Diana Clement

Real Money

Diana Clement: The seven deadly signs of financial disaster

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Everyone should dwell from time to time on financial risks and how to take some steps to minimise the fallout. Picture / Getty Images
Everyone should dwell from time to time on financial risks and how to take some steps to minimise the fallout. Picture / Getty Images

We survived the end of the Mayan world. And the fiscal cliff. So what should we be worrying about this year?

It would be easy to start the new year with a column about how readers should be making resolutions or goals (and you should all have done that by now). If you don't have any, then read my piece from last year, "Grab resolutions - and make them stick".

So, let's look instead at personal finance issues people should steer clear of this year. There are many, many risks to personal finances. It could be that inflation eats away at savings - although that's not likely to happen this year in New Zealand. It might be the risk of meeting a snake oil salesman who convinces an investor to stake his or her entire savings on one dud investment. Or it could be interest rates moving unexpectedly when you've done your mortgage repayment calculations based on rates staying at historic lows.

Anyone who has money put aside should dwell from time to time on financial risks and how to avoid them. Here are seven of the top risks for 2013:

1. Your job. - The single most important source of income for most people is their day job. "(Your job) would be the biggest issue at the moment," says Gareth Kiernan, economist and managing director of Infometrics. "Businesses are not taking on more staff and it is going to be a pretty hard slog (for jobseekers) in 2013 and 2014."

Unemployment hit 7.3 per cent (175,000 people) in the 2012 September quarter - the highest rate since 1999. The indicators are improving, says Kiernan. And the Ministry of Business Innovation and Employment expects the unemployment rate to drop to 6.8 per cent by March and 5.5 per cent by March 2015.

This doesn't negate the risk for anyone who relies on an employer for their income, however. Some people who lose their jobs find another almost immediately. There's no guarantee, however, that it might be you or that you'll get your old salary.

Jeff Matthews, senior financial adviser at Spicers Wealth Management, knows of one erstwhile council manager who spent nine months unemployed and was being offered half of his former salary by the private sector.

Russell Hutchinson, director of Chatswood Consulting, a financial services management consulting firm, says readers should ask themselves the question: "How would four months without income affect my finances?"

"Think about Christchurch," he says. "Some people woke up in the morning without a job, with no available credit, an unknown length of time to wait for an insurance resolution and no asset against which to borrow while they waited." Hutchinson recommends investing in education, paying off credit card debt, building an emergency fund and taking out income protection insurance that will pay you if you lose your job because of disability. Unemployment insurance is rare, but it does exist - if only to cover your mortgage and other loan payments.

2. Capital gains tax. - A capital gains tax on property and investments such as the family farm is probably inevitable when Labour next gets into power, says Andrew King, president of the New Zealand Property Investors Federation. King recently met Labour leader David Shearer and the party's spokesperson for housing, Annette King. A capital gains tax on residential property, Labour's supporters believe, would dampen demand in Auckland by taking some potential investors out of the market and make homes more affordable. It's not going to happen this year, but anyone buying investment property now needs to factor the risk into their long-term planning.

Infometrics' Kiernan says a capital gains tax could have the effect of making it harder for homeowners and investors to realise the value of their homes, farms and investment properties when they need to sell - especially outside Auckland and Christchurch.

3. NZ Superannuation. - Retirement income is something anyone under 55 ought to be thinking long and hard about. An ageing population means there will be fewer taxpayers to fund NZ Super for the next generation. Super may seem like a meagre amount of money now. It could well buy a lot less in a decade or two and the chances are that the age of eligibility will be raised.

"New Zealand Super is not sustainable unless the next generation wants to pay a lot more tax," says Spicers' Matthews. There are three risks to long-term payment rates, adds Hutchinson: "That the age of payment is increased from age 65, the rate of payment is made lower, [or] some changes to KiwiSaver rules are made." Those changes could be an offset of KiwiSaver income against NZ Super payments or a requirement to take a portion of a KiwiSaver pay-out as an annuity. Hutchinson says anyone saving to start a business needs to factor in possible increases in contribution rates to KiwiSaver.

4. Your house insurance. - Thanks to the Christchurch earthquakes, your insurance cover is changing. Homeowners and businesses wherever they are face a double-whammy of premium increases and lower cover. What's happening is that most house insurance policies are moving from replacement value to sum insured. Should your house be totally destroyed for any reason the insurance company only needs to pay out the insured sum, not pay to replace the house.

"(This) will make careful annual management of insurance vital," says Hutchinson. "You will want to keep that sum insured at the level which replacement would have paid," he says. "The big problem is that you'll probably forget unless you make a careful note of what to do when that insurance renewal comes in. It is a reminder that one of the most powerful tools in personal finance is your diary."

5. Government and council spending cuts. - We live in a world where governments need to spend less. The next spending cut could affect your personal finances. That's certainly the case in Wellington, where there have been job cuts in the public sector. Although most cuts are not hitting the general public in the pocket directly they do have an indirect effect on overall economic activity and job security, says Kiernan.

6. Social welfare benefits. - Will benefits be there if you need them? "The question is can the country afford what it pays out to people," says Matthews. Some people can guarantee that they'll never need the unemployment benefit. If made redundant they'll use their resourcefulness to get another job almost immediately, turn to consulting or start a business. For those who do need benefits - and it might be sickness benefit, or ACC, there are more and more hoops to jump through to qualify. If you want to maintain your lifestyle in the event of not being able to work, you will need to be using savings and insurance rather than relying on social welfare benefits, says Hutchinson.

"(Benefits) are a safety net, and the net is set at a standard of living that is pretty low."

7. Your marriage. - Divorce season is upon us after the Christmas break and splitting up is an expensive business. In a double-income economy it's financially difficult when one member of a couple needs to start living on a single income. It can devastate savings. Thirty-five per cent of couples who married in 1986 had divorced before their silver wedding anniversary (25 years). Divorce especially hits older women hard. Often they've either given up work or taken time off for child rearing and don't have the employability or earning power of their ex-husbands. This can, of course, work both ways. It mustn't be forgotten that two-thirds of marriages end in the death of one partner, and this can also be financially devastating without suitable insurance and good estate planning.

- NZ Herald

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