Coping with a cash surplus

It’s comforting when someone else tells you what to do with your money.

That’s why mortgages can be such comfortable companions in people’s lives.

But there comes a time in every homeowner’s life when PMT may strike.

That’s ‘‘post mortgage tension’’, a form of stress brought on by suddenly having to make decisions about what to do with the disposable income you suddenly have available.

There’s a similar condition which may strike KiwiSavers when they attain the age 65.

It’s called OCD. That’s ‘‘Options Confusion Dysfunction’’ characterised by similar feelings of panic about where to invest their newly-available funds.

Clearly, neither PMT and OCD are real medical syndromes.

But I think my made-up maladies capture real feelings of stress that can arise when big money choices have to be made.

I’m going to focus on PMT.

GOLDEN RULES

Do your planning Do your learning Be ready to cope with more financial freedom

When there is suddenly a surplus of money, suddenly you have to choose what to do with it. That’s scary.

When a frustrated EU decided to find out about why people make such bad investment decisions, it spent a large quantity of euros producing a report called Consumer Decision-Making in Retail Investment Services: A Behavioural Economics Perspective.

It could have been called ‘‘Why people make bad investment decisions’’.

The two biggest issues it identifies is fear of monetary loss, and ignorance.

Sufferers from PMT need to get over the fear, and the ignorance.

A short cut is to pay someone else to help, namely an authorised financial adviser.

They will help you set: a) your goals, and b) the strategy for achieving them, including how much you need to be saving and into what.

If you want to be self-led, you still need to work out a) and b).

This includes your ‘‘asset allocation’’ namely how much of your money you want in cash, bonds, shares and property, including how much in New Zealand assets, and how much in overseas assets.

‘‘When there is suddenly a surplus of money, suddenly you have to choose what to do with it. That’s scary.’’

You’re not really in new territory.

Before the mortgage was gone, you were investing in a mix of cash, shares, bonds and property, and perhaps in your own business.

You were already saving into KiwiSaver and the bank, and may have had an investment property or two, and a few direct investments like electricity and AMP shares picked up along the way.

Now is the time to direct each month’s surplus income into the assets that give you the diversification you want, and the best long-term risk-return you can manage.

You’ll also want to think carefully about how you save it. KiwiSaver funds provide instant diversification, but do you really want to be locking away even more money until the age of 65?

The best way to avoid either PMT, or OCD, is to become financially literate and capable now, and developing your a) and your b), so when the heady moment comes, you know what you’re going to do.