Do you manage your credit card debt by making the just the minimum monthly payments? If the answer to these questions is yes, then you are no different to thousands of other New Zealanders and, like them, you will probably retire with nothing much more than a debt free house and NZ Superannuation (if the Government can still afford to pay it!).

If this is how you want to live your life, then read no further. If not, then let me share with you some simple techniques that will help you achieve financial success. Transforming your financial situation is not an overnight process - it takes time and patience - but neither is it difficult. You don't need a lot of money to do it, you don't need to deprive yourself of the things in life that are important, and you don't need to take on a second job. All you need is a simple system for tracking and managing your money, combined with two basic principles - paying yourself first, and eliminating unimportant expenditure. Let's run through that in more detail.

In a typical household salaries and wages may be paid into a joint bank account. From there, mortgage repayments and household expenses are deducted, as well as personal expenses, and the account will from time to time go into overdraft, particularly if there is more than one Eftpos card or cheque book attached to the account. Holidays and Christmas presents are paid for with a credit card (minimum repayments are made and the balance increases over time) and saving for retirement is non-existent. Setting up a system for managing your money based on the 'pay yourself first' principle means reversing the order in which your money is used.

Start by saving for your retirement. A good rule of thumb is 5-10% of your income, but to get a more accurate picture go to www.sorted.org.nz, and use their retirement calculator. Saving should be made by direct debit from your bank account to a savings account or retirement fund (eg superannuation scheme or diversified managed fund). Next make a regular direct debit into a separate account to cover holidays, Christmas expenses or saving for home renovations, a new car etc. This amount could be another 5-10% of your income and should be saved into an interest bearing cash management account that is readily accessible. The amount left over after these deductions is the amount available to cover day-to-day expenses. At this point, you will no doubt be saying 'but I can't live on that little!' Here's where the second principle kicks in - that is, eliminating unimportant expenditure. This requires a little analysis of your budget. Generally, most things you spend money on fall into one of three categories - fixed expenses which you have little control over (e.g. mortgage payments, rates, insurance), semi-fixed expenses which you have some control over (e.g. food and clothing) and discretionary expenses which you have full control over (e.g. entertainment, meals out). Finding the spare dollars to save inevitably means cutting back on expenses, but the trick is to cut back on spending on the little, unimportant items. Start with discretionary expenses. Do you really need all those lattes, takeaways and video hires? Then move to the semi-fixed expenses. Do you really need your favourite brand of tea or coffee or can you make do with what is on special? Lots of small savings on unimportant items can add up to a significant amount of money. Depending on how sophisticated you want to get, you may want to have separate bank accounts for each of these three categories of expenses. Yes, there may be a cost in this, but you will find that this is more than offset through the benefits of being able to manage your money more effectively. Once your system is set up through direct debits, just sit back and watch your money grow!

Article by Liz Koh

Liz Koh is a financial adviser. A copy of her disclosure statement can be obtained on request and free of charge by calling 0800 273 847.

Ph: 0800 273 847

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