We hosted a "Money Matters" webinar with Liz Koh, a money expert from Enrich Retirement, to answer some of your most pressing questions about money issues. Liz has been a very popular guest on our previous webinars and in this webinar, she discussed many of the current money issues of the day like the state of the economy, the impact of high interest rates, how to manage your money, how to pay off debt, how to manage your mortgage, KiwiSaver, property investment, retirement planning and much more. You can watch the full webinar here.
In this blog post, we asked Liz to answer all the questions from the webinar, so take a look below.
The economy moves in cycles – from boom to recession and back again. During a boom, there is high economic growth and a low level of unemployment but there can also be high inflation.
Recessions are characterised by low (negative) economic growth, low inflation and higher unemployment. Cycles can be triggered by any number of events – an oil crisis, a war, an increase in demand for our exported products and a whole range of other things.
The challenge for policymakers is to smooth out the highs and lows and create a stable economy. Controlling interest rates and the amount of money in circulation are the two principal tools for managing economic stability. Changes to both are in the control of the Reserve Bank.
To slow an economy down, interest rates are raised and/or the amount of money in circulation is lessened. To stimulate the economy, interest rates are lowered and/or the amount of money in circulation is increased. However, due to lags in the economy, it is not easy to judge the degree to which interest rates and the money supply should be changed.
When COVID hit, a recession seemed highly probable and as a result, interest rates were lowered and the money supply was increased to boost the economy. However, the economy became overheated, resulting in high inflation and worker shortages. To slow it down again, interest rates were increased and the money supply tightened. A slower economy reduces the demand for labour and can result in increased unemployment as well as lower inflation.
When money is tight, it is very important to do a budget and look at cutting out unnecessary spending. The aim of your budget should be to spend less than you earn (in other words to save). The best way to save is to transfer an amount each payday to a savings account. If money is tight, start with a small amount and gradually increase it as you get better at budgeting and as your financial situation changes.
There are two key areas of spending to focus on – food and non-essential items. Food is one of the biggest items in any household budget – second only to your rent or mortgage. Significant savings can be made each week by setting a limit on how much you spend on food. For guidance, refer to the University of Otago annual survey of food costs which shows what an average household spends here.
It is also important to take a look at how much is being spent on non-essential items such as coffees, lunches, gifts, entertainment and so on. The easiest way to control this type of spending is to have a separate ‘pocket money’ account that covers these items and to pay a fixed amount per pay into the account. If you have a partner, each of you should have your own account.
In order to pay off your mortgage faster, you first need to be able to save money each payday! See the answers to the previous question for tips on how to do this. Part of your mortgage can be either a line of credit or an offset account.
If you are not sure what these are, please talk to your bank or mortgage broker. Both of these require a floating interest rate. Floating interest rates are generally higher than fixed rates and so the amount of your mortgage that is floating should be limited to no more than the amount you can save during the period of your fixed mortgage.
The amount of your mortgage which is not floating can be fixed in one or two tranches. Each payday, transfer your savings to the line of credit or offset account. Save as much as you can in the knowledge that, if you need to use the savings you can readily withdraw them to your everyday account.
Once the fixed part of your mortgage becomes floating, take some of the savings from your line of credit or offset account and pay off part of the principal before fixing it again. Then focus on building up your savings again. Keep repeating these steps until you have paid off your mortgage.
Another tip is to make your mortgage payments fortnightly rather than monthly in order to reduce the amount of interest you are charged. You can read more about this topic here: https://enrichretirement.com/how-to-pay-off-your-mortgage-faster
It is usually best to pay off debt than to invest. Paying off your mortgage in effect gives you a guaranteed tax paid investment return equivalent to the interest rate on your mortgage. Unless you are you sure of receiving an investment return of greater than this from KiwiSaver, your focus should be on paying off your mortgage faster. However, make sure you are putting enough in your KiwiSaver to get your tax rebate and employer contributions.
It is important to have a diversified investment portfolio. Just make sure that the KiwiSaver fund you have selected has the most appropriate risk profile for your circumstances. Keep in mind that your funds will be invested for a long time in retirement and you will need an investment strategy that keeps ahead of inflation, so don’t be too conservative. Seek advice from a financial adviser on the choice of fund for your KiwiSaver. You can read more about diversification here: https://enrichretirement.com/diversify-diversify-diversify/
It is a good idea to have money in the bank to cover your spending needs for the short term (say 2-5 years), however bank deposits are not suitable for long term investing as the investment returns don’t keep up with inflation.
Your funds should be invested in accordance with your investment time frame. When will you want to spend the money? If you don’t need to access the money for ten years or more, choose a diversified investment fund which emphasises growth investments (shares and property).
Growth investments are volatile, however if you are prepared to stay invested for a long time, and your investments are diversified, you can achieve a good return with an acceptable level of risk.
If you plan to spend the money in the short term, invest it in stable investments such as bank deposits. If your investment time frame is 5-10 years, choose a balanced diversified fund that has a mixture of growth investments and stable investments.
You can take a course on how to invest for retirement here: https://enrichretirement.com/all-courses/. Please note to enroll to these courses, you will need to be a Premium Member at Enrich Retirement. Remember, as a HealthCarePlus Member, you can get a 20% discount, click below to learn more.
There are websites, such as www.interest.co.nz, which enable you to compare bank term deposit rates. Keep in mind that higher interest rates usually mean higher risk and you should also check the credit rating of the bank. For a large sum (say $50,000 or more), consider splitting it into several deposits with different maturities. That way, if you need to access some of the funds earlier than expected you won’t need to pay penalty interest on the whole amount. You will also spread the risk of what interest rates will be in the future when it comes time to reinvest.
If you are under the age of 65, you will not be able to withdraw your KiwiSaver funds to pay off debt unless you can demonstrate hardship. If you have other investments, or if you are over the age of 65, it would be a good idea to get rid of your debt. A financial adviser or financial mentor can help you with this. For a list of free financial mentors, go to moneytalks.co.nz.
All financial advisers, including bank advisers, are subject to stringent regulations and a Code of Conduct. Your adviser should put your interests first.
You can read more about getting rid of debt here: https://enrichretirement.com/category/get-rid-of-debt/
Property investment is a great way to grow your wealth over the long term. So long as you are prepared to be a long term investor, there is never a bad time to buy property. Just make sure you have enough cashflow to cover the ongoing expenses. If you are not able to cover the expenses (for example, if interest rates rise or rents fall), you may be forced to sell the property and if this occurs at a time when house prices are low, you could lose money.
It is a good idea to learn about property investing before buying your first property. You can do this by reading, joining social media groups, attending seminars and talking to property investors about their experiences.
You can read more about property investment here: https://enrichretirement.com/category/property-investment/
The answer to this question depends very much on where you live and what kind of retirement you envisage for yourself. Do you want to do lots of travel? Do you plan to live a frugal life or do you want to live your retirement in luxury? Massey University publishes guidelines on how much you will need at the time you retire.
You can work back from here as to how much you will need at age 50 by subtracting off the amount you can save between now and then and allowing for investment returns. You can also find a retirement calculator here.
It is unlikely you will be able to safeguard your children’s inheritance in this situation. You will need to meet limits on your assets and income in order to receive a rest home subsidy. You can read more about paying for residential care here.
To watch the recording of the webinar, please click here. If you found the webinar engaging, and you are interested in other courses and webinars from Liz, then consider to be a Premium Member at Enrich Retirement. It's easy to join. All you need to do is click on the banner below. It will take you to Enrich Retirement page where you can sign up to be a Premium Member.
And remember, as a HealthCarePlus Member, you can get a 20% discount, click on the link below to find out more.