NZ Herald 28 August 2010

AFar from being simplistic, this is a tough question.

When people decide to marry or live together, it seems they don’t often take much notice of whether they are compatible financially. But having different attitudes to money may cause more disharmony than anything else. And it sounds as if you two are miles apart.

So what can be done about it? I suggest you drop the word “budget” — and to some extent the whole concept of budgeting. You’re not going to get anywhere if it makes your partner angry.

Instead, the two of you could commit to making certain payments, leaving you free to spend the rest of your money whatever way you wish.

Presumably you are financing your excessive spending on credit cards or similar. With interest rates commonly around 20 per cent, anyone who runs up large long-term credit card debts will pay thousands of dollars in interest over a lifetime. It’s dumb.

How about you start by both promising to pay in full all the new charges on every credit card bill? And, if you have ongoing credit card debt, talk to your mortgage lender about adding that amount to your mortgage, so you can pay off the credit card. The mortgage interest rate will probably be much lower.

It’s not wise to stop there, though. If you continue with the same old mortgage payments, you’ll end up with a longer-term mortgage, which means you won’t pay off the former credit card money for many years. You could easily end up paying more total interest on that money, despite the lower interest rate.

To avoid that, you need to take the next step: commit to paying extra off your mortgage. You could start with $50 or $100 more a month, increasing that by perhaps $20 or $40 a month. Gradual change is usually easier to cope with.

If your lender won’t accept constantly changing mortgage payments, transfer the money to a separate bank account and then pay off the mortgage every now and then. If your mortgage is fixed, and you face penalties for early repayment, wait until the fixed term ends to do the pay-off. Whatever you do, don’t let your partner near that account in the meantime! Perhaps put it in your name only.

What if your partner rejects these ideas? Some points you could make to him:

• If he follows the plan, he will pay much less on interest payments to financial institutions, leaving much more to spend on himself.
• It might help for him to imagine his pay has been cut, or he has moved to a lower-paid job. If that happened, he would manage with less spending money, so why can’t he now?
• Many of his purchases probably don’t really make him happier. Usually when we buy something non-essential it lifts our spirits for a while, but then it just becomes part of the status quo. Point out purchases he made several months ago and ask if they have really improved his life.
• This is serious stuff. Your situation clearly worries you — and it should. I’m no relationship counselor, but if you both continue the way you’ve been operating I don’t like your chances of staying together.

Readers might have other suggestions. Ideas are welcome.

Meantime, good on you for realizing the importance of tackling this situation now.

AI’ve got two comments:

• It makes no sense to judge a share investment over a single year. In any 12 months, there’s about a one in three chance that the share market will fall. But the long-term trend is upwards.
• Your background and books probably didn’t do you any good. Sure, they might have helped you to identify companies with good prospects, but full-time professional investors will have already realized that and bought shares in those companies. That will have pushed up their prices, so you were simply buying into good companies and paying high prices to do so.

That’s no more likely to make you rich than buying into bad companies at low prices. Broadly speaking, any share is probably as likely to do as well as any other — although riskier industries, such as mining, are more likely to do either particularly well or particularly badly. A random group of 20 shares will probably perform as well as your carefully chosen ones.

This assumes the New Zealand share market is efficient, which is debated. Many people claim they can pick shares that are more likely to gain. But watching what’s happened over the years, it seems to me that the market is efficient enough that non-professional investors — even with backgrounds like yours — are not likely to benefit from careful selection over throwing darts at a list of shares.

Sure, most share pickers do well over the long term. But so do most people who make random selections.

Having made your choices, though, your 20 shares are probably as good a bet as 20 others. If you don’t need to spend the money for more than a decade, I suggest you leave the investments where they are.

With that many shares, plus three managed funds, you’re quite well diversified. Fifty shares would be even better, but 20 is much more than most shareholders own. Chances are good that in the long run you’ll feel much better about your foray into shares.

AIf the Herald did that, I should probably be the one who writes the KiwiSaver column, given that I’ve written three books on the scheme. But I don’t want to give up the non-KiwiSaver topics. I like the variety.

In defence of including quite a bit on KiwiSaver:

• Every Q&A — on KiwiSaver or not — won’t appeal to everyone. I suspect the KiwiSaver ones have more relevance to the majority of readers than many others. Despite that, I answer a disproportionate number of non-KiwiSaver letters, partly because of comments from people like you and the previous correspondent.
• These days, the KiwiSaver letters I do answer are often about more obscure aspects, so it’s new information for most people. I do, though, occasionally repeat the basics — if there are still many people who don’t understand them.
• Many KiwiSaver letters concern investment issues that also apply beyond the scheme, to other savings. See, for example, the next Q&A.

Can I make a suggestion back to you? If you are too old for it, or for some other reason you are not in KiwiSaver, you could still read about it and help friends or family to sign up and make the most of the scheme. It really is too good to miss.

AYou could certainly end up with negative investment earnings. If your fund earned a return that large, it’s probably a riskier fund, which means it invests mainly in shares and perhaps property. Returns on such funds are negative quite often — although over the long haul they tend to grow faster than more conservative funds.

In your early years in KiwiSaver, it will be rare for negative annual returns to outweigh the money you’ve received from the government and your employer. As your account gets bigger, though, your balance is certain to sometimes fall over a year.

Hang onto your hat!