A new year is a great time to have a look at your finances and make sure everything’s in order. This is bigger than investing. Rather, it’s about looking at your money in general. By taking a look at where your money’s going, and making some changes now, you can build a solid foundation for your investments. And the more you invest, the bigger you can make that pie!
So with that in mind, here’s your financial checklist to start off the year.
1. Contribute to your KiwiSaver
This is a big one. If you contribute a bit more than $1,000 ($1042.86, to be specific) to your KiwiSaver each year, the government will give you another $500 (actually $521.43, of course). That is really the best deal in town—an instant 50% return!
If you’re already set up with KiwiSaver but you’re not currently contributing to it, you might want to start now. See, the government’s financial year starts in July. That means you need to have contributed $1,042.86 by July of this year to get your free $500. So if you’re just starting now, you’ll need to contribute $205 per month. May as well make it $210—just to be safe.
And while you’re at it, you may as well make sure your other KiwiSaver settings (like your tax rate and the kind of fund you’re in) are right. You won’t get $500 for sorting this, but it’s definitely worth doing. Here’s how to get everything organised.
2. Sort out an emergency fund
Sorry, this one’s a little bleak. The reality is that things happen sometimes—jobs don’t work out, companies go under, people get sick for a long time. If something like this happens to you (touch wood real quick), you’ll be in a much better position if you’ve put some money aside for emergencies.
You want to have enough aside that you can live for awhile without any income. An emergency fund you could live on for three to six months is a good rule of thumb, but it’s ultimately up to you. Two weeks isn’t very much at all if things get stressful, while two years might be excessive (not to mention takes ages to save up!).
If you don’t have an emergency fund, don’t worry—just set an amount you want to save, then decide how long you want to take to get there. You can start small and build up. Try to save up $1,000, or 2 weeks’ pay—whichever is higher. Then you can build on this over time. The longer you’re comfortable waiting, the less you have to put aside. The longer you wait, the less you have to “pay” each week, but at the same time, the less you’ll have if something happens before you hit your goal amount.
One last thing about an emergency fund: it doesn’t necessarily need to be in a bank account. You could invest it, as long as you’re comfortable with the risk of that investment potentially losing value, and maybe even putting a little more in to cover that. If not, you may want to look at something low-risk!
3. Take a look at your debt situation
One investing cliche is that you shouldn’t invest before you pay off your debt. We don’t think this is necessarily true, because there are different kinds of debt. The key thing to look at is the interest rate. The higher it is, the more money you should put towards paying it off.
This is because any investing you do has to “beat” the interest rate on your debt to make a difference. Let’s say you have $1,000 cash, and $1,000 in credit card debt. The credit card debt has a 20% interest rate.
If you invest that $1,000 for a year, you might make 7%. That’s $70—not bad. But at the same time, your credit card debt grew by $200! So you’re still $130 behind. Stink! Even if you made a 10% return, you’d still be $100 behind.
On the other hand, let’s say you have a student loan. That loan might be big and scary, but as long as you live in New Zealand, your interest rate is a not-so-whopping 0%. So there’s not much incentive to pay it off any faster than the bare minimum.
So take a look at your debt situation and focus on paying off any high-interest debt—Sorted have a great guide to help you make a plan for this! But if you have low or no-interest debt, you may be able to get away with paying it off slowly and steadily and put your spare cash to work in other ways.
4. Build a budget
Budgeting can seem scary, because people often think of it as putting massive restrictions on spending. We don’t think this necessarily has to be the case. Rather, a budget is more about getting a look at where your money is going. This gives you a clear picture of what you’re spending money on, and if you want to make changes, you’ll know where to make the adjustments. And if you don’t want to make changes, that’s fine too! It’s ultimately your money, so you can spend, save and invest in any proportion you want.
This last one can go right alongside the other four—get investing! That’s how you grow your wealth in the long term, and get your money working for you. You can put money towards an emergency fund, pay off debt, and invest, all at the same time. You just need to adjust how much you put towards each bit.
For example, you might want to put aside $100 a week. You could invest $20, put $40 towards your student overdraft, then put the last $40 towards an emergency fund. Once your overdraft’s paid off, you can invest more, put more in your emergency fund, or both. And once you’re happy with your emergency fund, you’ve got $100 a week to invest!
Looking after things like this is a great way to transfer some money to your future self. It’s a little housekeeping now that can really pay off later—so it’s much better to get it taken care of now, rather than wish you’d taken care of it further down the track.
Ok, now for the legal bit
Investing involves risk. You aren’t guaranteed a return, and you might lose the money you started with. Before investing, you should read your fund’s product disclosure statement. It contains the investment objectives, risks, fees and other information. You should carefully consider this information in relation to your investment time frames and goals.