Help, we spend too much!

Making more money is no guarantee of greater financial security without a plan and safeguards in place to protect it. In our latest Money Makeover, we find out what one family needs to do to put their big house in order.

Jason and Diana, both in their 40s, are a single-income family with four children. With the youngest heading off to school soon, Diana will be returning to work part-time. On Jason's salary (which ranges between $120,000 and $150,000 a year depending on bonuses) they have been able to get by on one income. Despite above- average earnings, they like to spend and debt is not insignificant. The family home is worth about $800,000 but they have a mortgage of $550,000. They have another $20,000 in credit card debt and car loans. Jason describes himself as a "spendthrift" who struggles to deny his wife and children "life's luxuries". Since moving to New Zealand from Britain, he estimates the couple has gone through $200,000 in savings. Despite a good income, and even better earning potential, Jason recognises the dangers of spending at current levels given their debt, future financial obligations with the children and economic unknowns. The couple has an estimated NZ$90,000 in pension accounts in Britain but is wavering about transporting them here. Here's how their situation breaks down:

Gross income:

$120,000 - $150,000 (including bonuses)

Assets:

House: $800,000

Savings:

KiwiSaver: $1800

Shares: $1300

UK pensions: $90,000

Liabilities

Mortgage: $550,000

Credit cards: $10,000

Car loan: $10,000

Expenditures:

Food, dining out, clothing and

entertainment: $23,4000

Power: $3500

Phone: $500

Rates: $2000

Risk management:

Life insurance: $550,000

Living assurance: $150,000

Disability income protection: $68,000

For an expert opinion, MoneyMakeover went to Richard Harden, with Richard Harden Investment Services in Nelson and Jeremy Flood with Westpac in Christchurch.

Richard Harden

Congratulations on your move to New Zealand. You have some goals which is great but you may need to make some tough decisions. Household income is excellent at around $150,000 - $170,000 per year but your debt and spending is high. Some areas to consider are:

Mortgage Payments/Debt/Spending

Your level of debt is substantial, with repayments being over 30 per cent of household net income. You appear to be paying off minimal capital and interest rates are rising so payments will rise.

Repaying your mortgage and adjusting your budget is top priority. To clear the mortgage in 15 years on 7 per cent interest rate would take monthly payments of $4943 which would be half your net income. That's $890,000 over 15 years with $340,000 alone in interest. That's a lot of money. Over time, with salary increases and the effects of inflation, the payments would become more manageable but realistically you may need to extend the term, especially with current spending. Look at flexible options which suit your requirements but capital reduction is important.

Insurance/Estate Planning

With a young family and high debt, personal insurances such as life cover, income protection and trauma are important. The life cover you have will pay off the mortgage should you die but what would the family live on? As the primary earner, if you can't work who will pay the bills? I presume the disability income policy of $68,000 is based on your basic salary. Check to see if you can cover bonuses as well. See a specialist insurance broker who can put together a comprehensive risk management package.

Retirement/UK Pensions

Retirement seems daunting with your level of debt, however you have started with savings in UK Pensions and KiwiSaver. Both of you should join KiwiSaver. Don't underestimate it - based on joint contributions of $9000 per annum, which will rise and including employer and tax credits to aged 65 (plus your UK pensions of approx $71,500), you could accrue around $825,000. This won't cover your retirement needs but could provide about $23,000 net per year in today's terms. I caution against relying too heavily on the NZ Government Super as it isn't sustainable at current levels. I based your contributions on salary and bonuses. As you reduce debt you can increase retirement savings.

Consider your UK pensions options carefully and get advice. You mention transferring them to New Zealand to clear debt. But you could face severe UK tax liabilities. Many New Zealand-registered Qualifying Recognised Overseas Pension Schemes are locked-in to 50-55, offering limited access but some can control currency issues. Before retirement, UK personal pension plans are more tax efficient than NZ Superannuation funds that pay 30 per cent tax. Longer-term there are advantages to transferring but understand the pros and cons.

Your current debt and spending is making it hard to get ahead. You need to put in place a far stricter budget or reduce your debt by downsizing to a $500,000-$600,000 house. This would solve your problems but is probably not what you want to do having just built a new home.

Jeremy Flood

Jason and Diana are a typical New Zealand family in terms of having school- age children, one main income, a partner working part-time, a sizeable mortgage and competing goals for a limited set of resources.

New Zealanders do not generally consider income as an asset and therefore neglect to protect it against unanticipated events. At 42, Jason has at least 20 years of work ahead of him, which could amount to an asset value of more than $3 million. It is this asset that the family will predominantly rely on to build its financial future. The question is how to best utilise and protect this asset to achieve the goals.

After building a new home, this family now has a significant mortgage to repay. Based on their current income levels, this debt will just be manageable, but they are also likely to be exposed to adverse events such as higher mortgage rates, unforeseen (or uncontrolled) expenses and any unexpected reduction in income (for example, due to ill heath). Therefore, based on these variables and their goal of wanting to repay this debt within the next 10 to 15 years, debt management will need to be this family's top priority.

Their mortgage is on a floating rate. With interest rates expected to increase in the next 6-12 months, even a 1 per cent rise could end up costing an extra $500 per month. Fixed rates provide certainty, while floating rates provide flexibility. They should seek further advice around optimising their mortgage structure to reduce their lending costs.

Many households struggle with managing the purse-strings. It is important to understand where your money is going and to establish a budget. A budget needs to be realistic, but beware about discretionary spending, as this can mount up and jeopardise your ability to achieve your goals.

Surplus income should be allocated towards each of the family's goals. It is often a good strategy to break large goals into smaller, more manageable portions. The family needs to work out what it would take to achieve their goals within their preferred timeline and see what is realistically achievable with their current budget. If there are not enough funds available, priorities need to be reset and adjustments made.

As this family's financial capacity is largely dependent on one person, it is essential that there is adequate insurance. I believe this family is significantly underinsured. The family needs to update wills to reflect their current family make-up and the family trust that has been established.

Retirement planning should become a key focus after their debts have been repaid, but it is important to still allow enough time to accumulate the necessary level of capital. Retaining their UK pensions and continuing contributions to KiwiSaver is necessary to keep their retirement savings growing.

This family's financial plan must initially focus on debt reduction and risk management. The next step is to set up an effective budget and establish key long-term priorities with the guidance of a qualified financial adviser.

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 Richard Harden and Jeremy Flood 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

- © Fairfax NZ News