Author Katrina Shanks, CEO Financial Advice NZ Article originally published in Stuff.co.nz.
The commentary has been frequent and clear: 2023 is going to be a year of challenges as inflation and interest rates continue to rise. Many economists are tipping it to be tougher financially for most people than either of the past two years. So, how are you going to survive it in good shape? In this four-part series, we look at steps you could take to help get you through. Today: Preparing yourself by setting goals.
How hard can it be, you might ask. Just sit down and jot down some ideas on where you want to be at the end of the year and how you might get there, right? Well, yes, it is that simple. Unfortunately, it seems not many of us do it.
Independent research conducted last year for Financial Advice NZ last showed the extent of the problem: just 39 per cent of those asked said they had a written financial plan, with the remainder having either a “loose” plan or no plan at all.
It may be because many are short on time, feel like they have their financial situation under control, or simply don’t see the value in goal setting.
Whatever the reason, it is like taking a gamble, because none of us know what’s around the corner, and the only way we can guard against the unexpected is with a plan. It’s even worse because we are being warned almost every day of what’s coming.
Setting goals is actually the first step in managing your money.
When setting your goals, it’s important to split them into timeframes. This makes them easier to manage. The short-term ones will likely be something you can tick off sooner, and that will give you a sense of achieving something. Longer-term ones will take more planning and more time to achieve, but give you the opportunity to review regularly with a view to changing the timeframe.
Short-term goals (maybe less than a year)
When writing these down, ask yourself how you can put yourself into a better financial position immediately. This should include paying off any debts where you can and as soon as you can. To achieve this, plan to pay off your credit card within the interest-free period (usually around 55 days of your purchase).
With a personal loan or buy now pay later credit, set a regular payment that ensures you make each set date. At the least this should be set at the minimum payment due, preferably more than that so you save on later interest. You can set all these up as automatic payments from the account your wages go into so you don’t even see the money.
Then consider saving for an emergency fund. This will give you peace of mind in case the unexpected happens. Because you don’t know ahead of time what the emergency will be, it’s difficult to put the right number on what you want to reach, and everyone’s needs are different. But do whatever you can afford – $500, $1000, $5000 – to help you and your family get through. Open a special bank account for it and contribute to it each payday. There is a rule of thumb that it should be three months of income but that may take a while to build.
If you already have no debt and that emergency fund tucked away then focus on a goal for the next twelve months that you would like to achieve. It maybe saving for a new appliance, a holiday fund or even planning to give to a charity that is close to your heart.
Medium-term goals (1-3 years)
These are usually on a bigger scale than short-term goals.
Say you are saving for a deposit to buy a home (with house prices the way they are, that may be longer than three years). As for the emergency fund, open a special account and set up a payday transfer each pay period.
KiwiSaver is another way to save for a home. There’s plenty of good, independent advice available (check out sorted.org.nz) on the right type of fund to get started and what the criteria is to withdraw your money for your first home. Your contributions (along with those from your employer) are taken out before you are paid.
Saving to upgrade your car or even to do a renovation on your property is better than borrowing the funds and is rewarding when you know you don’t have to pay it back over time.
Long term (four or more years)
Setting long term goals is about setting yourself up for your future. This means building your assets which normally involves planning to purchase your own home and building up retirement savings and investments.
Repaying your mortgage: It doesn’t matter how many years you have left on your mortgage, reviewing how much you are paying is very important. Fortnightly payments are much better than monthly over the long term, so if you’re not doing that, consider it. And if you can afford to make occasional lump-sum payments you’ll save interest in the long term. Maybe a goal could be if you get a pay rise to increase your mortgage payments to take advantage of the extra pay you’re getting.
Saving for retirement: There’s no time like the present to start saving for retirement, so if you’re not doing this already, start planning now. Decide on the type of lifestyle you imagine you want and how much money you’ll need. The Massey University Retirement Expenditure Guidelines is a great place to get some idea of how much money you will need. Not planning for your retirement and putting it in the too-hard basket is not the solution. Preparing today for the future has never been truer for your retirement.
Investing: Buying shares or investing in managed funds could be another way of creating wealth for later life, either on top of or instead of buying a house. It is hard to know where to invest as both property and shares have taken a tumble recently. The key is to keep contributing to your future and not stop. Diversification is key when building an investment portfolio. There are many managed funds that have great diversification, and of course there are many other classes of assets to invest in. There is a difference between putting money on a platform and trading (like Sharesies and Hatch) and having a plan you contribute to in a structured, considered manner, where you have identified your risk tolerance and the correct assets to invest in. This can be tricker to navigate, so if unsure, get professional advice.
I normally set my goals with my financial adviser every couple of years but I’m constantly rethinking what I am doing with my short term and medium-term goals as life constantly changes around me.
It’s recommended you review your goals regularly, maybe every six months, to make sure you’re on track. If not, don’t be afraid to change things around if your circumstances change, or you see an opportunity you want to take advantage of.
As my financial adviser would say, the main thing is to make a plan and go for it.