Founder and Director of EnableMe Financial Personal Trainers Hannah McQueen is here to help you make the best financial decisions possible, pandemic or no pandemic.
In your 40s & 50s, you might be tackling your mortgage, and even looking towards your retirement. Both of these things are long-term goals that need long-term thinking, so how do you manage the here and now while also looking out for your future self?
Tackling your mortgage
At the moment we have record-low interest rates which would suggest you should be able to pay off your mortgage in record time. However, knowing what you should do and doing it are unrelated concepts – people assume they go hand in hand, but they seldom do! Research shows that simply ‘knowing – ie having the financial literacy – only improves what you actually do by 3%. In reality the opposite happens, and people use lower interest rates as a chance to borrow more.
Interest rates are just one factor in paying off your mortgage faster. In fact, when I got my first mortgage and negotiated hard for an interest rate discount I worked out it would only save me $12,000 over the life of the mortgage, which seemed like small fry when I worked out I’d be paying almost three times what I borrowed back to the bank in total!
Paying it back faster starts with knowing what you’re capable of and should be aiming for. As a guide, with our clients we work to these ratios:
If you have debt that’s four times your income, eg you have $400,000 in debt and you earn $100,000, you should be aiming to be mortgage-free in 8 years.
If your debt is 5 times your income, aim for 10-12 years.
If your debt is 8 times your income, you’ve overstretched yourself and we’d be telling you to sell.
Reaching your capability requires having money left over – a surplus each year – and consistently having a surplus requires having a workable budget, tracking your progress towards that plan and having your borrowings structured to help with faster repayment (which is not how the bank does it funnily enough!). Having someone who can hold you accountable to your goals and help you adjust your plans for life’s curveballs and opportunities is also really important – because again, knowing you should do something seldom means you do it!
Saving for retirement
Plenty of people get to their 50s and freak out – because all of a sudden retirement feels just around the corner instead of light years away. Before you freak out, you just need to start with some number crunching. How much does your life currently cost on an annual basis? Multiply it by the number of years you’re likely to be retirement and compare it with how much you’re likely to have when you reach retirement.
Helpfully, your KiwiSaver account should now give you a projection for how much you’re likely to have when you reach 65. For most people this won’t cover their entire retirement and there will be a gap but don’t panic – we just need to develop a strategy to close it. Some alternatives are less palatable or achievable than others – like working longer, earning more, spending less, or receiving an inheritance (it feels funny to rely on someone dying to fund your retirement, but if we’re desperate then we will!)
The best start is getting mortgage-free as quickly as possible, because we can put that cash to work in other ways – investing in your business, shares, or leveraging into property to help grow your wealth and close the gap. Basically, we need to get strategic to ensure that you can enjoy your life now, but not live to regret your choices when it’s too late to fix them!
