Today marked the start of NZ Money Week! I thought it was timely to review this book.
The Perfect Balance: How to get ahead financially and still have a life
By Hannah McQueen, Allen & Unwin,
First things first: I like Hannah McQueen’s approach. Early in her book, the chartered accountant/financial trainer gets straight down to it: you are never doing as well as you think you are, but it’s never too late to change your ways. I’m also totally behind her argument that to be money smart is to be socially responsible – let’s face it, everything comes back to money in this world.
But for anyone up with the basics of personal finance, there’s nothing groundbreaking here. Establish an emergency fund. Spend less than you earn. Avoid lifestyle creep. Consolidate debt at lower rates. Brownie points, however, for taking time to discuss the psychological aspect, because in reality finances are just as much rooted in emotion as they are about logic. Think money personality types and triggers for spending and saving. (You may well get a bit uppity, fellow 99 percenters, at the mention of some of her uber-earner clients who can’t seem to get ahead despite pulling down low to mid six-figure incomes.)
When it comes to talking property, she gives negative gearing a bit of a slap. Many investment properties have a shortfall between rent and the actual mortgage (what does that say – that as ridiculous as our rents are, house prices are even more insanely high?) For every dollar you top up (covering the shortfall between rent and mortgage/other property costs) you get up to 33 percent back in tax. In what universe is this actually a good thing? Sounds about as logical as buying 5 cans of tomatoes just to get a free one, when you know you’re not actually going to use them all up (something I nearly did this week). Relying solely on the property value to go up is risky, especially as we don’t have 30-year fixed rates (the longest term is five, to this renter’s knowledge). And as McQueen writes, over a 30-year mortgage you could well be facing double-digit interest rates at some point.
(I recall, as an intern, being tasked with compiling a piece comparing mortgage rates around the world a few years ago. It was difficult to pin down true apple-to-apple comparisons, particularly in the US, what with balloon loans and their fixed rates being higher than floating rates, the opposite of here. Nonetheless, our interest rates are always going to be higher than those in many other countries, and as a saver without a mortgage, I am grateful for this right now.)
The most interesting part of the book comes toward the end, when McQueen finally addresses what is apparently her patented super-mortgage-paydown formula (the catalyst for her starting her own financial advisory business, EnableMe). When she got her first mortgage, she was horrified at how little principal was actually being paid down for the first two decades. So, as you do, she rung up a calculus lecturer at the University of Auckland. The outcome of that was an eight-page equation that apparently will get you out of debt ASAP based on structuring your mortgage on an optimal mix of rates and timeframes, assuming of course that you have spare cash to make extra payments. I’d be interested to know more about how that works, but I guess that’s what her clients cough up $200-plus an hour for.
You’re so right that that US has a mishmash of different mortgage interest rates, even though it’s usually only the 30-year fixed 80/20 loan rate that gets quoted in the media. In reality, that rate can even differ from state to state because of the varying laws regarding the risk to the lenders. (Some states let lenders come after your other assets if you foreclose and the house isn’t worth enough to cover your mortgage balance, while others limit their claims to only the house.) Are there mishmashes like this in other countries as well?
Uh… I couldn’t say for sure. This was many years ago; I was basically tasked with putting together a quick at-a-glance type thing comparing apples to apples common mortgage rates in the US/UK/Australia/Canada to see if we in NZ were getting good rates comparatively. Being nearly all Commonwealth countries it wasn’t too hard to get most of them (I think I took the average floating rate) but when it came to the US there were SO MANY KINDS of loans (yes the 30 year, but also all the other kinds that non Americans have no clue about. Serious WTFery) and your fixed rates were higher than your floating rates, so trying to figure out some kind of average was pretty much impossible.