November 22, 2021
We were all hoping that 2021 would hold better things than 2020 … and thanks to Covid, we also all know how that turned out!
If you’ve reached the end of the year having worked really hard - but not much to show for your mahi, you're not alone. Uncertainty can make it more difficult to make decisions, among many other things!
While by now we know we can't rely on next year being blissfully Covid-free, there are ways to make 2022 more financially fruitful.
Start with a performance review
It's important to regularly assess how well your current investment settings are serving you. That would include reviewing your KiwiSaver, any managed funds, index funds or direct shares you may hold, perhaps digital currencies, investment properties or other assets. What have they returned over the past year? What fees are you being charged? Are those returns acceptable amid high inflation? What about the impact of rising interest rates, or regulatory changes - what impact will they have on the cost of holding an investment property and does that change whether the current property remains one you should continue to hold?
Reassess your investments - and your risk profile
Higher inflation tends to result in investors chasing a higher return, because if their returns don't outpace inflation then the value of your money is declining in real terms. However, before you race off in search of the best return you can find, you need to be confident that you have the stomach, the time and the resilience to tolerate the higher risk that strategy entails. Will you sleep soundly, or worry all night long if there's a market correction? What would losing some of that money mean for your financial situation? What are the chances you'll need that money next year, in 5 years, or tomorrow? You need to be clear on when you'll need to call on that money, as that impacts your investment horizon, which needs to inform your investment plan. Ignore or underplay your risk profile and inflation could end up being the least of your worries.
The power of finding the fritter
If you're chasing the best investment return, don't overlook the gains you could make - risk-free - by focusing on fine tuning your own financial management. By all means maximise your income and look for great investment options, but don't let that lull you into a false sense of security - if you still don’t have anything left over at the end of the month, you’re still poor! We don't tend to like to admit it, but our own financial behaviours do matter! Determine what's important to you and prioritise those things - that will allow you to identify the fritter and repurpose that money. Fritter can amount to 15% of your income - which is a great rate of return if you can find it! Luckily, fritter often isn't about cutting the things you love - but determining when more of those things cease to make you any happier, and finding inefficiencies in tax and mortgage structures, late payment fees, unarranged overdrafts, outdated insurance policies and credit card interest. We all pay a degree of 'lazy tax', too - where better deals are available, or we no longer use memberships, but we just haven't gotten around to shopping around or hitting 'cancel'.
Develop systems to do the heavy lifting
Daily life erodes - and sometimes completely exhausts - your willpower, and that's how even the best laid plans come unstuck. For that reason, you need robust systems to make sticking to your plan easy or automatic. For example, setting up a separate account for everyday food spending, or withdrawing the weekly budget in cash, can help you clock when you're overspending. Using a weekly meal kit service can help reduce the number of nights you resort to takeaways. Setting up your bills to be paid by direct debit can help ensure you always get the prompt payment discount. Having a parking app can help you top up your parking when your meeting is running over - so you don't end up with a hefty parking fine.
Determine your mortgage strategy
We all know that interest rates are on the rise - and if you've bought a property in the past 10 years or so that might be a bit scary, as you'll be experiencing it for the first time. You need to consider whether you need the lowest rate possible to allow you to make progress right now - in which case a short term rate might be appropriate - or whether you want to trade the lowest rate for more certainty, in which case you might try fixing it for longer. But try not to get too caught up with interest rates in isolation - remember, the rate at which you repay your mortgage is what will make the most difference to how much interest you pay in total. That's why you need to have a plan in place to repay it faster than the standard 25- or 30-year term. Rates are still low by historic standards, so if things are already tight, we have other problems to fix – and need to fix them quickly before your current fixed rate expires.
If you want to get ahead - you need to work on your head! The goal is to build a wealth mindset, where you invest today to create a better tomorrow. In our experience, few things will switch up your mindset faster than seeing results. To clock the results, you need to be clear on what the goal is, what milestones you need to be hitting on the road to reaching that goal - and then you need to measure your progress towards each milestone, and crucially - celebrate those wins! Creating momentum is key - and that little dopamine hit you get from hitting your milestones will provide you the encouragement you need to keep it up.
Hannah McQueen is a financial adviser, chartered accountant, personal finance author and the founder of enable.me – financial strategy & coaching. To book an initial consultation with an enable.me financial coach, click here.