By Janine Starks*
From my mail bag:
We are a couple who have recently inherited $250,000 to $500,000 (not quite sure yet!). We are renting and one of us has a stable, pretty good income and is happy to remain at that job (maybe reduce to 4 days instead of 5). We still have $60,000 in student loans and owe $7,000 on credit cards.
We could buy an investment property which we'll live in, but aim for the mortgage to be less than the rent we pay now. I want to make sure we have enough liquid money for any unforeseen pay outs and savings for our children's education in 12 years or so (we have three kids). Plus we want to have some fun now! We are confused about how to make the most of this money, as we want security for our future.
Inheritances remind me of the search light which has appeared from the broken Cathedral in Christchurch; it arrives like a ray of hope, but it’s tainted with sadness, because money doesn’t appear without someone departing. That light is also a little bit spooky and an inheritance will always have that facet to it as well.
There is an opportunity to reshape your life, but it comes with a big sense of responsibility. Someone close to you worked very hard for the money and it would be nice to make them proud of how you are spending it. I’m sure they would smile when you have a little bit of fun too.
Feeling flush with half a million?
You sound grounded and sensible and I can tell the sense of responsibility is not lost on you.
Just out of interest – have a think about this question: "Does half a million dollars make you feel rich? "
It reminds you of Big Wednesday, but try and wipe the Q7 and the Gallardo from your mind. Lots of people would shout ‘I’m rich’ from the roof tops, but I’ve got the opposite view. Half a million doesn’t make you wealthy enough to be frivolous with a single cent of it. It’s only enough to give you a basic foundation to build on.
You are a single-income family of five, who don’t own their own home and have $67,000 in debt. This is going to sound harsh, but the money is only enough to leverage you out of a hole. This level of bluntness is intended to make you think.
You are pondering a four-day week, but I don’t think the size of the windfall gives cause to embark down this path. Especially since your current asset base is not just zero, but negative. When you are starting below the low-tide mark and you need a home, a retirement fund, an education fund, and a summer holiday, you’ll find the cash gets snaffled away very quickly. The groceries still need to be paid for and a growing family is going to chomp through your income. Part-timers struggle to get pay rises and promotion, so that decision could end up being a life-long hand-brake.
Sit and look at the money
When it arrives, think about sticking the money in a term deposit for a few months and not spending a cent. Just learn to live with it and look at it for a wee while. It’s so easy to whip off to the islands in the school holidays and a promise to do a financial plan when you get back. Do it before you step on the plane or it won’t happen.
Your ‘money personality’
You’ve got some hard decisions on how to carve up the cake, so your first appointment should be with a financial adviser. They will challenge you. Before you go, see if you can both agree the ‘non-negotiables’. For example, does ‘fun’ mean a trip to Te Papa in Wellington or the Tate in London? The cost implications are wildly different, but they might be dreams which are not up for debate in your family.
An adviser will take you through the steps: pay off debt, set aside emergency funds and decide on the priorities between owning a home, investing for retirement and setting up an education fund and Kiwisavers for your kids. Repaying the student loan will be debatable as its interest free, so you may wish to invest that money instead. Crucially, you also need a savings plan for part of your wages. Remember, this windfall is just the foundation.
The big question is whether you take on a mortgage and invest some of the inheritance, or have no borrowings. There’s a generic rule that it’s unwise to borrow from one pot and invest in another (you can end up paying more interest than you earn and going backwards). I don’t disagree with this on a financial level, but it doesn’t work for many people on a psychological level. If someone is mortgage free, but has to save each month into an education fund, it can easily get frittered away on flat screen tellys and new clothes. The education fund never builds. If money is locked-up in advance in a long term investment and they pay off a mortgage, the budgeting is more controlled. You have to seriously consider what type of ‘money personality’ you are.
Home sweet home
Question yourself. Do you really want to start by owning a property that is selected for its investment potential and not for the needs of your own family? You need a permanent roof over your head – why not put yourself first? You could get used to being a home owner and then decide if an investment property is on the agenda further down the track.
Kicking the numbers around
With the help of an adviser, it is fun to kick the numbers around and discover the power of investing money. While the markets are an awful mess right now, and real returns fairly paltry, it’s not generally like that over the longer term.
Just as a taster in terms of retirement planning; if $50,000 is invested today for 30 years and it achieves a 4 percent return each year after tax, it will grow to over $160,000. With more risk and an 8 percent return after tax, it could grow to over $500,000. Take off three decades of inflation at 2 percent and that half a million will buy roughly what $300,000 does today. You have to admit those numbers are powerful and will make you want to plan now.
*Janine Starks is Co-Managing Director of Liontamer Investments. Opinions in this column represent her personal views and are not made on behalf of Liontamer. These opinions are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.
34 Comments
"You have to admit those numbers are powerful and will make you want to plan now."
No, I don't admit it. Those numbers are misleading and are potentially dangerous financial advice. "With more risk and an 8 percent return after tax,"!!! With more risk, you could be wiped out. 8% return after tax = 12% return before tax, averaged over 30 years! I don't think so. Very unlikely over the next 30 years. Even achieving 4% after tax will be difficult. And inflation at 2%? Over the last 30 years inflation has averaged 4.7% compounding. Your money will be worth less than you started, PLUS you have foregone 30 years of benefit that you would have obtained by spending the money.
My advice is to pay off all the debt first (can't believe you didn't insist on this) and buy a modest house, preferably mortgage-free.
we received an inheritance equal to our mortgage, not wanting to lose the ability to use the money if we needed to, we have changed our mortgage to an off set mortgage provided by kiwi bank, this means we pay no interest on the loan so the mortgage payments of $830 come off the balance every month, and as you only have to keep the mortgage and off set account equal we transfer $830 from offset account into a interest bearing account each month, the advantage to us is we save thousands on interest, we still are disciplined to pay the mortgage every month, if we had paid the mortgage off we probably would not save that much each month, we are also mortgage free years earlier with inheritance in tact.
Hi Julia - thanks for mentioning this - I have been intrigued by these KB offset loans. Can I ask - if you have a sum in your accounts equal to the mortgage it now becomes in effect an interest free loan?
Also
a) What time frame can you sign up for - have KB guaranteed the schemes existence till the loan has been paid off?
b) What loan multiple did KB off - 90% of the house purchase price value?
c) Are you still getting interest on the cash that is in the KB current accounts?
Seems there is an opportunity here to game the system that KB has set up?
thats right we pay no interest on our loan, the money in the off set account equal to the loan doesn't receive any interest either, but you can transfer the amount out of this account every month equal to the amount of mortgage you pay each month in to an interest bearing account, you pay no interest as long as the loan and off set remain equal. Before we did this we had a mortage with national bank at 6.5% and a term deposit with KB @ 5% taxed at 17.5%, this way we are essentialy getting 5.5% (current KB off set mortgage rate) tax free return on our money. Our morgage is for 20 years but will be paid off in 10 by doing this, but you can select any term as far as I know.
There is no guarantee KB will keep this type of mortgage, I think BNZ or ANZ can't remember which one, is the only other bank that does something similar.
as for the loan multiple I quess they will lend you as much as you can afford according to their lending criteria but to pay no interest at all you have to have the same amount in savings, even if you don't have as much savings as the value of your loan you still reduce your over all interest bill tax free.
Hi Julia,
Tell me with the offset loan what would happen if Kiwibank were to go under? Are the two positions netted out or are you on the hook for the full amount of the mortgage and at the same time a creditor for the amount you have on deposit with the possibility of a haircut on this amount?
BNZ do the same it is called Total money..you savings or whatever you have elswhere with are offset against your loan held in the total money account, you can offset up to 5 other accounts i.e if you have kids accounts with them or something you can offset that balance against your mortgage (you just dont get interest paid on that money but you don't pay interest on that amount held in the mortgage).
hi curious
I quess it is possible that Kiwi bank could go under, but as we owe the same amount as we have in a savings account with kiwi bank I would hope that would cancel each other out with the bank so we still would not owe any thing, things would have to be pretty dire in the financial world for this Kiwi bank to fold, but who knows with the way things are in europe...but I wouldn't be the only one taking the hair cut, some times you just have to trust every thing will be ok
When you put your money in the bank, you no longer own that money.
The bank owns it. You have exchanged your money with the bank in return for a promise that it will be paid back.
No different than giving it to a finance company, except perhaps the lower risk of defult has been priced into the returns, in the form of interest payments, allbeit generally at a negitive return after taking into account real interest rates and tax.
The offset thing is really just another twist on a standard revolving credit loan - most banks do them as far as I know. With revolving credit your mortgage is basically a great big overdraft: if you come into a wad of cash you can put it into your mortgage (and reduce the interest you pay), but you can take your money out again whenever you like. Very flexible, as long as you have self-control.
In our case it's handy: being in Chch we're due a big EQC payout, which will go straight on the mortgage so we won't be paying any interest at all until our house is finally fixed, at which time we draw the money out again.
The only real difference is that theoretically our lender could withdraw the lending facility at any time so we'd no longer be able to withdraw our money. With the offset mortgages perhaps they might not be able to grab your money like that - but you'd need to check the small print...
I agree debt repayment is paramount, but learn how to avoid debt in the future as well.
Secondly home ownership BUT not with an uncomfortable mortgage.
I question the ability of many "financial advisers" to be able to put themselves in the shoes of recipients of significant money. As one example, risk appetite is very different for each individual,
It also depends on your life experience. Personally, as one of those pre BBs, I find it difficult to justify buying even a new shirt despite the possibility I could write a cheque and buy the shop.
After reading that letter from "the family of five" Janine, I am off to change my will. I think I will set up a trust and my beneficiaries can receive their inheritance when they are 45 with the right to receive the income at the discretion of the Trustees. May be they will have some sense by then. I give "the family of five" say four years and their inheritance will be all gone and they will be in exactly the same position as they are now. In debt.
Seems you don't have much faith in your beneficiaries' (children's?) budgeting ability/financial sense!
We're planning to do the opposite - passing on the inheritance earlier rather than later by making donations to our children when they need it, eg to help them buy their first home or make it easier for them to decrease work hours for a while if they wish to when they start a family. I'd say this will be in their late twenties/early thirties and I have little doubt they'll be responsible enough by then (or much earlier in fact)! I suppose it depends on the education one gives their kids, and the example one sets.
The trouble with that argument Elley is you have no idea who your children are going to marry and that partner will have more effect on your children than any education you give your children. Howevert that education does come back but not until they are in their 40s. But good luck to you with your plan and I do mean that.
If I were the family of five, I'd pay off all the interest-bearing debt and use the rest towards a modest house to live in, with as small a mortgage as possible (ideally none!). Have a revolving credit or offset mortgage as described above, that way they'll be able to get at the cash if they really need it, but it'll be working hard for them in the meantime. They're not rich, but for a typical family they've been given a head-start of 10-20 years towards their retirement.
Don't waste a cent! If you want to 'have fun', don't do it out of your windfall but save for it out of your normal income, you'll find it a lot easier now. I wouldn't step down work until my retirement income was secure.
Well I'm hoping a Chinese relative will look out for me........
I was reading the other day that, apparently, 1 in 5 people are Chinese...and there are 5 people in my family, so, which one is it? Well, it's not me...so, it’s either my mum... ...or my dad... ...or my older brother Colin... ...or my younger brother Ho-Cha-Chu. Hmm I think...it's probably Colin.
Yup , it's Colin ! .... as in , one day the Chinese will colin America to get their money back .
...... but hey , the obvious Kiwi solution to having a lazy $ 500 K sloshing around , is to set up your own finance company . Give that Chinese financial wizard Colin Meads $ 10 000 to front your TV campaign , $ 50 000 for advertising , $ 10 000 for a " prospectous " ( ha ha de haaaa ! ) , and that leaves $ 430 000 .
Uitilse $ 400 000 as a capital base , on a 12 to 1 equity ratio you can take in $ 4.8 million of suckers ..... oooops , sorry .. of investors money . charge a management fee of 2 % ( cos you're worth every penny of it ! ) , and there's a guaranteed $ 96 000 p.a. return , which on the original stake , is an annual return of near 20 % , risk free ....
.. Oh yeah , that remaining $ 30 000 from your set up costs , ... because you're so " into " your new venture , a " fact-finding " trip for you and all the rellies is called for ....... Tahiti is a great place to start .
:) Love it, thanks gbh, as much as your normally on the other side if the fence from bh, pdk, steven etc, at least there is common ground on some issues. What is colin meads phone number??? Might put this into action on monday, there's shortage of non bank lending institutions at the moment supposedly...
Contact Sir Colin & Miss Verna at the Te Kuiti Retirement Home for the Bewildered & Financially Insane , Te Kuiti .
...... not after 8:45 p.m. , of course ....... the oldies need their rest . . they gotta spruik Sir Bob Charles " Deer Velvet " tablets in the morning , on RadioLive .....
The way the tea party are going I dont know there will be much of the USA left for the chinese to buy.....and anyway they wont buy til the firesales start....which with companies having so much cash could be a few years and probably a decade away even with a depression.....
regards
Many thanks for this. Very useful discussion.
Good point on the Q7 and Gallardo. I have a pet hate for Audi Q7s and Porsche Cayennes. They are pointless, tasteless, wasteful, expensive barges that are useful as 4WDs, depreciate like a stone and drink fuel like drunken fish.
I feel better after getting that gratuitous SUV bashing out of the way...
Now. I reckon you're right to say this: "You need a permanent roof over your head – why not put yourself first? "
This sounds to me like the beginning and the end of the story.
And the line about not bothering to repay the student loan (and letting inflation do the dirty work of getting rid of it) feels depressingly right.
Debt free home ownership looks attractive.
cheers
Bernard
At least if you bought a Range Rover you know it can go off road.....
However it has to be diesel driven and bio-diesel modded....so a Discovery....If I had cash right now I'd buy a MiEV and a small diesel car (are there diesel co-powered EVs?).....or maybe a discovery....its capacity is useful....
I think we are headed into an age of Austerity.....I think many ppl wont be able to afford to run cars.....think after a house the second biggest HP item will be a car....and they will be sitting there and not moving.....being a drain on income.....I have a small car....it ill last another 5~10 years and see out affordable petrol I think....
Roof over your head.....yes and no.....if you accept a depression is coming then you want to have cash and buy a house or houses in 5 or do years....when we see a 50%+ drop.....putting money where ppl have to spand makes sense....but the price has to be what they can afford....and a lot of that will be paying little for good houses and renting them out I think.
Student loan, yep except I suspect when our Govn gets desperate in 5 or so years they will be looking around for cash, and I bet they will call in any loans they can.....got a $300k house and a $15k loan, oh dear, pay up or we'll take the house and mortgagee sale it......they wont care frankly....
Debt free home....only if you paid less than 50% of its present value.....then at least you break even.
Kiwisavers, where do they put their money? commercial property and the dhare market.....I think there will be a lot of hacked off ppl in a few years....
regards
Interesting choice of words 'spend wisely'
Not invest, put to work, use but spend.
I would be thinking too that within a few years they will have 'spent' They are already thinking about spending it and they haven't got it yet.
The first step is seeing a budget advisor and finding out where their money is going now-- esp in view of the 7K on the card. 7K! what on! What did they buy?
The next step would be to get themselves some financial education. It's all very well seeing a financial advisor but it's your money and you should take some responsibility for how it is invested.
I would also find out how my relative managed to accumulate that nest egg and see if there are lessons to be learned there.
Above all take your time, the money will still earn interest while you're thinking and learning.
There is no point in paying off the student loans as long as they remain interest free. Best to put what you owe aside in an account, and collect the interest from it. Then as the student loan repayments are deducted from your earnings, just pay yourself back from that account. Essentially you will be getting free money from that interest which is ultimately being subsidised by the tax payer, but that shows yo uhow stupid the interest free loans scheme is...it was just a vote grabber.
Also agree with what other people ahve said, and $500k isn't really much, especially when spread across 5 people, that is just 100k each. I read somthing that estimated that the cost of bringing up a single child is about 400k. As the letter said, they may only get 250k, which is just 50k each. I wouldn't be retiring just yet.
If I would inherit that kind of money I would just focus on getting my management degree and start my own business. I would keep the money until I'd be absolutely positive the business I'll start will be a successful one and then I would go for it.
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