Personal Financial Health â€" The Prognosis for 20061 February 2006
Personal Financial Health â€" The Prognosis for 2006
Bythe Retirement Commissioner Diana Crossan
Introduction
The 2006 Christmas holiday stood out to me because therewere just as many conversations on the beach, in the bach,or over dinner, about personal finances as there were aboutthe windy weather.
It seemed everyone had a story to tellabout rising house prices, or were wondering what theReserve Bank announcements meant and whether they should buyor sell their house now.
The conversations are a smalldemonstration of what is likely to become the main theme forpersonal finance for New Zealanders this year: the mountingpressure for people with high levels of debt to move theirfinances from the red into the black.
Economist andcommentators are debating whether, and by how much, theeconomy will slow down this year. Recent business confidencesurveys show that optimism is currently very low.
Whilesome households are managing debt well, others arestruggling. Westpac has estimated the average householdspent 14 per cent more than it earned in 2005.
In thesecircumstances, the holiday conversations indicate that manypeople are wise to the risks that economic conditions mightpose to their personal finances.
But what they are lookingfor are clues on how to get better at managing their money.The Retirement Commission helps people do that vitalfinancial planning. The Commission’s main aim is for NewZealanders to be financially well prepared for retirementand that means getting financially sorted during workinglife.
This can be a challenge in the current environment.Easy access to debt, unlimited access to consumer goods anda throwaway mentality means that many people from all walksof life find it easier to spend money these days, thanpeople have in the past.
People living only for today andwithout a longer term financial focus may find themselves indifficulty later in life, and possibly over the next fewyears if economic conditions change against them. Highconsumption today will be at the expense of less to spendlater, and debt payments could weigh heavily on somehousehold budgets.
2006 â€" what will it bring?
The market
Dr Alan Bollard has repeatedly calledfor New Zealanders to reduce debt by easing up on creditcard debt and to moderate investment in an“over-inflated” housing market. Pre and post-Christmasspending is yet to be fully evaluated but initialindications are mixed with some retailers experiencing adownturn in spending while others enjoying an increase.
The pundits predict the housing market to slow in 2006and as many point out, this could be a self-fulfillingprophecy. Few experts are advising people not to buy ahome. Becoming freehold on a significant asset like a homecan be one good way of preparing for retirement. But peopleshould think carefully about how much debt they take onthrough property investment. Those who stretched themselveswith investment property may find themselves servicinghigher cost debts.
Some commentators, including theReserve Bank itself, say New Zealander’s areover-investing in the property market, so suggest theyconsider other investments such as shares and businessrather than property.
Research results
One key tomoving New Zealanders with risky debt levels into healthiernet worth situations is well targeted financial education.Overseas research has shown that better informed consumersmake better financial decisions. However to target educationprogrammes we need good, up-to-date data.
The 2001Household Savings Survey has been one foundation for theCommission’s education programmes but this year will bringmore recent statistics. Results of the country’s firstadult financial literacy survey will be released in March.The joint ANZ-Retirement Commission survey announced inDecember 2004 has assessed personal financial knowledge,skills and competence. It will provide data about where NewZealanders’ level of personal financial knowledge reallystands.
In addition this year, there will be the firstrelease of information from SoFIE - Statistics of NewZealand’s longitudinal Survey of Family, Income andEmployment. Information gathered in SoFIE will, over time,help us understand more about the factors (such aseducational qualifications, family situation, sources ofincome, or age) which most strongly affect social andeconomic well-being. This information will also be fed intofinancial education planning.
The financial plan for 2006
The individual
The Retirement Commission’s messageto individual New Zealanders is clear - taking action tosort finances now means a better life in retirement.
As2006 could be a year of belt-tightening for some, this is anexcellent time for people to calculate their net worth andwork out how to stick to their long term financial goalseven if economic conditions change.
For those withconcerning debt levels the most important step to take thisyear is to look closely at your capacity to manage if thesituation changes â€" and to take particular care to avoidhigh interest debt (eg. credit cards, if you cannot affordto pay the full balance off every month.)
For savers andinvestors the key will be to make sound decisions and toavoid knee-jerk reactions to a slowing economy like pullingmoney out of long term savings vehicles.
Whatever yourfinancial status, know your current situation and yourcomfort level with taking financial risk. Make financialdecisions with your eyes wide open.
The RetirementCommission’s website www.sorted.org.nz has all the toolsand information to get people started.
The financesector
The financial advice sector has a central role inhelping New Zealanders reduce overall debt and increase networth. A trusted financial services sector helps NewZealanders become more financially savvy, and helps themknow more about placing their savings in investments otherthan property.
The Commission would like to see a lotmore recognised, relevant training and qualifications forthe industry, an independent complaints process, transparentfees and remuneration and a quality control system foradvice and products.
We look forward to the policydevelopments of the Government’s Taskforce on FinancialIntermediaries and the Product and Provider Review beingmanaged by the Ministry of Economic Development. Theseproposals are due before Cabinet by the end of the year withlegislation planned for 2008. The KiwiSaver initiative forworkplace saving will also continue to be developed forlaunch in April 2007.
The long term future
TheRetirement Commission believes financial education ofchildren is the key to ensuring future generations havefinancial know-how.
This is a challenge requiring sharedlong term commitment and investment from educators, and thefinancial services sector, particularly given easy access tocredit and the abstract nature of transactions with onlinebanking, internet shopping, cash machines and the plethoraof credit cards. Today’s financially illiterate17-year-old could become tomorrow’s 18-year-old with asubstantial loan.
Parents can obviously help instil moneymanagement values into children and there are interactivelearning games, tools and information for parents andchildren available on the Sorted website.
Schools alsohave a role in financial literacy although the subject isyet to be officially in the curriculum. Through the PersonalFinancial Education in Schools project the Commission isworking with the Ministry of Education to embed financialeducation into the curriculum by 2009. In 2006 a curriculumdocument will be completed and we will also audit ofexisting financial education resources.
As well asschools we are taking steps to see education in theworkplace developed.
So in conclusion, personalfinance issues will be very topical in 2006 and decisionsthat will affect the long term may be harder to make thisyear.
Those who are over-extending themselves financiallyand ignore calls to rein in spending may well suffer in aneconomic slow down. And for the rest of us as January isalready over and memories of the beach and the bach arestarting to feel remote, it’s about seizing theopportunity now to take stock of our financial situationsand make some decisions that will set us up well for thefuture.
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