Balancing act

Managing one's money amid the juggling of kids, jobs and household duties can sometimes be chaotic and revolving mortgages can add to the confusion. In our latest Money Makeover, we look at the anatomy of one family's finances. 

Paul and Kylie are a typical Christchurch couple. Both in their 40s, they have two children, aged 10 and 12, two jobs between them, credit card debt and a mortgage. With discipline and effort they managed to get pay their mortgage down to zero but then went back into debt to pay for renovations. While happy with the extra space and upgrades, they are back in debt, owing $120,000 on a revolving line of credit tied to their mortgage. While Paul is a faithful bookkeeper he feels the family's finances could use some fine-tuning. Staying within budget is proving difficult and knowing where to cut costs is tricky. "And the revolving mortgage has made it too easy to gradually increase the mortgage every month without pain."

Here's how their situation breaks down:

Net household income: $91,000 per year

Key expenses: Mortgage: $16,000 per year

Food: $15,000 per year

Tuition: $7000

Debt:

Visa: $7000

Mortgage: $120,000

Savings:

Cash on call $16,000

Fixed term $50,000

KiwiSaver: $ 7000 per year contributions

Ask the expert

For an expert opinion, Your Money approached certified financial planner James Smith with Bradley Nuttall Ltd in Christchurch. Here's what he had to say:

Paul and Kylie's situation will sound familiar to many other Kiwi families who at times find it hard to keep their heads above the financial water line.

With trying to balance the books at the end of every month it may feel like they are going nowhere fast, but in actual fact their situation is not as bad as they might think.

The key to getting back in control is to put in place a set of simple rules or structures that will help support the good habits that they want to maintain - to quote the late Jim Rohn, "success is nothing more than a few simple disciplines practiced every day". Provided Paul and Kylie can stick to the rules, they are actually well positioned to achieve most of their objectives and should be able to look forward to a comfortable retirement.

Household Income & Expenditure

Paul's gross income is a healthy $97,500 per year and equates to approximately $70,000 after tax. Kylie's part-time teaching brings in another $15,000 per year and together with the $6000 Paul receives annually from a Trust Fund gives a total net household income of around $91,000 a year.

According to Paul's budget the three major expenses are 1) their mortgage at $16,000 per year, 2) grocery bill at around $15,000 per year, and 3) children's school fees at $7000 per year. These major items come to a total of $38,000, but this still leaving them with $53,000 to play with. Whilst this might not be enough to travel to Europe every year, with some careful planning this should be sufficient to maintain a reasonable lifestyle for the family.

Cash & Savings

Paul and Kylie have done well accumulating a good cash buffer of $16,000 in a savings account and a further $50,000 which has been put aside for the children's tertiary education and is held in a UDC Fixed Term Investment.

An argument could be made for using the $50,000 to repay a chunk off the mortgage. The saving in mortgage interest payments would be higher than the after tax return from UDC. However, because the funds have a specific purpose I recommend that they be kept intact and set aside for the children's education.

Whilst UDC is financially sound and has a "AA" credit rating from Standard & Poors, because of the problems that have beset the finance company sector, I recommend that they review their options when the investment matures later this year. I also recommend they use part of their cash reserves to fully repay the $7000 Visa bill. This will still leave $9000 in cash, but will enable them to save on the credit card interest payments which are typically around 20 per cent per year.

I also recommend they reduce the Visa limit from $10,000 to say $2000 and make sure that any outstanding balance is repaid at the end of the month. This will help to ensure that the balance never gets out of control and that they are never making unnecessary interest payments.

Revolving Mortgage

The revolving mortgage, which works well for some, is perhaps their biggest handbrake for getting Paul and Kylie's spending under control because they can always dip into the mortgage at the end of the month.

I recommend that they switch to a simple fixed-rate repayment mortgage so they know where they stand and exactly what they need to pay. If at the end of month they find that there is nothing left over, it will force them not to spend. They will just have to do what our parents did - stay in and break out the board games.

Schools for the Children

Paul and Kylie have questioned whether they can continue to pay the children's private school fees. While they represent a reasonable proportion of their disposable income, given their resources, the school fees should be affordable.

The decision then is more a question of choice and the quality of alternative State schools in the area. If they decide that yes, schooling is important, given their household income they have the means to afford the payments.

Long-term Savings

With trying to balance the books at the end of every month their retirement planning may feel like it has been put on the back burner. However, the $7000 which is automatically going into Paul's KiwiSaver each year will add up. For example, according to Sorted's KiwiSaver calculator, these contributions could accumulate to a fund of around $250,000 in today's terms by the time Paul reaches 65.

Together with the expected Government Superannuation of around $25,000 per year after tax for a couple and a further $20,000 per year that is expected from Paul's Trust Fund, they seem well placed to generate an income of between $50,000 to $60,000 in today's terms without having to make any additional savings. If Kylie also joins KiwiSaver to obtain the employer contributions and government tax credits, this will add further retirement money.

Insurance & Estate Planning

Paul and Kylie have put in place a reasonably comprehensive insurance package which includes life, trauma, income protection and lump sum disability cover. However, at $170,000 Paul's life insurance would only cover the mortgage and leave Kylie little left over to support the children. While they may have to compromise on other areas to afford the premiums, I recommend that Paul's life cover be increased to a figure closer to $500,000.

Wills are important documents and Paul and Kylie should ensure that their wills are up to date and reflect their wishes.

* No person or entity will be responsible or liable for any errors, omissions or inaccuracies in this article or liable to anyone for any loss, damage, injury or expense suffered or incurred as a result of reliance on the information provided and opinions expressed in the article. Disclosure documents for James Smith, with Bradley Nuttall, are free and available upon request. Are you interested in being the subject of a free MoneyMakeover? Send your details to: amanda.morrall@press.co.nz.

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