How to avoid money problems in our middle years

Avoiding Money Problems

Spending more money than we earn

It is often during our middle years, that we are nearing, or are at, our highest earning ability where we bring in more money to the household and feel we have the freedom to enjoy our hard-earned cash, spending more on travel, newer vehicles, a boat and a bigger home to accommodate a growing family.  It’s important not to be caught by instant gratification and take a step back to think before we buy.  For a 40 year old who can save an extra $400 per month and have this invested into a good quality investment portfolio, this could grow to around $300,000 by the time they retire, based upon a return of approximately 7% p.a.

Not taking care of the emergencies

When we are young, in our 20’s and single, a few thousand dollars was able to pay for the financial ‘curve balls’ that came our way.  With a family and more responsibility on our shoulders, we need to adjust our emergency fund and look to have around 6 months’ expenditure at least, tucked away in a bank cash account, that is readily accessible for unforeseen ad-hoc expenses.  Emergency funds also help fund any excesses on personal medical cover and home and contents cover, helping to keep these premiums affordable

Using the mortgage account as a bank account

As the value of our homes increase, instead of using credit cards or personal loans (in themselves not a great idea) there is a temptation to top-up our mortgage when we want money for other things such as a family holiday, buy a new car or even leverage it to buy an investment property. Short term gratification of cars and travel are effectively spending tomorrow’s dollars today, so although it may seem to make sense to make use of the low mortgage interest rates, all we are doing is increasing our debt.  Leveraging to buy an investment property may be gearing to buy a growth asset, however, whatever the money is being used for, other implications come into play, such as do we have enough life, trauma and disability income insurance to cover the increased repayments if we are unable to work due to illness or injury or if we die prematurely – leaving our young family with such a financial catastrophe will add stress, anxiety and potentially repossession of the family home. Just don’t do it, unless you have all the ‘what ifs’ covered.

Not taking the value your home and contents seriously

Many people sigh when the renewal of the house and contents insurance comes around, wishing the premiums hadn’t increased.  The tendency is to just pay whatever is due without giving a second thought to the actual value of our personal belongings or the structure of our home, should we lose everything in a fire, flood or as is common in New Zealand, an earthquake.   If you take the time to consider what it would cost to replace everything you own – your furniture, clothes, kitchen equipment, computers, paintings and picture frames, everything in our garages and workshops, valuable heirlooms and jewelry, most of us would not have enough cover in place.   To add to that, should we lose our home to an earthquake and need to rebuild, the cost of not only rebuilding the property is needed, but the clearing of the site, rebuilding any retaining walls, and looking at the costs involved by the construction company to access your property is wise too.   Getting a structural valuation every few years to check on the rebuild costs is worth it, as if you think about it, paying what is effectively a small cost each year to receive hundreds of thousands of dollars in insurance cover, is great peace of mind and enables us to sleep well at night knowing we will always have a home for our family.

Expecting the government to support us in old age

We are fortunate in New Zealand, to have a government superannuation fund however, it will not provide enough for most of us to live in retirement, especially not covering the luxuries of life.  KiwiSaver has been great to get into the habit of investing for our futures, however, for most of us in our middle years now, what will be available when we retire, will just not ‘cut it’.  Albert Einstein was reported to have said that “compound interest is the eighth wonder of the world” so making our money grow and work for us, needs to be one of our financial planning goals in our middle years.  Paying ourselves first is one way to look at trying to budget well, to try to create surplus over our income versus expenses and investing this money in robust investment portfolios, where dividends and interest are reinvested for growth.  Starting now means we have a good 15-25 years ahead of us before we need to access the money for a passive income in retirement.  The question is whether we want to be in control of our financial future and live the life we choose, or be at the mercy of whatever government support is available at the time (if any) and just exist financially.

Spending our retirement funds on the kids

This is more common these days, when we find most of our children wishing to go to university and as they get a little older, wanting financial assistance to buy a house.  Our children have a long time horizon to build their own financial futures and repay student loans, so we must not neglect our own retirement needs for theirs, as it will be much more difficult to make up any money we have gifted away and be harder to catch-up.  We must factor these goals into our own retirement planning goals and ensure we take our own futures seriously and not feel guilty about putting ourselves first in this regard.

Putting all our eggs in one basket

Of course, we’ve heard this before – another phrase for diversification.  Owning a broad spectrum of growth and defensive assets is much less risky and likely to produce more consistent returns over the longer, especially if we diversify in assets worldwide.  Owning 3 finance company stocks, or owning one or two rental properties solely (which is based in one city and in one country) is not diversification!

Don’t panic when share markets fall

Seeing our investment portfolio and funds in KiwiSaver fall, gives some of us an empty feeling and we panic about what to do.  It is important to effectively do nothing!  Once invested in a good quality robust portfolio, staying disciplined is the key – jumping in and out of shares and trying to time the market is fruitless and will potentially do more harm.  Moving out of the share market when markets fall will only find us missing out on the upturn when it happens and there’s plenty of evidence to support this.  We just need to make sure we have the best type of investment portfolio in the first place and importantly have an adviser who will educate us, helps us stay focused on our longer-term goals, and be there to coach us when the going gets tough.  When share markets fall, this is the best time to buy – just like anything else we want to purchase in life – buy when the sales are on, when prices are cheap.  Remember Warren Buffet’s words – “be fearful when others are greedy and greedy when others are fearful”.

Being too cautious with our investments

Just think about it – when we are 50 years of age, we could have another 30-40 years of life ahead of us based upon the modern mortality rates.  If we have an investment portfolio that is overly conservative, we won’t achieve the growth we need to keep pace with inflation and grow by more than the rate of cash interest.  Having a combination of various assets, for growth whilst we don’t need the money to live on, and then a mixture of growth and defensive assets, will give us the best shot to help us grow our wealth.  Our investment time horizon should not stop when we give up work to retire, as we then have the longest holiday of our lives to look forward to.  Having an investment portfolio that can fund our retirement goals for passive income and ad-hoc financial ‘treats’ is the way to go.

Being forgetful about our health

We all know that medical treatments and operations are becoming less invasive with the advances in medical science however, the cost of these continue to increase far greater than inflation and as we grow older, the need for medical assistance of some kind increases too. We focus so much on running our businesses, working long hours at our jobs, spending time with our families and generally getting on with the day to day hustle and bustle of life, that some of us forget to invest in ourselves with a good diet and exercise regime.  Looking after our physical health, alongside our financial health, can help to have our mind, body and soul on the same page.  We all know the saying “the mind is willing but the body isn’t” don’t we!