal structures in New Zealand, but the value of these is changing. The new Trusts Act 2019 comes in to force in January 2021, changing the responsibilities of Trustees and making Trusts more transparent. There is no guarantee that your assets will be protected in the future against asset testing.
There are valid reasons for having a Family Trust in place (to protect assets against future relationships, to protect assets for a child or family member with a disability for example), but there are limited (if any) taxation advantages for having a Family Trust in place. If a Family Trust IS relevant for you, it is important that you manage it properly, and keep all of your minutes, resolutions, accounts and documentation 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 our clients to celebrate milestones – repaying the mortgages, getting to a particular value of investments. On the other hand, you do need to have that discipline to make sure that you are putting away money to achieve those goals.
While it would be easier if we all just won lotto or got a big inheritance, the reality is that the majority of people achieve their goals and have a good retirement because of good old hard work, regularly saving.
And it does work.
Putting money into KiwiSaver means that you don’t really notice that you aren’t getting it the bank. Every year when we meet with people we work with them to gradually increase how much they are saving to achieve their goals. It might only be an extra $50.00 a month. But when they look at the retirement savings analysis every few years, they can see the difference that it makes.
As you get closer to retirement, this is the time that you need to be more aware of how much you are spending, and whether that lifestyle is sustainable in retirement. Where possible, upgrade the vehicles and whiteware, do those touch up’s to the home if you are going to stay there for a long time – but do them out of cashflow.
It is harder when you aren’t going out and earning money to live off, so this is when you really need to be aware of your spending and make some decisions, to make sure that your investments will sustain you through retirement.
8. Seek good advice – 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 we really have seen the difference. Remember, your adviser lives and breathes what is happening in the investment, insurance and financial planning worlds. We know that the trends are, what the issues are that are coming up, we monitor changes in legislation that will impact you.
We have access to investments that you can’t access directly on your own, and we monitor your financial solutions continually.
Because we work with a number of clients, we have an intuitive feel for whether what you want to achieve is going to be possible, but we also have the knowledge and skill to model out the options for you. Our experience also means that we can suggest options to you that might work better for you.
With our accumulated 80+ years of experience working in the financial industry, we have seen lots of good investments and some bad investments. We have learned about some of these by recommending them to our clients – we have learned from our mistakes. We have the tools to spot a scam, or a fraud, or even the issues with something that does look good (for example, how are you going to make money out of that investment, and more importantly, how are you going to take money out of the investment.)
A golden rule is that ‘if it looks too good to be true, it usually is’. No matter how convincing the sales person on the phone from overseas is….
9. Regularly review your plan
If the only steps that you take are step one of setting your goals, and this step – regularly reviewing your plan, you will be ahead of other people who haven’t even done that.
The reason that you should regularly review your plan is that things change. For many of our clients, their life changes every few years in the phase between age 25 and 45, then around every five years after that until retirement.
But more importantly the financial solutions change continuously – every day there are changes to insurance products, and investment and KiwiSaver solutions.
We often work with people who have done absolutely the right thing in the past and put in place insurances, superannuation and investments, based on what was available at that time.
But things change, locked in superannuation, high fee and underperforming investments, insurances that cost more than if you put in place new insurance today (depending on no significant changes in your health), KiwiSaver managers who are consistently underperforming……
You should be monitoring all these things and making sure that your financial solutions are the best for you and working for you.
You should review your financial plan every couple of years (or annually if you work with Moneyworks on an ongoing basis), but at least every five years. This means that you will keep up to date with trends and you will keep your money working for you to reach those goals.
Moneyworks NZ Ltd
P: 0800 225 621
E: contact@moneyworks.co.nz
P O Box 1003, Cambridge 3450
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.