Agony Aunt: Joining ‘the game’

Dear Janine,

We're in our mid-30s, with one child and one income. I'm due back from maternity leave soon.

We've both lived overseas and came back to New Zealand about five years ago.

We bought a house and now have built a decent amount of equity in it. We've got money overseas still. Do we put everything we can on the mortgage, invest in property when it seems cheap, invest in shares or just sit tight?

It's hard to know where to start. Plus, if we're going to extend our family, should we be more conservative or does that mean missed opportunities?

We often feel that many of our peers are miles ahead of us financially, with investment properties and share portfolios, because they just got on and did it years ago, and we want to "get in the game" too. How do we get more proactive with our money?

ANSWER:

- Caught Napping

We peer over the fence and the neighbour's cabbages look fatter and their parsley bush plumper.

Inside, we assume their investment portfolio is being polished until it's glistening. Or in my case, we and the neighbours seem to be cultivating the most enormous tree-sized weeds on the spare plot next to us, healthily preventing any illusions.

Peer groups are funny things, aren't they. Life would be no fun if comparing was banned. But it should really be categorised as a class C drug - not particularly dangerous, but slightly hallucinogenic. The wealthy never discuss their net worth, so in reality, the snippets of information we glean from the remainder of our peer group is usually distorted. That's because one person's measure of success is entirely different from another's.

A friend may have immense pride in their share investments and rave about their broker, because it gives them the feel- good factor. The reality is that the investment may be no larger than the balance of your emergency savings account.

Or there's the rental property that turns out to be a dunger, with a mortgage that sucks the life out of their lifestyle.

Money can be a bit like marriages. What is portrayed by other people on the outside is often not quite as glossy as what's happening on the inside.

What opportunities have you missed out on in the last few years? You missed the global financial crisis, a tumultuous ride on the sharemarket, the collapse of the finance company industry locally, and you didn't buy a property at the peak of the market. Buying a house in 2005 and child-rearing through the crisis makes you look like a couple of smart cookies.

The first lesson in financial planning is that you ignore the actions of others. They create noise which could influence you into taking risks which are not in your comfort zone.

The key areas where you need to take some financial advice or make some decisions are:

Your tax situation: The words "money overseas" alerts me to the fact that you could have offshore investments. If these are in foreign investment funds, a new- ish tax regime has been introduced in New Zealand and these could be taxable. Check with an accountant that you are dealing with this correctly.

Your KiwiSaver arrangements: Do all three of you have KiwiSaver accounts? Can you afford to make the maximum contributions? These accounts are a fantastic first investment step for most New Zealanders.

Your mortgage: While I can't give you any personal advice about your situation, it's standard practice to get rid of debt as a priority. It just comes down to the mathematical fact that borrowers are clocking up interest at, say, 6 to 7 per cent on their house, causing them to pay back two or three times its value. The only way of earning more than that by investing is to take risk. Even if you take risk, you can end up with a return which is less than your mortgage rate, so you're effectively going backwards.

Family planning: It sounds as if you're heading back to work, but, as you say, a decision needs to be made on baby No 2. If you got into the property market on the basis of a second income plus rent paying off the new mortgage, a baby may throw the finances into turmoil. It might pay to keep things financially simple, until you make a decision.

Excess income: Work out exactly how much your excess income is. Calculate it on one income, two incomes and 1 1/2 incomes. Do a detailed budget and allow for your lifestyle, treats and holidays. Do your homework on the property market - prices, rents, maintenance costs and mortgage repayments.

Sit down with the results and really weigh up the repayments, rental down time and add-on costs, to see if it gives you an acceptable long-term lifestyle.

It might be easily affordable, or the exercise might prove you would be forced to work full time.

As a mum, you have to look at the non-financial costs. Think about how it compares with a passive investment such as buying shares or investing in funds, from a time perspective. Take advice from a financial planner.

While we've talked about the importance of paying off debt as a priority to investing, KiwiSaver is generally an exception, because it's a small percentage, is habit- forming and, given it's a proper long-term investment, the performance has a better chance of matching mortgage rates.

When considering whether you'll pay off more of your mortgage or invest in another area, there is a flipside to the standard thinking that debt reduction is best.

Unfortunately, many people are so relieved they're mortgage- free that they just start spending, as if it's "mission accomplished".

It takes an incredible amount of discipline to continue the same levels of cash into investment vehicles. For this reason, some people choose to saddle themselves with a mortgage long term and a long-term investment plan. While it might not make the best mathematical sense, it can create good habits for those who don't trust their own levels of discipline.

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They 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.