On Sunday morning I nearly poisoned myself with spray n wipe and bleach. No, life is not that bad but with the first day of spring behind us I couldn’t stand the accumulating dust or the mould on the window sills any longer. I just snapped and had to clean it. My financial affairs came in for a bit of spray n wipe too. Read on to see what I did:

The timing is pretty good for all of us to review where we are and its something Kirsty and I do a couple of times each year. We do a kind of ’state of the nation’ review and when she gets home from work tonight we’ll discuss it more. Economically speaking, interest rates are steady for the moment but poised to increase over the next 1-2 years. GST is going up in a few weeks time but most people get a tax break too. And yes, we’re heading into summer after a pretty miserable few months.

Against that background here are the top 5 questions I asked myself

1. What have I got?

I find it useful to understand the value of what I own and owe and importantly work out the difference between the two values. This difference is called your ‘net worth’ and is a snapshot of the state of your (financial) health. The nice thing about this number is that it shifts your focus from the daily grind of paying bills and gets you to look a little further out. With a broader perspective you can often see things that you would otherwise miss when you’re just getting through the day.

The idea is that this number should improve each year either with increasing asset values (eg your house goes up in value, you keep paying into Kiwisaver) or reducing liability values (eg your mortgage being paid off gradually). Knowing where you’re at is a good start.

2. How much do I spend?

Of all the people I’ve done mortgages for only a handful have ever been able to tell me about their spending with any degree of accuracy. Its funny how people know exactly what they get each pay day but have no real idea of what they spend it on. Yet knowing what comes in and where it goes is the first step toward better money management!

Take the time to go over your bank and credit card statements and write down what you spend on power, groceries, petrol, mortgage/rent, telecoms, bank fees, going out, savings etc and put everything else in a ‘miscellaneous’ category. I do this routinely as part of your mortgage application and its fair to say most people have a large ‘miscellaneous’ category full of so-called discretionary spending.

Don’t get me wrong, we all do it and I’m not a saint either but this category is often where the extra money for increasing your mortgage payments or saving for a holiday can come from. I looked at some statements the other day and found that buying lunch and coffee was costing this person $400 a month. Imagine that on your mortgage!

3. What am I doing to improve my (financial) future?

Going from one pay day to the next is all very well but it can get to feel like rut after a while especially if you don’t feel as if anything is happeneing or you’re just going through the motions. If you’ve answered the above two questions honestly you should be able to look further ahead and look forward to some fun stuff. You could even get really serious and plan for a time when work is something you don’t have to do any longer.

For most people, that future involves living in a freehold house with money in the bank or other investments to live off. What are you doing about it? Are you doing enough? Are there any new skills you could work on so as to improve your income?

It was really great to see that Kirsty and I could both add Kiwisaver to our list of assets this year and that we had paid off a little chunk of the mortgage.

4. How much do I need to live on?

Closely related to the previous question, this one forces you to find out where the bottom line is. What are your essential costs, the things you absolutely have to cover even when times are tough. Strip out all the discretionary spending and find out where your bottom line is. You never know what life is going to throw at you — earthquakes, redundancy, divorce — and while you can’t always do much to avoid those things having quick access to resources makes dealing with an emergency so much easier.

The trick is to build an emergency fund to cover a crisis position. Aim for 3 months of your bottom line living costs, ideally more. You might actually find you can get by on very little and that’s good news because it means you can put your income into other things like retirement funds or saving for a house.

5. What would happen to the family if something bad happened to me?

An insurance broker’s favourite question and one existing clients will have heard me ask before. If you have children then it’s likely that you’ll want to take care of them, right? This means lump sums to pay off or reduce debt are a good idea.

On the other hand, if you’re single and don’t have kids life insurance is a waste of money but protecting your income is really important. For you, life without income is a bit like life without oxygen. Either way the size of your backstop depends on how you answered the previous four questions.

And it’s not just about insurance either. Appoint guardians if necessary and ensure your Will reflects your final wishes.

So the conversation tonight with my good wife will be something like this — keep going to work dear, you can’t stop just yet. We’ve made a good dent in the mortgage and even though house values have slipped a little we’re still ahead of where we were at last year.

Try the exersize and see where you end up.

 

About Campbell Hastie

Cam is one half of Auckland based mortgage brokers, The Go 2 Guys.

He makes a living by sharing what he knows about mortgages with people, arranging mortgages for people and then insuring people.

He doesn't claim to know everything about mortgages himself which is why he teamed up with David Mercer — hence the ‘2’ in Go 2 Guys.

He writes posts regularly on his blog and has been told he has an ability to share his knowledge in a simple and sometimes memorable way.

Feel free to comment and ask any questions. Contact Campbell Hastie m: 027 697 7789.

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