DO YOU WANT
TO BE RICH OR POOR IN THE FUTURE? PERSONAL FINANCIAL PLANNING
FUNDAMENTALS
WHAT SEPARATES THE FINANCIAL NON-ACHIEVERS AND ACHIEVERS?
(a)
Lack
of Knowledge
-
don't understand the investment market.
-
lack of desire to gain that knowledge.
-
don't know where to turn to for advice
(b)
Lack of Foresight
-
failure to put money aside for the future.
(c)
Lack of Planning
-
failure to work towards a goal with a plan.
(d)
Spend Now Rather Than Later
-
do not live within means- would
rather buy it now on credit and pay interest rather than later when have built
up savings and can afford it.
(e)
Invest in Items Which Lose in
Value Rather than Items which Gain in Value
-
non-achievers invest in expensive motor cars, appliances and other
luxuries which don't increase in value over time and invariably take out hire
purchase with high interest rates to pay for these items which means that they
end up repaying much more for them than original cost.
-
achievers buy items such as houses which increase in value and borrow at
relatively low interest rates.
(f)
Bad Money Management
-
living an expensive life with expensive cars, clothes, entertaining etc.
and not putting money aside for a
future emergency.
(g)
Bad Mental Attitude
-
successful people have an optimistic attitude and unsuccessful people
have a pessimistic attitude.
-
achievers mix with successful money managers with similar optimist
viewpoints.
-
achievers have strong desires to become financially secure, are willing
to borrow, invest and take risks to obtain gain.
(h)
Inefficient Use of Time
-
a good time manager can achieve more in a day than someone who manages their
time poorly.
(i)
The Need To Conform
-
the majority do not take investment risks and are not financially
rewarded.
-
the creative minority who dare to be different and seize opportunities
are generally financially rewarded.
(j)
Lack of Action
-
the person who says "I am getting around to it" but never takes
action will not be rewarded financially.
THE
FOUR STEPS TO FINANCIAL SUCCESS
Step
1
Set
yourself a measurable financial goal, being the minimum lump sum of capital that
will return a permanent flow of income.
Step
2
Place
a specific time frame on the achievement of that goal.
Step 3
Develop
a strategy for the achievement of the goal within your time frame.
-
assess your risk tolerance
-
decide the investment portfolio mix to suit your needs
-
start a regular savings programme
Step 4
Retain
that strategy, monitor it and progress towards your goal.
HOW
MUCH INCOME WILL YOU NEED IN RETIREMENT
A good guide as to this
calculation is to base your annual retirement income needs on 60 to 70 per cent
of the annual income you are receiving, or expect to receive, just before you
retire.
The total amount of savings
you will need to cover your retirement income gap depends on whether you use
only the income (e.g. interest) from your savings each year to meet your annual
expenses, or whether you use part of the lump sum (your capital) you have built
up as well.
If you want to use only the
interest and leave the lump sum intact, then you'll need a lot more.
For many people, using only the income from interest on their savings to
supplement New Zealand Superannuation will not be a realistic aim- they will
need a lot more than just these income forms.
The following Table helps you
work out the total amount you will need to save, so as to get the annual
investment income you need on top of New Zealand Superannuation.
The amounts are calculated on the basis that you use income and a portion
of your capital each year for 20 years.
After that you would be dependent on New Zealand Superannuation.
Annual
Income ($) |
Lump Sum
Needed Using Interest and Capital for 20 years ($) |
|
5,000 |
78,000 |
|
10,000 |
156,000 |
|
15,000 |
234,000 |
|
20,000 |
312,000 |
|
25,000 |
390,000 |
|
30,000 |
468,000 |
|
The next Table shows how much you will need to save each
month to give you the annual income you need.
Depending on
how many years away from retirement you are now, the amount will
change.
Years
Annual
Income |
5 |
10 |
15 |
20 |
25 |
30 |
35 |
40 |
|
5,000 |
1,219
|
572 |
357 |
251 |
188 |
146 |
117 |
95 |
|
10,000 |
2,439 |
1,144 |
715 |
502 |
375 |
292 |
233 |
191 |
|
15,000 |
3.658 |
1,716 |
1,072 |
753 |
563 |
438 |
350 |
286 |
|
20,000 |
4,877 |
2,288 |
1,430 |
1,004 |
751 |
584 |
467 |
381 |
|
25,000 |
6,096 |
2,860 |
1,787 |
1.254 |
938 |
730 |
583 |
476 |
|
30,000 |
7,316 |
3,432 |
2,144 |
1,505 |
1,126 |
876 |
700 |
572 |
|
(Assumptions-
based on 2.5% compounding rate of return after tax
and inflation)
(Source-
Retirement Commissioners Booklet
"Welcome to Your Retirement)
WEALTH
BUILDING PRINCIPLES
The principle of compound interest is that
you do not withdraw earnings or growth from an
investment, but
leave them intact to be added to the principal.
Thus you earn interest on the sum of the
principle plus interest you have already earned.
THE
RULE OF 72
The Rule of
72 lets us calculate how long it will take
for an initial investment to double in value if you
divide 72 by the expected rate of growth.
It works like this:
Investment Return (%) |
Calculation |
Time
it takes to Double Your Money (Years) |
|
4 |
72/4 |
18 |
|
6 |
72/6 |
12 |
|
8 |
72/8 |
9 |
|
10 |
72/10 |
7.2 |
|
12 |
72/12 |
6 |
|
AN
EXAMPLE OF THE EFFECTS OF COMPOUND
INTEREST
An initial investment will
increase in value faster and faster as
time passes.
For example,
the following table shows what a
single deposit of $10,000 will grow to
by age 65 at varying rates of interest
(excluding the effects of taxation).
Age of Person When $10,000
Invested
Compound Rate (%) |
20 Yrs ($) |
30
Yrs ($) |
40
Yrs ($) |
50
Yrs
($) |
|
5 |
89,850 |
55,160 |
33,863 |
20,789 |
|
10 |
728,904 |
281,024 |
108,347 |
41,772 |
|
15 |
5,387,692 |
1,331,755 |
329,189 |
81,370 |
|
Thus at a rate of return of 15% the person who started at 20 built up over 4 MILLION DOLLARS more than the person who started 10 years later. That delay cost him nearly $8,000 PER WEEK.
CONCLUSION
****
SMALL INCREASES IN RATE
OF RETURN OR IN LENGTH OF TIME
INVESTED MAKE DRAMATIC INCREASES
IN THE INVESTMENT VALUE BUILD-UP
WEALTH
BUILDING PRINCIPLES
In
periods of inflation your dollar
buys less every year.
For example, it would
take over $140 today to buy the
same amount of goods as $15
would in 1970.
The result for people on
fixed incomes is a steadily
declining standard of living.
CONCLUSION
****
INVEST ONLY A SMALL PART
OF YOUR INVESTMENT PORTFOLIO IN
LONG TERM FIXED INTEREST
INVESTMENTS AND BANK DEPOSITS
WHICH ARE LOSING VALUE EVERY
DAY.
SUCH INVESTMENTS HAVE NO
CHANCE OF CAPITAL
GAIN,
NO TAX BENEFITS ATTACHED
TO THE INCOME STREAM (DUE TO THE
FACT THAN ANY INTEREST INCOME IS
SUBSEQUENTLY TAXED) , AND YOUR
CAPITAL IS DEPRECIATED BY
INFLATION WHEN YOUR INVESTMENT
MATURES.
****
KEEP THE MAJOR PART OF
YOUR ASSETS IN A FORM WHICH
SHOULD INCREASE IN VALUE.
e.g.
Property
Equities
Superannuation Scheme
investing in Property and
Equities
Managed Funds investing
in Property and Equities
****
USE THE EFFECTS OF
COMPOUND INTEREST TO YOUR
ADVANTAGE.
****
TIP FOR PARENTS AND
GRANDPARENTS FOR EDUCATION FUND
FOR CHILDREN-
PUT $10,000 IN MANAGED
FUND FOR CHILD AT BIRTH AND
ARRANGE FOR DIVIDENDS TO BE
REINVESTED-
ASSUMING 10% GROWTH AFTER
FEES THE FUND WOULD HAVE GROWN
TO $67,275 AT AGE 20 AND WILL BE
AVAILABLE TO PAY FOR UNIVERSITY
EDUCATION.
WEALTH
BUILDING PRINCIPLES
It serves to offset the
effects of volatility of unit
prices over investment periods.
Because you are always
investing the same amount, if
the market drops your next
investment will buy a larger
number of units.
As the market rises, you
will buy fewer units with each
purchase but your
existing units will rise in
value.
The net result of this
process is that more units are
purchased at relatively low
prices than at relatively high
prices.
You will always be buying
units at an average cost which
is lower than their average over
the investment period.
This is because you are
buying more units at the lower
prices and fewer units at the
above average prices.
The following table
illustrates the Dollar Cost
Averaging Process:
|
Year 1 |
Year 2 |
Year 3 |
Year
4 |
Year 4 |
|
Investment
($) |
1,000 |
1,000 |
1,000 |
1,000 |
1,000 |
|
Unit
Price Paid ($) |
10 |
4 |
6 |
5 |
12 |
|
Units
Purchased |
100 |
250 |
166 |
200 |
83 |
|
Units
Purchased To Date |
100 |
350 |
516 |
716 |
799 |
|
Average
Cost Units to
Date ($) |
10 |
5.71
|
5.81 |
5.59 |
6.25 |
|
Average
Price Units to
Date ($) |
10 |
7 |
6.66 |
6.25 |
7.40 |
|
That
is, 799 units have
been purchased
over the
investment period
at an average
price of $6.25
whereas the
average price per
unit over the same
period is $7.40.
Also the
investor has paid
$5,000 over the
period whereas
current
realisation value
is $12,000
CONCLUSION
****
SET UP AN
INVESTMENT PLAN
AND INVEST SUMS ON
A REGULAR BASIS.
****
IF UNIT
PRICES GO DOWN YOU
WILL BE PURCHASING
UNITS AT CHEAPER
PRICES.
****
IF UNIT
PRICES GO DOWN AND
YOU ARE IN DESPAIR
WITH THE PRICE
DON'T TERMINATE
YOUR INVESTMENT
UNLESS YOU HAVE
RESEARCHED THE
INVESTMENT AND
HAVE A TOTAL LACK
OF CONFIDENCE THAT
THE PRICE WILL
RECOVER.
WEALTH
BUILDING
PRINCIPLES
All
investment markets
move in cycles.
Investors
shift their
capital as
opportunities
appear then
disappear.
At the peak
of the market
cycle speculators
with a short term
investment
objective dominate
the market.
Activity is
intense with
speculators buying
and selling to
make quick capital
gains.
Prices rise
as more and more
investors
motivated by greed
enter the market.
The boom
does not last and
when the demand
lessens and there
are more sellers
than buyers the
market drops and
prices fall.
Most
investors hold off
buying until they
see others buying
and sell when
others are.
They
rely on
emotion rather
than knowledge and have a greater chance of suffering a loss as market values
fall.
CONCLUSION
****
DON'T GET
SWEPT UP IN THE
EXCITEMENT CAUSED
BY A SHARE WHICH
HAS ALREADY RISEN
DRAMATICALLY IN
PRICE OR
AUTOMATICALLY SELL
WHEN THE SHARE
PRICE HAS HAD A
MAJOR DROP WITHOUT
RESEARCHING THE
SHARE.
****
IF YOU DO
YOU MIGHT WELL BE
BUYING HIGH AND
SELLING LOW.
WEALTH
BUILDING
PRINCIPLES
RISK AND RETURN
Risk
in investment
terms is the
possibility that
the expected
return will not be
realised.
A general
rule of thumb to
investing is the
higher the return
the higher the
risk.
Investment
assets can be
broadly classified
in terms of risk
as follows:
Risk
Level |
|
Type
of
Investment |
|
9 |
High |
Futures,
Options |
|
8 |
|
Highly
geared
Commercial
Property,
Second
Mortgages |
|
7 |
|
Mining,
Oil
Exploration |
|
6 |
|
Collectibles |
|
5 |
|
Gold,
Silver |
|
4 |
|
More
speculative
Shares,
Low
geared
Commercial
Property,
Highly
geared
Residential
Property,
First
Mortgages |
|
3 |
|
Sound
Shares,
Managed
Funds,
Low
geared
Residential
Property |
|
2 |
|
Commercial
Bills,
Local
Body
Stock,
debt-free
Commercial
and
Residential
Property |
|
1 |
Low |
Money
Market
funds,
Treasury
Bills,
Bank
Deposits,
Government
Stock |
|
Thus,
applying
the
risk/return
relationship
to
the
above
table
it
can
be
said
that
investment
in
shares
carries
a
greater
risk
than
investment
in
bank
deposits
but
that,
conversely,
likely
return
will
be
higher.
INVESTOR'S
PERSPECTIVES
The
perspective
of
the
rational
investor
is
to:
-
maximise
return.
-
minimise
risk.
DIVERSIFICATION
Diversification
means
investing
investment
money
over
a
number
of
different
classes. By doing so investors can take advantage of the
potential
benefits
offered
by
higher
return/
higher
risk
assets
while
balancing
the
overall
risk
in
their
portfolios.
A
well
balanced
portfolio
would
have
investments
with
varying
degrees
of
risk,
depending
on
the
circumstances
of
the
investor.
For
example,
the
following
Table
is
an
indication
of
the
possible
investment
asset
mix
for
different
situations
(excluding
the
personal
residence):
Category |
Circumstances |
High
Risk |
Shares,
Managed
Funds |
Property |
Fixed
Interest |
|
Young
Person
with
no
dependants |
Probably
will
take
a
relatively
high
risk
level
in
return
for
high
returns |
10 |
60 |
20 |
10 |
|
Newly
married
couple |
Invest
in
a
house
so
likely
to
have
minimal
external
investments |
5 |
55 |
20 |
20 |
|
Middle
Aged
with
Dependants |
Has
20-30
Years
to
retirement
so
will
still
have
limited
exposure
to
risk
sectors
|
5 |
45 |
20 |
30 |
|
Approaching
Retirement |
Becoming
more
Conservative |
|
30 |
20 |
50 |
|
Retired |
Preservation
of
Capital
is
paramount |
|
10 |
20 |
70 |
|
(a)
By
Country-
Usually
when
one
country's
share
market
falls,
another
country's
share
market
is
rising.
By
diversifying
your
investment
across
several
countries,
you
are
not
exposed
to
the
share
market
performance
of
any
one
country.
(b)
By
Industry-
It
is
important
to
avoid
relying
on
any
one
industry.
Try
to
spread
you
investments
over
a
wide
range
of
industries.
(c)
By
Company-
Within
any
particular
industry
there
are
winners
and
losers.
(d)
By
Currency-
You
face
the
potential
for
significant
losses
if
all
your
investments
are
denominated
in
the
same
currency.
CONCLUSION
****
DON'T
PUT
ALL
YOUR
EGGS
IN
ONE
BASKET
****
SUCH
ACTION
COULD
RESULT
IN
TOTAL
LOSS
OF
CAPITAL
IF
THE
INVESTMENT
FAILS.
****
DIVERSIFY
YOUR
INVESTMENT
PORTFOLIO
BETWEEN
INVESTMENT
TYPES
IN
ACCORDANCE
WITH
YOUR
CIRCUMSTANCES.
****
FURTHER
DIVERSIFY
YOUR
INVESTMENTS
BY
COUNTRY
,
INDUSTRY,
COMPANY
AND
CURRENCY.
****
MANAGED
FUNDS
ARE
AN
EXCELLENT
INVESTMENT
VEHICLE
FOR
DIVERSIFICATION
AS
THEY
OFFER
THE
ABILITY
TO
DIVERSIFY
YOUR
PORTFOLIO
OVER
A
NUMBER
OF
INVESTMENT
TYPES
AND
AREAS
AT
A
COST
MORE
AFFORDABLE
THAN
DIRECT
INVESTMENT
INTO
A
DIVERSIFIED
PORTFOLIO.
WEALTH
BUILDING
PRINCIPLES
There
is
no
right
answer
to
this
question,
but
the
following
is
a
logical
procedure
which
in
the
long
run
will
make
you
financially
better
off:
(a)
Pay
off
debts
in
the
following
sequence:
-
first-
high
interest
personal
debt
which
is
not
deductible
for
income
tax
purposes
e.g.
credit
cards,
store
charge
cards,
hire
purchase.
-
second-
personal
housing
loans
which
are
likely
to
be
at
a
lower
interest
rate
than
the
above.
e.g.
if
you
had
a
$100,000
mortgage
at
9.0%
for
25
years
and
you
increased
your
mortgage
payments
by
$100
per
month
you
would
pay
off
your
mortgage
7
years
earlier
and
save
$37,000
in
interest
costs
on
the
mortgage.
-
last-
business
debt
as
interest
on
this
can
be
claimed
for
taxation
purposes.
(b)
You
should
consider
starting
a
retirement
savings
scheme
while
you
are
still
paying
off
the
mortgage.
By
doing
so
you
are:
-
getting
into
the
savings
habit.
-
building
up
your
knowledge
of
savings
and
investment
options
so
you'll
be
better
prepared
to
decide
how
to
invest
your
savings
when
the
mortgage
is
repaid.
-
not
only
will
you
end
up
with
a
mortgage
free
house
but
you
will
also
have
a
nest
egg
to
use
for
further
investment
or
consumption.
TAX
PLANNING
POINTS
FOR
THE
PRUDENT
INVESTOR
SPLIT
YOUR
INCOME
Under
current
tax
legislation
increased
income
is
liable
to
a
higher
rate
of
income
tax.
To
counteract
this
give
consideration
to
the
name
of
the
person
you
put
on
investments
on
which
interest
and
dividends
are
received
.
For
example
it
would
be
advisable
to
put
these
in
the
name
of
a
non-working
spouse
if
the
other
partner
is
working.
If
the
working
spouse
is
earning
an
income
with
a
higher
marginal
tax
rate
this
is
likely
to
reduce
the
family
income
tax
liability.
INVEST
IN
ASSETS
WHICH
HAVE
TAX
FREE
GAINS
Property
offers
the
following
benefits
as
an
investment
vehicle:
(a)
Any
capital
gain
achieved
is
not
taxable
under
present
legislation.
(b)
Only
rental
income
is
regarded
as
assessable
income.
All
expenses
incurred
in
earning
that
rental
income
can
be
claimed
as
expenses
to
establish
profit/loss.
(c)
Highly
geared
property
whereby
interest
paid
on
loans
is
in
excess
of
rental
and
results
in
a
tax
loss
means
that
the
investor
can
offset
this
loss
against
other
income,
thus
reducing
the
marginal
rate
of
income
tax
payable.
Shares
also
offer
capital
gains
which
are
not
assessable
to
the
non
share
trader.
INVEST
IN
ASSETS
WHICH
HAVE
TAX-PAID
GAINS
These
investments
pay
the
appropriate
rate
of
tax
on
your
behalf,
and
credit
you
with
the
bonuses
or
earnings
that
are
calculated
after
the
tax
paid
by
the
fund
is
taken
into
account.
Thus
you
are
not
required
to
declare
that
income
in
your
Income
Tax
Return.
Examples
are
Insurance
Bonds
and
Superannuation
Funds.
MAXIMISE
YOUR
TAXABLE
DEDUCTIONS
AND
MINIMISE
THE
DEDUCTIONS
THAT
ARE
NOT
TAXABLE
Loans
and
Credit
Card
balances
which
are
not
business
related
offer
no
tax
benefits
and
should
be
paid
off
quickly
and
before
business
related
loans
on
which
the
interest
cost
can
be
claimed
as
a
deduction
against
business
income.
IF
IN
BUSINESS
EMPLOY
THE
FAMILY
If in business employ members of your family who have a lower overall taxable income. You must be able to prove to the IRD that the members are carrying out work for the business. You will save tax at a higher marginal rate than the family member will pay, due to the low income rebates that can be claimed.
IF
YOU
PURCHASE
PROPERTY
CLAIM
APPROPRIATE
DEPRECIATION
RATES
AS
AN
EXPENSE
Break
the
purchase
price
down
into
asset
type
on
the
purchase
agreement-
a
number
of
the
improvements
can
be
claimed
at
a
higher
depreciation
rate
than
the
building.
SUPERANNUATION
Superannuation
Schemes
are
intended
to
provide
long
term
investment
and
financial
security.
Their
features
are:
(a)
the
contributor
makes
a
regular
(usually
monthly)
payment.
(b)
this
payment
can
stay
constant,
or
be
increased
at
the
investor's
discretion
or
by
a
percentage
each
year.
(c)
the
investor's
contributions
are
locked
in
for
either
a
pre-determined
period,
or
until
a
certain
age
is
reached
(usually
retirement
age)
(e)
the
regular
payments
are
put
into
a
pool
of
funds
which
is
administered
and
managed
by
a
professional
funds
manager.
(f)
the
regular
nature
of
the
payments
means
dollar
cost
averaging
benefits.
(g)
the
investor
can
choose
where
to
invest
his
money
among
a
number
of
funds.
These
are
unit
linked
and
the
value
of
the
scheme
is
directly
linked
to
the
value
of
the
units.
(h)
gives
the
benefits
of
diversification
to
the
investor.
(i)
income
tax
is
payable
direct
against
the
Scheme
and
amounts
withdrawn
are
tax
free
in
the
hands
of
the
recipient.
There
is
no
need
to
include
proceeds
in
your
Tax
Return.
(j) Superannuation should be regarded as a long term investment proposition, as in most cases entry fees are taken out of contributions early in the investment period which means that rapid accrual of termination value does not occur until late in the investment period.
MANAGED
FUNDS
Managed
Funds
enable
investors
to
make
lump
sum
investments
and
withdraw
the
proceeds
quickly.
Their
features
are:
(a)
Don't
require
large
sums
to
enter
as
is
the
case
with
other
investments
e.g
direct
property.
(b)
Gives
the
benefits
of
diversification
to
the
investor.
The
pooling
of
capital
among
investors
enables
a
managed
fund
to
diversify
into
various
assets
which
an
individual
investor
of
limited
capital
cannot
afford.
(c)
Variety
of
objects-
there
are
a
wide
variety
of
investment
sectors
and
types
available-
the
investor
can
choose
the
fund
depending
on
objectives.
(d)
Professional
Management-
a
professional
fund
manager
is
responsible
for
the
investment
decisions
and
day
to
day
running.
(e)
Time
and
Knowledge,
Ease
and
Convenience-
a
Managed
Fund
is
ideal
for
investors
who
lack
the
time
or
confidence
to
make
their
own
investment
decisions.
(f)
Low
risk-
Managed
Funds
generally
have
no
debt
and
therefore
have
lower
risk
than
most
public
companies.
(g)
Ready
Access
to
Funds-
Units
can
usually
be
converted
back
to
cash
at
short
notice
(within
14
days
on
average),
although
some
property
trusts
have
a
much
longer
redemption
period.
(h)
Switching
Between Funds- this option is available.
(i)
Performance
Information-
Units
are
valued
regularly
and
prices
available
quickly.
(j)
Competitive
Costs-
the
up
front
fee
and
the
ongoing
management
charges
compare
reasonably
well
with
direct
investment
into
the
markets.
(k)
Insurance
Bonds,
a
type
of
Managed
Fund,
are
taxed
in
the
hands
of
the
insurance
company. Therefore no income needs to be included in the
investor's
tax
return.
(l)
Managed
Funds
should
be
regarded
as
medium
to
long
term
investments
and
are
particularly
suitable
for:
- someone
intensely
involved
in
money
making
opportunities.
- investors wanting to relieve themselves of the demands of managing their own investments.
If we can assist further, please email TotalACcounting as follows:
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