Human Capital

In Christchurch there’s recently been a massive earthquake and a swarm of quite considerable aftershocks. These were not predicted as it’s a fault line that hasn’t been active in living memory.

As usual, the news cameras provided voyeuristic shots of dogs searching through masonry rubble for bodies and a selection of those buildings that had collapsed in the most spectacular manner. Other pictures showed police cordoning off the inner city and there were reports of looting.

 So far the images fitted the stuff of a full scale disaster. The stuff that glues people to the T.V. waiting for the next sensation to give them that sense of awe that such things should happen to other people.

 In Christchurch, it was the shock of witnessing that it had happened to us and consequently that our city was the subject of international curiosity.   Missing from the news headlines was the miracle that, given the magnitude of the quake, there were no deaths. Probably the first time in history that a 7.2 quake in a built up area has not taken a single life!

Of course no one would deny that destroyed infra structure and buildings equal destroyed livelihoods.  And that the collateral damage isn’t only financial but emotional as some people have to come to terms with ruined homes. Despite these hard facts perhaps Christchurch’s most newsworthy attribute is the way people are coping.

There’s a reason for this of course. We’ve received invaluable support from the police, the fire department, the armed forces, civil defence, the council and the government and these have all been instrumental in providing solutions for repairing our homes and our infrastructure. However, it is the psychological impetus that has been Christchurch’s real triumph.

Teams of volunteers have offered manual help in clearing silt from houses affected by liquefaction problems. People are speaking to one another on the streets and ringing round family, friends and neighbours to see whether they are ok or need help. The spirit of Christchurch has lifted into a “can do”, “will find solutions” approach to the disaster. It’s a kind of grass roots neighbourliness that has often been missing in a world obsessed with material things and the work hours needed to maintain this level of consumerism.

So if there’s any upside to a local disaster, it’s that it personalizes the plight of other people and defines a much more positive sense of community identity.  Such a model shows us that sharing ideas and ingenious solutions is the sort of human capital that could enable us to evolve characteristics designed to succeed in a world where much is unknown and uncertain.

Future Planning or Navel Gazing?

In times of stress we are supposed to be hard-wired to fight or take flight.

New Zealanders are known as battlers but what do we do if the odds get too stacked? Do we a) pretend it's not happening, b) freeze into a position of inaction, fearing any action could tip the balance adversely or c) do we take stock of what is happening and decide to change the game plan. Put this way it sounds like a no brainer but probably, if we were honest, most of us would fall into the first two categories because exposing ourselves to financial realities can be quite disturbing.

Financial advisers often ask, "What's your long- term plan?"  "What do you want to do with your life?" and sometimes, we are so busy coping with the present that such questions are quite embarrassing especially as the average Kiwi family is juggling daily to keep a delicate balance between income and expenditure.

So what keeps our income in suspended animation like this? It's that critical ratio between what we need to spend on our daily needs and debt servicing. The bottom line is food and shelter and probably our incomes come close to being sufficient for these. However over the years our wants and sometimes needs have caused us to borrow beyond our income and, in the current economic climate, these borrowings are causing us concern.

It’s this we need to take stock of. No good lying awake at night.  We have to be able to look hard at our loans. Factualize the actual cost of them and then see whether there isn't a better way to manage them. Die-hard belief systems often prevent us from imagining alternative solutions to our current problems.

Let's look at some of the most common loan problems. Cars for instance. If we can't pay cash for our cars , it’s really important to investigate the true cost of getting finance before we make a decision. One person once told me he had borrowed $48k for a car and now three years later he'd be lucky to get $15k for it, so was having to sell his house because the interest on his car finance meant he still owed $72k on his car. So think rationally. If we can't pay cash for our car update, it could be sensible to modify our ideas. If we have sufficient ownership in our house we may be able to add $10k and pay mortgage rates of interest on the deal. This will make it altogether more affordable. However, this isn't so great either, because it could push our mortgage out a further year and if we’re paying $20k a year this isn't a great return on our money.

Houses of course are our most expensive debts. They can take up anything from 25% to 48% of the average income. On the basis of this, it's not surprising Kiwis aren’t the greatest savers in the world, and are so typically under-insured. What's more we've generally taken out a 25 year mortgage contract in order to be able to afford the interest charged on such a hefty piece of borrowing.

So what to do? Most of us would consider a family home essential to our well being so selling the house is probably not our preferred option for solving our debt problems.  If this is true for us, the first thing to do is to prioritize this investment in our house. To ensure that we have the ability to cope with this commitment we do have to recognize that other claims on our money need to be rationalized.  There are two sensible options available to help you to reduce your debt and give you a comfortable balance between mortgage debt and life style.

The first one is to stay away from further borrowing i.e. store cards, credit cards and unmanaged line of credit.

The second one, if we have 20% ownership in our house, is, paradoxically, to get advice around how to get a mortgage management company to manage you out of your long-term mortgage debt by using managed line of credit. 

This form of management really makes a difference to home owners.  A good mortgage management company will redesign a mortgage to a clients advantage , and continue to monitor  and redesign according to any change in circumstances so clients can be assured they will get the maximum amount of unnecessary interest converted into their saving  through time. 

Typically, a properly mentored mortgage management program can reduce a 25 year mortgage term to 12 years. Naturally, 12 years worth of $20k can make a considerable difference to the way we currently live. It could also allow us to achieve updating and maintenance projects cash positive and start planning for a financially secure future. 

So back to the question financial planners ask their clients, "What's your long- term plan?" "What do you want to do with your life?" Let's not just accept the status quo, let's do some research on our own behalf and change the game plan.