Get your money working smarter

COLUMN Deborah Carlyon

Healthy eating and getting fit are common aspirations and there’s a greater chance of success if you map out specific steps – menu plan, grocery shopping list, walking or running regime. Writing the plan is the key – whether the goal is health, more leisure time with your family, enhancing your career or renovating your home.
In my financial planning business we help people achieve lifestyle goals. Money is usually the main focus but rather than an end in itself, we regard money as a tool in the process. Good money management is a crucial first step – starting with how we allocate our income and assets. For many, a house is the major asset and conventional wisdom states that repaying the mortgage should prevail. Conversely our income has to cover all manner of everyday living expenses along with saving for future goals such as holidays.
To get the most out of your income, allocate it broadly into three categories: the first category is obligatory expenses like rent or mortgage, food, transport, rates, insurances and utilities. The second category is for the discretionary or ‘fun’ expenses the money you spend on yourself, movies, coffee and presents. For the fun expenses, take out a weekly fixed amount in cash and once that’s spent, wait until the following week. The third category is for your goals.
For a simple money management system, open separate savings accounts for specific projects or goals. I like to see clients directing money regularly to a separate emergency fund and a separate children’s education fund. Also useful is a separate ‘bills account’ to cover direct debits for those obligatory expenses and a car account for servicing, ownership expenses and eventual replacement. Splitting your income across these accounts each pay day will bring a paper budget to life and continue automatically.
Historically banks have had fairly static products with fees for each account you open – hardly a savings incentive with the mortgage, meanwhile costing you interest. Fortunately, some banks have come up with a new product designed as a nifty financial planning tool. It is known as an ‘offset mortgage’ because you can offset your savings balances against your loan balance and pay interest only on the difference.
Here’s how it works. If you owe $200,000 on a mortgage and you have $10,000 in savings, interest will be charged on only $190,000. So you can use your savings to help cut down on the interest you pay and the length of time your mortgage runs for.
Key to this working:

- Your set loan repayments stay the same
- You don’t earn interest on your savings
Using our example, $200,000 for 25 years at 6 per cent means set repayments of $1,288 per month whereas $190,000 requires only $1,224 per month so you are actually paying off an extra $64 per month. That adds up to $768 per year off your loan balance. Of course you are giving up say 3 per cent interest on a savings account; but after tax that’s only 2 per cent ie: $200 on your $10,000. After a year, your net gain from the offset mortgage is still a very healthy $568 – you can’t earn 5.68% after tax from bank deposits. The offset loan has to be at the floating rate but you can split some onto a fixed term if you are worried about interest rates increasing.
The BNZ’s Total Money and Westpac’s Choices Offset allow you to group up to 10 every day accounts together and pay only one fee of $10 per month. That’s perfect for allocating your income each month to bring your budget to life, much like grandmother’s habit of putting money into various jars. KiwiBank’s Offset Mortgage allows eight accounts. I suggest you ask your bank about their version of the product.
And not all must be in your name – the accounts of your partner, your children and even your parents or other family members can be offset, providing they don’t mind not earning on their money. If you keep money short term for tax payments, or are saving for a renovation, group those accounts.
Overall I’m very impressed with this product. It is a lot better than bundling all your financial affairs into a revolving credit facility because it helps you keep better track of your finances and there is less temptation to increase the loan at whim. In fact, watching your accounts grow over time can make you less inclined to spend them – and you have the bonus of reducing your mortgage a little faster while keeping money aside for when you need it.

You might be interested in reading: Examine your money personality.

 

This column by Deborah Carlyon featured on page 26 of Issue 010 of New Zealand Renovate Magazine. New Zealand's first and only magazine solely dedicated to home renovations.

 

Get in touch with Refresh to discuss your home renovation project

If you would like to discuss options and ideas to finance your renovation, please use the enquiry form alongside to provide us with your contact details. We will get in touch with you at a time that suits you to discuss your project.
*All information is believed to be true at time of publishing and is subject to change.
Deborah is a Certified Financial Planner (CFPCM), a member of the Institute of Financial Advisers (IFA) and an Authorised Financial Adviser (AFA). She is a principal of independent advisory company Stuart + Carlyon. This column does not provide personalised advice. Deborah’s Disclosure Statement is available on request and free of charge by emailing deborah@stuartcarlyon.co.nz.