Q: Due to Covid, our tourist business income has dropped substantially, from $70,000 to $30,000.
I asked my bank (where I have been a customer for 60 years!) for a temporary loan, but they tell me I can't afford the interest (but I can afford the interest on my credit cards which are creeping up!) My assets are $3 million, with liabilities of less than $90,000. We are both over 75. Our future bookings are returning to $70,000 in November 2022. My problem is firstly the bank, and secondly the next 12 months. Should I approach a lawyer for a second mortgage?
A: I suppose the bank thinks you can't be certain about your future bookings. And these days it's become much harder to qualify for a loan, under recent law changes.
But still, with a balance sheet like yours it seems odd that you can't get a short-term mortgage. And your long relationship with the bank should count for something.
What to do? I don't think many lawyers are in the second mortgage business these days. I suggest you go to a mortgage adviser, who can tell you about other possible lenders.
Failing that, look into a reverse mortgage against your home, making sure the lender will let you pay it back soon, if you can. If your business doesn't return to its old level, you can just keep the loan, making no payments, until you die or sell your property.
The interest will compound over the years but you're in a strong enough position to cope with that.
Interest rates on reverse mortgages are higher than on other mortgages. But they are way lower than most credit card interest.
For a somewhat happier letter about a Covid-hit business, read on.
Q: I'm reading your book Rich enough? and wanted to sincerely thank you. I started a business just pre-Covid that unfortunately went belly up, leaving my wife and me with a large debt (well over six figures) to pay off — not to mention the emotional toll it has taken on the whole family.
Although I subsequently got a job, the banks were unwilling to add this amount to our home lending, so we had to sell our home and move into the rental property we own, using the proceeds to pay off the business lending as well as lots of our home loan.
Being in our 40s and now with decent equity but not actual savings, the next question was how do we start to save for our retirement and other future rainy days? Your advice has been nothing short of game-changing for us. As a direct result of reading your book, we are paying down high-interest consumer lending (vehicles, appliances) and setting up a monthly automatic payment into a growth managed fund, which we selected using the tool you recommended on the Sorted website.
I just wanted to let you know that you have made a massive difference to a family that has been beaten up by Covid, but is now emerging re-energised and, thanks to your tips, with a solid plan. Thank you.
A: What a lovely letter to receive. Thanks so much for writing.
There are several points in your letter that other readers might want to note:
• You borrowed a lot of money, but you had a back-up if it went wrong — the ability to sell your rental property. It's important to have an escape route.
• It wasn't great that you had accumulated high-interest debt in the first place. Sometimes you have to borrow to buy a washing machine or a car if your old one has broken down. But paying that back as fast as possible should be a top priority. If you want a new appliance, vehicle, furniture, electronic goods or anything else just because it would be nice, it's far wiser to save for it first. High-interest debt is a scourge. It's great you are killing it off.
• Setting up automatic monthly payments into a low-fee KiwiSaver or other investment fund is a great way to build your wealth. And after a few months it feels painless.
Property v shares
Q: Oh dear, Mary, Mary quite contrary. Disappointing! In your last column last year, headlined "Borrowing to invest", you and IRD have again confused tax avoidance with tax evasion.
The former is sensible. No "warning" required. The latter is illegal.
I do have a question re property versus shares. You state, also in your last column, that "returns on rentals and shares are fairly similar over long periods". My ETFs and index linked funds are not performing well at all. I have only had them for a few months though, but some are in negative territory. And no dividends (yet).
My $1.1 million property purchased in May 2020 on the other hand is still potentially appreciating at a very healthy rate, as the current valuation is $1.7 million. That surely cannot continue though?!
A: Probably not. But who knows in the short term? In the meantime, since you wrote, your funds have probably done worse.
Judging the performance of shares, share funds or property over a few months is like judging a region's climate by the weather on one day. You need several years of climate data, and many years of share and property data.
In October, Canstar compared returns on New Zealand house prices and shares since 2000. That's still not long enough, but it tells the recent story, which is:
• The house price index rose 416 per cent — more than five-fold.
• The NZX50 share index rose 625 per cent — more than seven-fold.
On tax avoidance and evasion, I've long known that distinction.
British Chancellor of the Exchequer Denis Healey is said to have commented in the 1970s, "The difference between tax avoidance and tax evasion is the thickness of a prison wall".
But sometimes there are middle-of-the-road situations. A taxpayer can argue that their steps to avoid tax are legitimate, but Inland Revenue might not agree. However, it can't be labelled evasion until a ruling is made.
In the column you refer to, a tax expert — neither the IRD nor me — said, "The plan, however, may be subject to tax avoidance. IRD could ask what was the purpose of the restructure?" That usage is fine with me.
Ready to retire
Q: My SuperLife fund balance was at $195,000 on January 6 and is now at $188,000. About 83 per cent is in Growth and 17 per cent is in Conservative.
I'm 69 and plan to retire this March. We are debt-free, mortgage-free and have $40,000 in a rainy day fund. The 17 per cent in Conservative is what I plan to spend in the next three years to subsidise my Super, if necessary.
I may also need to buy a car and am planning to take $30,000 out of the Growth fund. Should I move that portion to the Balanced fund?
My 60-year-old wife will continue working at Farmers and her meagre salary will assist in putting a crust on the table.
The volatile sharemarket is a worry which I know won't last forever.
A: Oh but it will! The market will calm down sometimes, but then soar or dive with no warning. You have to either get used to it — knowing that in the long run your average returns will be higher than in a low-risk fund — or, if it's too nerve wracking, move out.
Part of your worry is, perhaps, that your car money is in the growth fund. Yes, I suggest you do move it to a balanced fund. Or, if you expect to shout yourself a new car within three years, use the conservative fund.
Perhaps move that money in three lots of $10,000 — now, next month and the month after. Then you won't move it all at what turns out to be the worst time.
Apart from that, you are set up well, with your emergency money and lack of debt. Can I just say, though, that your comment about your wife's contribution sounds rather belittling?
Many money rules
Q: Here's my list of basic financial "rules" that I have given to my children, accumulated over the years from various commentators, probably even you!
1) Track your spending. You can't budget if you don't know what you're spending.
2) Needs and wants are often confused.
3) Talk money with those linked to you financially. Get financial discussions out in the open.
4) Take your advice from people who have been through several financial cycles.
5) People are too quick to judge others' financial decisions, but also ... 6) People will justify their bad financial decisions to the end of the earth.
7) Children learn about finances by watching their parents, not listening to hypocritical lectures.
8) You can earn a good salary and still be (cash) poor.
9) People can and do lose all their money — disastrous events/scams/tricksters.
10) Entrepreneurship is good. Grounded but entrepreneurial people persevere after setbacks.
11) You can be a capitalist and still have a social conscience.
12) You don't have to have a high-paying job to get wealthy.
13) Don't blame your parents, children, partner or education. Be personally financially responsible.
14) Employ financial advisers, brokers and other professionals — but your money is your responsibility.
15) Saving money is a choice.
16) Live within your means no matter how little you earn.
17) Don't think you are poor — it will lead to poor decisions and a downward spiral.
18) Pay your taxes on time.
19) Don't fritter money on coffees/lunches/eating out. Direct to savings.
20) Do spend money on experiences.
21) Drive smoothly. Braking and the following acceleration wastes fuel.
22) Do not incur fines. Moronic.
23) You can get rich one dollar at a time. Every dollar is precious. Think before you spend it.
24) Save before you buy.
25) Do not use interest-free hire purchase. Fees are very high and penalty interest is even higher.
26) Credit cards can make you look rich — but the debt will mount up if you cannot clear it every month.
27) Your credit card limit is not your money.
28) The only "good debt" is mortgage debt, provided you don't over-leverage yourself.
29) Interest on credit cards, HP agreements and personal loans is "idiot tax".
30) Avoid investing in "popular" — you have probably missed the peak.
31) Avoid phone or seminar investments — the broker makes their money from you, not the investment.
32) Buy property young. Move heaven and earth to get a deposit. Rent is wasted/dead money.
33) Get life insurance.
34) Get third party car insurance at a minimum. Ideally full insurance.
35) Diversify your investments. Entire classes can move at the same time, but seldom multiple classes.
36) KiwiSaver is good.
37) Read the fine print of legal documents — insurance policies, travel insurance, investments.
38) Investments trend to the average. If out of kilter — either up or down — be wary.
39) Don't choose an investment to minimise tax.
40) Don't always assume credit rating information is accurate.
41) You cannot get rich quick. You can get rich slowly, but steadily.
42) Look carefully when purchasing from an entity when associated with a government subsidy.
43) Passive cashflow rules.
44) You can always learn more about money.
45) You can change your financial ways of the past.
A: Wow. So much wisdom for the start of the year (well almost). I agree with pretty much all of it — even if the "buy property young" one is tough these days — and in fact I make several of these points in today's column.
One exception: you can indeed get rich quick, but only by taking big risks — such as borrowing to invest in a single high-tech stock — and being lucky. And that level of risk can also make you seriously poor.
Readers might want to pin this list on their loo wall, or somewhere else where it can be pondered.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to firstname.lastname@example.org. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.