Benje Patterson looks at 10 ways to kickstart your financial health

Today's guest Top 10 is by Benje Patterson, a senior economist at Infometrics.

As always, we welcome your additions in the comment stream below or via email to david.chaston@interest.co.nz.

And if you're interested in contributing the occasional Top 10 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 10s here.

This Top 10 explores ways of getting into financial health and avoiding debt-traps from spending increases to your home’s ratings valuation.

1. Don’t frivolously spend increases to your home’s valuation.

Households nationwide have recently received notices of changes to ratings valuations. In many cases, these increases have been sizeable, with the average Auckland household now boasting a $1m+ valuation attached to their humble abode.

But this constant chatter about home values is something that bothers me. We talk of how wealthy people have become and forget that many families’ finances are houses of cards built on debt.

Personal finance measures of success should instead be benchmarked on debt-to-asset metrics (i.e. net worth) and whether your income level sustainably supports your desired lifestyle. A recent Martin Hawes’ article sums up this logic succinctly:

“A more valuable house does not put cash in the home owner's pocket ready to spend – much of the increased spending comes from debt.

A more valuable house has not made any difference to their incomes.

Mostly the things which home owners go out and buy are "value losers"; things like cars, appliances and furniture which fall in value soon after they are purchased.

The wealth effect may spin the wheels of the economy, but buying stuff on credit is really a quick road to ruin.”

2. Almost one third of households are worth less than $100,000.

People’s financial health appears a little different when we look beyond the family home and bring other assets, and debt into the equation. Statistics New Zealand estimates showed that the median New Zealand household had a net worth of just $289,000 in 2014/15. Even more interesting from a personal finance perspective are the vast differences between the net worth of different households.

“Five percent of households had negative net worth, and the largest proportion of households (25 percent) had a net worth between zero and $100,000. At the higher end of the distribution, 8 percent of households had a net worth above $1.5 million.”

3. New Zealanders spend more than they earn.

A recent survey by Statistics New Zealand showed that 90% of households say they earn just enough or more than enough income to meet their everyday needs. However, this self-reported measure of income adequacy is not supported by actual numbers on household income and consumption. National accounts data shows that households collectively spent $4.1bn more than they earned over the last year.

“It is not that long ago, though, that we were balancing our books. In 2012, New Zealanders saved a combined $3b between them.

"Household consumption expenditure increased across all categories in 2017, with large increases in restaurants and hotels, transport, and housing and household utilities," Stats NZ national accounts senior manager Gary Dunnet said.”

4. Prior planning prevents piss poor performance.

To succeed in most things in life, you need a plan. A well-thought-out budget is key to adding zeros to your bank balance. It’s easy to do - the folks at Sorted have an easy budgeting tool. If you are not sold already, then consider this result from the Westpac Money Week survey:

“Only one in four New Zealanders have a documented budget, and only one in seven budget further than two months out.

The survey showed that those who did use a documented budget (a tool or app of some sort) had an average of $5,000 more savings and a third more likely to feel financially secure.”

5. Spend your money smarter.

The word budget probably puts a shiver down some people’s spines. But that’s stupid. Budgeting is not about being a tight-arse, instead your aim is to spend money smarter.

After allowing for basic needs and savings, you still need to leave some discretionary funds for spending on the things you value in your world. This money can either be spent on day-to-day treats, or temporarily tucked away for periodic thrills, like a weekend getaway or a new bike.

The trick to allocating spending is getting the best bang for your buck – a balancing act between cost and how much you will enjoy the result.

“Recognize what you value and use your money on that. Or, recognize when spending more doesn't actually give you a "more" experience.

Imagine walking into a wine bar and asking for a recommendation for an easy-drinking red that is sure to please a crowd.

The employee gives you two bottles to choose from: A $25 cabernet and a $10 pinot noir.

Both bottles came with a positive recommendation and both are going to achieve your goals of being versatile and likely able to be enjoyed by a group. You're going to extract the same value and experience from the $10 bottle of wine that you would from the $25 bottle.

Buy the $10 bottle and move on.

You still used your money on something you wanted and you'll still get value out of it. But you also have more money in your pocket than if you had mindlessly chosen the pricier bottle because of whatever story you made up about what it means to "act" rich.”

 

6. A side hustle might dig you out.

No matter how hard you budget, the reality may be that you just don’t earn enough for the lifestyle you need/want. Going cap in hand to your boss might work for a lucky few. Others may like to consider getting a side hustle. Start a small enterprise, become an Uber driver, or rent out the spare room on Airbnb. Many kiwis have a second job:

“About 2.5 million people were employed in the June 2017 quarter, of which 154,200 (6.1 percent) said they had two or more jobs, according to the Household Labour Force Survey (HLFS).

“The majority of multiple job holders tend to be of an age at which they are more likely to have mortgages and dependent children,” labour and income statistics manager Sean Broughton said. “Although financial pressure could be one of many reasons for holding a second job.”

7. Make sure you get an emergency fund.

Sometimes the unexpected happens – the car breaks down, the roof springs a leak, or you find yourself twiddling your thumbs for a few weeks between jobs. For these situations, you need a rainy-day fund. This fund gives you something to tide yourself over, instead of being held hostage by pay-day lender heavies, or withdrawing cash at high interest rates using your credit card.

Sadly, most New Zealanders don’t have savings in case of an emergency. A recent BNZ survey showed that 22% of people have no money set aside for emergencies, while a further 24% have less than $1,000.

“Having an emergency fund can provide peace of mind and help people make better decisions when life doesn’t go according to plan.

 “All it takes is for your car to fail its WoF and you need a new set of tyres and people without anything set aside can find themselves racking up debt quickly, often on their credit cards. For many, it can take a long time to pay it all off and get themselves back on track because of the higher interest rates that credit cards carry.”

8. Insure what you can’t stand to lose.

Anything you can’t stand to lose should be insured. As a young person, your insurance needs will be simpler things like car insurance - just so that pinging the neighbours new BMW doesn’t bankrupt you.

As you get older, and dependents creep in, insuring things like your income and life become important so your kids are supported no matter what. Shop around by all means, to ensure you get the best deal. But don’t leave your future and your kids’ futures to a game of roulette by flying naked.

“When considering getting insurance we need to weigh up the risks of not having the insurance against the costs of buying it. Ask these four questions:

What is the risk I would be insuring against?

What are the chances of it occurring?

What would happen?

How much would it cost?”

9. Take an active role in planning for your future.

It’s 10 years since KiwiSaver entered our lives and since then KiwiSaver balances have grown to $40.8 billion. Surprisingly, with so much money at stake, most KiwiSaver members are very hands off. There were 67,611 new members allocated to a default KiwiSaver scheme in the March 2017 year and only 16,902 default members made an active fund choice.

Such ambivalence leads to question marks regarding whether people are in funds that best suit their stage of life. The Financial Market’s Authority is so concerned they have strongly outlined concerns to the CEOs of default providers:

“We expect efforts and results to improve

We expect the undertakings about addressing the financial literacy of their members, made in their tender for default status, are delivered upon, or updated to something more effective

We want reporting on their broader education initiatives for all members – not only default members – to focus not just on what they are doing, but to evaluate their effectiveness

Their member financial literacy efforts will form part of our ongoing engagement with them through the default monitoring panel, supervisory visits and other meetings

We are prepared to partner with them in behavioural insights trials, to address default member engagement or other challenges.”

10. Financial advisers are mostly marketed towards those with money.

The lack of financial literacy highlighted by the FMA in its KiwiSaver review is a sad reflection of New Zealand’s finance industry. Personalised financial advice is expensive and out of reach of many New Zealanders.

Most finance advisers prefer to only offer their services to those with money to invest. The typical adviser earns their keep by clipping the ticket of what they manage.

A select few advisers shun these purely wealth management focussed strategies, and will deliver personalised financial plans, with regular check-ins, for a fixed fee.  These fixed fee advisers are more accessible for those starting out, but may still be out of reach for those on meagre incomes.

A new start-up, called Sharesies, is trying to get people from all starting points excited about building wealth, and teach people along the way:

“We want to make this generation the most financially literate. Starting with making investing easy — by breaking down the current barriers that stand in the way of investing today. We want someone with $50 to have the same investment opportunities as someone with $50,000.

We have an opportunity to make a real difference to how people manage their money and growing the wealth of everyday New Zealanders. We want our friends and others like them around buying and selling shares, comparing portfolios and giving each other tips to grow their wealth. Getting gratification from spending $20, not just on brunch, but investing in the portfolio sitting in their pocket.”

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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38 Comments

Gareth morgan needs to take note of #1. His comment to Guyon Espiner is that there is still a rort going where owner occupied property values are not taxed. The people who own a single property and live in it are as much victims of the market as wannabe first home buyers and renters. To tax on a change in value will just make them victims of poor Government policies, that have singularly failed the majority of Kiwis.

If however they choose to make use of the change in value by borrowing against it, to the max of that valuation, then they should then be considered for tax, if only to stop them doing something really stupid. I well remember a friend in AK after the 87 crash who was suffering through an ill-timed marriage breakup who told me that if they sold their property at that time they would still owe $50K on it. and Yes he had borrowed against the change in value.

A comment from someone who does not (or want) to understand the policy. The comment that those owning a single property are as much victims as fhb reinforcing the ignorance. Read more.

The suggestion is an interesting one. Just checking my understanding, I think what you are saying is that if you borrow against a rise in value as a means to further some other endeavor, then the capital gain has been realised (as income) for that proportion of the asset's overall value - and hence a rate of tax should apply to the amount of that gain which has been re-capitalised.

Proposition 13 in California worked a bit that way. It was mainly about limiting what we would refer to as rates rises, but another aspect of it was really interesting;

It also prohibited reassessment of a new base year value except for in cases of (a) change in ownership, or (b) completion of new construction... A large contributor to Proposition 13 was the sentiment that older Californians should not be priced out of their homes through high [property] taxes.

https://en.wikipedia.org/wiki/California_Proposition_13_(1978)

It aligns a bit with your kind of thinking, murray86 - in that the new value of the asset is not taxed at a higher rate until such time as the asset is disposed of - and then the new owner pays at that higher rate recognising the current market value (that which he/she paid) of the asset.

"the capital gain has been realised (as income)"

My problem here is this ignores the debt (the loan). If we start defining "income" as something we owe back then what a confusing conversation we will have.

Note that the TOP proposal the tax would only increase based on the net gain of equity

Yes but that is an unrealised gain.

How much tax credit and cash backs do we get if the house value falls?

What say the tax valuation turns out to be higher than the sale price of the home - do I get a big cash payment plus interest from the government for the tax they got wrong?

Banks will love this.

Because it is an unrealised gain cashflow becomes the major issue. Tax departments aways want their cash and they want it now, they have no interest in life and its problems.. So if you are asset rich (savings of a lifetime) and cash poor (retired now) then the solution will be to take a loan from the bank. As businesses do now (the origin of the overdraft idea).

The net result could well in an ever increasing negative cashflow brought about by increased interest on ever increasing debt until the retiree is forced to sell the house and try and to rent - which she no longer has the income to afford.

I guess we could then pass a welfare payment to these people out of the increased tax take, less of course the enormous cost of government on the dollar.

What a merry go round.

Have a full read of the policy doc https://d3n8a8pro7vhmx.cloudfront.net/garethmorgan/pages/95/attachments/...

And remember that 80% will be better off due to the reduction in income tax. The burden of this tax, falls on the high-end and multi-property owners and benefits everyone else.

And to point out that a % tax on equity can't wipe out equity on its own as it would decrease as the tax-reduced equity amount does.

No but it can decrease total equity if cashflow goes south due to increasing debt to service the tax load.

Another thought.

In an environment where it is government policy to create meaningful inflation isn't at least some of the increase in valuation of my home inflation alone?

Why should I pay tax on inflation?

I do realise I am playing devil's advocate here, thanks for answering seriously M. kiwimm.

You pay tax on inflation for savings account income, managed funds and capital gains (when it applies and is treated as income). With our tax thresholds not moving inline with inflation, even your inflation component of your income is being taxed.

Hm.. That is suspiciously true.

You have obviously not studied Morgans proposal well.

He is not proposing a tax on value changes - but a tax on all assets including the family home to incentivise investment in productive assets that earn a cash return to pay the tax. A land tax which we used to have and has been advocated previously is an example.

He states the value of owner occupied properties should be taxed. The reason is largely irrelevant. I worked hard and saved to put a roof over my head, and those of my family. i did this before I made any other investments. I resent some rich bugger who says i should have put my money in other places before providing a roof over my head. I resent someone implying that because i don't pay rent to some other investor, and am therefore somehow denying people from profiting from my hard earned resources. Investing is a risky thing to do and if someone is prepared to protect my investment, in the same manner as owning my own home is protected, then i will happily invest there. but we all know that the world does not work that way. Investing is carried out on the principle of caveat emptor, i bought my home on that principle and now i am protecting it and preserving it by maintaining it and insuring it, before i put money out to be fiddled by people i don't really know, and with limited information to truly validate their companies. I cannot maintain my investment in a share portfolio the same way i can protect my home. Oh and by the way - i do pay taxes on it. They're called RATES!

If one tax is good - then double is even better??

The point is that ALL wealth should be taxed equally rather than the skewed, scattergun approach we have now which is causing distortions.

I think a wealth tax would be an excellent check on the government. If their policies cause your house price (and its tax) to double then they won't last long at the polls.

But what if the money you used to pay for your home was savings from your salary - that was already taxed?

If you put your salaried money into your kiwisaver or managed fund, it gets taxed (on the capital amount - see FIF rules). If you spend your money, it gets taxed (GST). If you put it on the house, nothing.

When you purchase a house the GST (if any) is paid up front. Repayments of any associated debts are simply spreading out the repayment of that initial purchase. Renovations, repairs etc attract GST.

What Morgan is really trying to do is slip an inheritance tax on pensioners to offset their superannuation costs as most own freehold houses. This gets past politically unpalatable means testing etc.

You also need to read the policy. Income tax (including on super) would be reduced by a third. You would need to have an expensive house to pay more tax. Although all pensioners can choose to not pay and accumulate the amount interest-free against their property - effectively a subsidy making it cheaper for retirees than everyone else.

It is probable that with inflation and "bracket creep" half the housing will eventually be classified as 'expensive' for tax purposes.

yes, so better to tax the whole house equity at a lower rate and reduce income to compensate. No difficult judgements or loopholes.

FYI - wealth taxes already exist in many parts of the world. Many allow a reasonable amount tax-free to cover a reasonable family home:

- Argentina: It is named Impuesto a los Bienes Personales, on assets above ARS 800,000 (US$53,500), the annual rates are 0.75% for 2016, 0.50% for 2017 and 0.25% in 2018.
- France: There is a solidarity tax on wealth on any net assets above €800,000, if your total net worth is €1,300,000 or more. Marginal rates range from 0.5% to 1.5%. In 2007, it collected €4.07 billion, accounting for 1.4% of total revenue.
- Spain: There is a tax called Patrimonio. The tax rate is progressive, from 0.2 to 3.75% of net assets above the threshold of €700,000 after €300,000 primary residence allowance. The exact amount varies between provinces.
- Netherlands: Interest income is taxed like a wealth tax. Up to and including 2016, the rate was fixed at 1.2% (30% taxation over an assumed yield of 4%). From the fiscal year of 2017 onwards, the tax rate progresses with wealth. See Income tax in the Netherlands.
- Norway: 0.7% (municipal) and 0.15% (national) a total of 0.85% levied on net assets exceeding 1,480,000 kr as of 2017. For tax purposes, the value of real estate assets are estimated to approximately 50% of the market value (25% if it is the taxpayer's primary residence). The Conservative and Progress parties in the current government and the Liberal Party have stated that they aim to reduce and eventually eliminate the wealth tax.
- Switzerland: A progressive wealth tax that varies by residence location. Most cantons have no wealth tax for individual net worth less than CHF 100,000 and progressively raise the tax rate on net assets with a top rate ranging from 0.13% to 0.94% depending on canton and municipality of residence.[8] Wealth tax is levied against worldwide assets of Swiss residents, but it is not levied against assets in Switzerland held by non-residents.
- Italy: Two wealth taxes are imposed. One, IVIE, is a 0.76% tax imposed on real assets held outside Italy. The values of such assets are determined by purchase price or current market value. Property taxes paid in the country where the real estate exists can offset IVIE. Another tax, IVAFE, is 0.15% and is levied on all financial assets located outside the country, including, so far as the language seems to imply, individual pension schemes such as 401(k)s and IRAs in the US.

But that is an investment choice. You have to sleep somewhere at night and the usual solution is a home.

Shelter is a human right not a economic argument.

Yes, and it should not be allowed to explode in price. This tax would help ensure it stays as shelter rather than a get rich scheme for a few.

Having read some more on the policy, and had a moment or two to consider your replies to the obvious problems that sprung to mind, and bearing in mind that the devil is always in the detail, and all other things being equal (which they rarely are), I find myself concluding that:

It could probably work it structured right.

Nice, TOP vote might be up to 2.5% now :)

Sorry to be hogging this comments stream on this post today but there is a general level of misunderstanding of the TOP wealth tax. My one final passing thought before the weekend is:

If you were to start from scratch and design a tax system that treated all sources of gain equally, it would have to involve a wealth tax to prevent distortions and workarounds.

Have a good weekend Ralph and everyone else.

He states the value of owner occupied properties should be taxed. The reason is largely irrelevant. I worked hard and saved to put a roof over my head, and those of my family. i did this before I made any other investments.

I resent some rich bugger who says i should have put my money in other places before providing a roof over my head. I resent someone implying that because i don't pay rent to some other investor, and am therefore somehow denying people from profiting from my hard earned resources. Investing is a risky thing to do and if someone is prepared to protect my investment, in the same manner as owning my own home is protected, then i will happily invest there.

You're conflating the consumption of shelter with investment, as most Kiwis have been led to believe is how they should think, particularly over the past 20 years. People don't just "believe" their house should be a perpetually increasing-in-value asset; they actually "expect" it.

Gareth Morgan understands the psychology well. The get-rich-from-property syndrome does not make people or a country rich in the long run. It ultimately fails if history is any indicator.

I've always known the title to #4 as:
Proper prior planning prevents piss poor performance...possibly.
The eight P rule.

or: if you fail to plan, you plan to fail

Houses and commercial property is and always has been a safer investment than giving funds to someone else to invest.
If these advisers were that knowledgeable then they would not need to attend a job 5 days a week, like I don’t!

Depends what you mean by safer. Shares are more volatile but provide greater returns for the risk. Property recent history has provided a good leveraged ride. Good luck going down the other side.

Owning a physical asset doesn't mean it's a safer investment. It can still burn down, be flooded, get stolen, get foreclosed on or fall into a sinkhole. Look at the homeowners in Edgecombe, Christchurch, Australia or the USA who have lost their investment to flooding, fires, earthquakes or tornadoes. Would you tell them owning a house is the safest bet?

Also, what do you mean by giving funds to others to invest? Are you referring to giving financial advisers etc control over your investments?

To pinch pennies is to develop a life long habit of looking down.

Living within your means and investing wisely means that you only ever look up - at the ever-rising line of your graphed net worth (also see point 4 - make a plan).

He did'nt mention Cryptos...