2. The balancing act

You’re packing a lot into life these days. Juggling a career, perhaps a relationship, marriage, young children, and a hefty mortgage. Remember when stress was all about choosing which party to go to on Saturday night? Now, you don’t seem to have the time to do half the things you’d like to do. Life is full, but you need a sense of humour to stay sane! You’re managing to put a little aside, and you know it’s going to get easier.

This is the passage of life when most people plunge into full adult responsibility, e.g. working (and playing) hard, relationships, the accumulation of acquisitions and perhaps taking on a substantial mortgage. Marriage, the arrival of children, and reliance on one full-time and one part-time income are also typical in this passage.

Interestingly though, the trend is for many of these events to occur later in this passage than they did 20 years ago.

For couples, these are the high-stress years when there is a need for honest and open joint planning by both partners, which will do much to ensure financial well-being as well as a lasting relationship. Sadly though, these are also the years of highest divorce rates.

Home, sweet home

Buying your own home is a very strong New Zealand tradition. It served your parents and their parents very well, because inflation and higher wages made mortgage repayments easier over time.

For your parents, owning their own home when they retired was their main goal as they expected a pension to provide them with their retirement income. That may change – you will probably need to save to pay off a house and have enough money of your own to ensure financial security in retirement.

Today we have low inflation and low wage growth. It is sensible to question whether paying off a big mortgage makes sense. However, if you choose to rent instead of buy, you should make yourself save and invest the difference between your rent and what your repayments would have been with a mortgage.

The emotional benefits of taking a mortgage and buying a house may be more important than the investment issues. Owning a house provides a sense of worth, security and family stability, as well as a long-term investment.

So what are the important things about taking on a mortgage?

• Include in your budget the additional costs of buying and owning your own home, such as loan application fees, valuation fees, building reports, legal fees, rates, insurance, moving costs, connection fees (phones, gas, etc.), maintenance and vital repairs, and the additional costs if interest rates go up along the way.

• Think hard about the type of mortgage that best suits you – should you have an interest rate that varies, one that is fixed for a specified period or a combination of both?

• As a basic rule, pay off your mortgage as quickly as possible. If you come into some money, normally it is best to pay off some or all of your housing loan.

Above all else, budget carefully. Don’t be ambushed by your loan; control it or it will control you!

Protect your income and your assets

If you take out a mortgage and buy your own home, you will have more debt than you ever had before. As a result, you need to ensure you have plans in place to protect your partner and dependants in case something goes wrong.

Firstly, your ability to pay the interest owing on your mortgage is reliant on you receiving a regular income.

Depending on your occupation, you may be able to buy income protection or disability insurance, which will ensure you have a way of replacing your pay if you fall ill for any length of time, or are disabled.

Secondly, you will want to have sufficient life insurance to ensure that if you die you leave a debt-free home and sufficient capital from which your dependants can draw an income to meet their future needs.

You will also want to make sure that your home and its contents are insured against flooding, earthquake, fire and theft.

Start saving now!

All this adds up to the fact that these are the hardest years in which to set aside some of your income for retirement. However, starting early and investing longer can make a very big difference to the end result.

Bear in mind that by the time you reach age 65, your salary will be nearly three times what it is at age 30, even if salaries increase only 3% every year. In order for you to have enough income in your retirement, we suggest you will need a lump sum of about 7.5 times your anticipated annual income at retirement.

Savings in these early years should be invested in a spread of strong ‘growth’ assets such as shares and commercial property (unit trusts and superannuation funds enable you to invest in commercial property for a small outlay).

These growth investments can produce much higher returns over the long term than more conservative investments like term deposits. The flip side is that returns may be more variable from year to year, but you have time on your side to ride out any falls.

If you get just a 2% higher return on your money, over 35 years, the end pot will be almost double. For example, $10,000 invested at age 30 at an average annual return of 7% would be worth $107,000 at age 65. The same amount invested at 9% would be worth $204,000 by the same time.

So you can see a higher return makes it easier to reach the savings target of about 7.5 times your income at age 65.

At this passage, the ‘tightrope test’ is very real. While your commitments and expenses are at their maximum, you want to enjoy a quality lifestyle as well. To manage both requires careful planning and goal setting. Only you can determine your own priorities.

If you are one of the 52% of men or 42% of women in this age group who have not married, some of the balancing act pressure may not apply to you. For example, you may not need the life insurance cover we suggest. However, the other items are still required.

The numbers say you’ve got a long innings ahead. However, if you haven’t made a will yet, do it now. It’s as important to have orderly financial affairs after you’re gone, as it is while you’re here.

The following are broad averages that apply to New Zealand men and women aged 25-40:

There is no perfect way to manage your family finances. To test your situation, fill in your personal checklist. Allocate yourself the points indicated and check your score against the comments below.

A score of 100 or more is excellent – this is a clear indication that your household has a thorough understanding of what is required to have financial security now, as well as a financially independent retirement.

A score of 80-100 is good – your answers show what is required for you to be properly prepared as you pass into the next financial passage.

A score less than 80 indicates prompt action is required for you to gain control of your financial affairs. Very likely, you currently have the feeling of going around in circles, working harder, getting nowhere.

Summary

You have full adult responsibility. Maybe marriage, home, mortgage, children, the demands of a peaking career. It’s very hard to set aside some of your income for retirement. But careful planning and good budgeting will enable you to ‘walk the tightrope’ and strike a balance between your commitments, expenses and lifestyle needs.

If your score was less than 80, it’s essential you begin putting aside some of your household income for long-term savings. A professional adviser can help you in all aspects of structuring your financial affairs.

Now is the time to break the cycle and start the savings habit…because if you don’t, the future promises to be one long list of opportunities lost.

Now go to Back to basics for more information about keeping your finances under control.