Financial wellbeing tips for 2022

 

Having had more than a decade of steady (and at times spectacular) growth in the value of property and stock market investments, low interest rates, low (official) inflation, and low unemployment, 2021 has brought several nasty surprises.

Inflation has made a dramatic return. Interest rates are rising. Access to mortgages is getting harder. Property investments are subject to a less benign tax treatment. Stock markets have become more volatile. The COVID pandemic continues to frustrate policymakers the world over.

The world is truly a messy place right now, so what can you do to prepare for whatever 2022 may bring?

Know your numbers

In good times, a lack of knowledge and attention to the details is often masked by rising investment values and easy access to credit. As the great Warren Buffett said "It's only when the tide goes out that you discover who has been swimming naked".

So right now it is more important than ever to know your numbers. What do you earn and what do you spend? Very few people that I have worked with over the past twenty years actually know what they spend each month.  In preparing to deal with greater financial pressures, such knowledge is vital.

Suggested holiday reading (or audio book) on the subject would be the classic "Rich Dad, Poor Dad" by Robert Kiyosaki. The key premise being: it's not what you earn it's what you keep that matters. Most people spend their income on things that drain more money (buying another car and so on) in other words: liabilities. Whereas the route to financial freedom lies in acquiring assets that increase your income instead.

There is no longer the need to keep every receipt or trawl through bank statements, in order to know your numbers. There are several online tools that can help, taking feeds from your bank accounts which you can then categorise and build a powerful picture of your spending month to month. One such tool is PocketSmith.

Fix your mortgage rate as soon as possible

New Zealand is leading the world in raising interest rates faster and more significantly than anywhere else. You can debate the wisdom of this but you must still prepare for it.

Economist Tony Alexander estimated in his October report that those with mortgages should prepare to be paying rates 2.5% higher than they were in April, by October 2023.

Looking back at rates then, I estimate that a 2 year fixed rate averaged around 2.65%. So that would mean an average of 5.15% by late 2023.

When they hear things like this, many people shrug it off: "It's only 2%" and perhaps adding "that's less than inflation" or "less than my house value increases" or "less than the growth in my Kiwisaver".

But really you have to look at the effect on your monthly costs. 

For example, if you had a mortgage of $500,000 with a 25 year term, back in April you were paying approximately $2,281 per month in repayments. 

If Tony Alexander is correct, then the same mortgage in October 2023 would have monthly costs of $2,967. That's a 30% increase. What impact would that have on your monthly budget?

Many two year term rates are already over 4.3% per annum and the Reserve Bank Governor still plans a number of further increases in the base rate. 

The Official Cash Rate currently stands at 0.75% and is predicted to reach 2.6% by the end of 2023 (and rise further into 2024).

So as things stand the rate rises have only just begun. 

It is therefore entirely possible that Alexander's prediction significantly underestimates the extent of the rise in mortgage costs to come.

For those whose fixed terms are ending in the next year or so, it may be worth discussing the cost of breaking and re-fixing your mortgage rate sooner rather than later.

Pay-off short-term debt

As always if you have a credit card try to ensure that you clear any balance monthly. 

Carrying a balance entails enormous overall expense. 

As a simple example, a balance of $5,000 on a card with a 19% APR, paying off $200 per month would lead to a total repayment cost of $6,415 over almost three years.

Have an emergency cash fund

Prudence dictates that you should always have access to cash in case of unforeseen expenses or perhaps redundancy. 

The rule of thumb is to have between three and 6 months' salary or expenses in cash at all times. 

If you are young with no dependents or debt, then three months should be fine. If you have a family and a mortgage then six months is more appropriate.

Don't forget to invest regularly 

The simplest and often cheapest way to do this is via a Kiwisaver plan.

I am continually surprised by the number of people who have a plan but do not contribute to it at all.

Firstly, if you don't then your employer doesn't need to either. 

If you contribute from your salary then they must contribute at least an additional 3% into your plan.

Secondly if you pay in at least $1,043 per annum, the Government will add an additional $521.

Someone starting a plan at aged 30, earning the average income ($56,000pa), contributing 3% (matched by their employer) till retirement, focusing on equity investments (rather than cautious) averaging 6% growth per annum, could expect to have a fund at retirement of almost $400,000

You'd probably enjoy pay rises over this time as well, meaning that the total would be much greater.

These are truly uncertain times.

This means that knowing your numbers and having a proper financial plan has never been more important.

For those who are interested in discussing this further, please do not hesitate to contact me

Dunotter disclosures

Disclaimer: This communication is purely meant as information for general interest. It is in no way to be taken as financial advice or relied upon in any way for investment decisions.