Money worries freak Kiwis out

Many New Zealanders are living precarious financial lives, but there are steps people can take to put them on a more stable footing.

A recent survey by Cigna indicated around half of respondents worried about how they would make ends meet and keep a roof over their families’ heads if they lost their income.

Its findings echoed research done by the government-funded Commission for Financial Capability, which rated many people’s finances as being so sick they were either in ‘‘intensive care’’ or ‘‘on the ward’’.

Stabilising family finances can’t happen overnight, without the aid of a big lottery win.

But financial adviser Liz Koh says people serious about improving their finances can make progress by focusing on eight key things in the money lives, which over the course of months and years can turn their money lives around.

It’s far tougher for individuals and families without stable work, or earning too little to generate a surplus.

They face an extra step, said Koh, which is finding more stable, and more lucrative work.

1: Spend less than you earn

‘‘Unfortunately, the first step is where most people stumble,’’ Koh said. ‘‘Once you’ve cracked it, the rest is relatively easy. Spending less than you earn is a matter of mindset.’’

2: Join KiwiSaver

KiwiSaver increases long-term wealth, and should improve the quality of your retirement. ‘‘Employer subsidies and tax credits mean that you will achieve a high rate of return on your money with a high level of certainty,’’ Koh said. KiwiSaver funds can also be accessed in times of financial hardship, making it a last-ditch emergency fund.

3: Pay off short-term debt

‘‘Paying off debt gives a tax-paid rate of return on your money which is the equivalent of the rate of interest on the debt,’’ said Koh.

Debt saps your income, reduces your ability to save money and leaves you at the mercy of lenders should you lose your job. ‘‘The higher the rate of the interest, the better off you will be by getting rid of the debt.’’

4: Set up an emergency fund

‘‘The best way to avoid getting into debt is to set up an emergency fund to cover unexpected loss of income through illness or job loss, or unexpected expenses such as car repairs, whiteware replacement or medical and dental bills,’’ Koh said. Ideally your fund should be the equivalent of around three months’ living expenses.

5: Buy at least one house

Owning a home remains a key component to long term wealth. ‘‘By the time you retire, you will be financially better off if you have a mortgage-free home to live in.’’

6: Pay off your mortgage

‘‘Paying off your mortgage gives you a guaranteed, tax-paid rate of return on your ‘investment’ equivalent to the rate of interest on your mortgage,’’ Koh said.

‘‘If you have surplus cash of your own, it makes sense to place a higher priority on paying off your mortgage than on using this cash to set up an investment portfolio for which the returns carry risk, unless of course you are investing in KiwiSaver or a subsidised superannuation scheme.’’

7: Set up a savings and investment portfolio

Once the mortgage is gone, there’s a bigger surplus to invest. Investing puts your money to work earning interest and dividends that grows your wealth.

‘‘Saving for your retirement should become a priority once your mortgage is paid off,’’ Koh said.

People in this blessed position should have two streams of saving.

‘‘One for retirement and one for your shorter-term goals such as travel or home renovations. Working out how much you will need for your retirement will help you achieve balance between the two.’’

8: Protect your wealth

Insurance can reduce the risk of personal catastrophe destroying your wealth.

‘‘It is easy to overlook the risk of losing the wealth you have created,’’ Koh said.

‘‘Risks include loss of income through illness, loss of assets through disasters such as fire or theft, relationship property claims and business failures, to name a few.’’