NZ Herald 14 June 2025

AGood on you for saving that fortnightly $50. It will really add up over time.

I assume you are also in KiwiSaver, and getting the maximum from your employer and the government. If not, do that first — because the employer and government contributions really boost your savings.

On weighing up the index fund versus paying extra off your student loan, compare the index fund return, which is probably at least 5% after fees and tax on average, with the interest you pay on your loan, which is zero (assuming you live in New Zealand.)

You will do better going with whichever is higher — in this case clearly the index fund.

That might change if you moved overseas and were charged interest on your student loan.

AThis is a variation on the above Q&A. In both situations, compare the return on an investment with the interest you pay on a loan.

But the answer is less clear cut for you. While you’ll know your future mortgage interest — at least for a while — you won’t know how well your fund will perform after fees and tax. It might or might not exceed the mortgage interest.

In these situations, paying down the mortgage probably wins — partly because it’s good psychologically to get rid of debt. Or you could do 50–50.

Today’s excerpt from my book Rich Enough? is also about repaying debt versus investing — but it’s entirely different debt from a student loan or mortgage.

AI think you’ve done it perfectly.

Older people often complain about how fast health insurance premiums increase. But you don’t have to look far to understand why. And if an insurance company subsidised the oldies by charging younger people more, the young ones would probably just not have insurance.

Anyway, your solution should work well. You know that you’ll pay up to $4,000 a year for health expenses, but no more than that. And, as you say, your saved premiums will help with the $4,000.

You can also reduce premiums by changing what’s covered — for example, excluding GP visits.

Another approach, discussed in last week’s column, can work if you have a mortgage-free home. If you suddenly face big health costs, get a reverse mortgage or home reversion.

This is one of three excerpts from Mary’s revised and updated No. 1 bestselling book Rich Enough? A laid-back guide for every Kiwi, published by HarperCollins Aotearoa New Zealand

Psst! Have I got an investment for you! No, we need more exclamation marks. Have I got an investment for you!!!! It’s easy! And it pays you 20% a year!! At no risk!!!

I hope you’re looking at me sideways. “What’s Mary up to? This is definitely too good to be true.” That’s exactly how I would want you to respond to any ‘low-risk’ investment offering more than very low interest.

But this is different.

Oops! I hope you’re looking at me even more askance. The “this time it’s different” line should make all the warning lights flash.

So what am I on about? Paying off high-interest debt.

I hate seeing people with expensive debt — often run up on credit cards or Buy Now Pay Later, or through a finance company to buy a car or computer or something. (To keep things simple, we’ll call it all credit card debt. The same principles apply to other high-interest debt or high-fee borrowing.)

Most credit cards are run by banks, and they must love people with big card debt. Banks take in people’s money — in savings accounts and term deposits — and they pay pretty low interest on it. And they lend money out — for mortgages, business loans and credit card purchases — and charge higher interest on it, especially on cards.

To some extent that’s fair enough. They’ve got to cover the costs of running the business, and losses on loans that aren’t paid back. They’ve also got to give profits to their owners, the shareholders. But those profits are awfully big these days.

In light of that, I can’t see how banks can justify charging around 20% on credit card debt. But they often do.

And people pay. According to credit scoring company CreditSimple, one in three New Zealanders doesn’t pay off their credit card in full each month, which means they pay hugely high interest on the balance. Presumably most make the minimum required payment, which is a con. If that’s all you pay, your debt is likely to grow rather than shrink even if you make no more purchases.

And it gets worse. More than one in ten said in a survey that they’re comfortable with credit card debt of up to $10,000. Horrors!

Let’s start, right now, on a campaign to deprive banks of the profits they make on credit cards. How? Don’t pay their high interest rates by not having the debt in the first place.

Too late for you? Well let’s get rid of it.

You’ll be in good company. In a New Zealand survey conducted a couple of years ago, nearly three-quarters of the people said they are concentrating on reducing and minimising their debt.

What 20% amounts to

If you have a 20% credit card debt, and don’t pay it off, the compounding can be truly frightening.

Let’s say you owe $1,000 and make no payments. After a year you’ll owe $1,200. The next year it will be $1,440, then $1,728, then $2,074. The debt has more than doubled in just four years.

The year after that it’s $2,488, then $2,986, $3,583, $4,300, $5,160. After nine years, your $1,000 debt is more than five times as big. That’s horrible.

Are you a lucky one?

If you’ve got credit card or similar debt that you don’t expect to pay off on the next bill, in an odd sort of way you’re lucky! You can take advantage of that 20% ‘investment’ — or thereabouts — touted at the start of this step.

How does that work? Let’s start by considering how we measure financial wealth. We could look at the things somebody owns — properties, cars, shares, whatever. But what if a big spender has borrowed to the hilt to buy those items?

His debts might even be bigger than the value of his assets. That might not matter for a while. But what say he loses his job, or his business founders in a downturn, and he needs to sell some assets to buy the groceries and clothe the kids?

Because the economy has slumped, others are in a similar plight, so there are lots of properties, cars and shares on the market, going cheap.

Desperate to sell, our hero accepts low prices. In an extreme case, he might find himself with no assets to speak of but still owing money to the bank. Wealthy that ain’t!

A true measure of our wealth is the value of our assets minus our debts.

In a fascinating book called The Millionaire Next Door, Thomas J. Stanley and William D. Danko draw on their research on American millionaires. They found that most professional people looked wealthy, judging by their homes, cars, clothes and lifestyles. But many were like our big spender. They had borrowed heavily to live that way. Subtract their debt from their assets and there wasn’t much wealth left.

Stanley and Danko found that many of the actual millionaires were the folk next door, who had lived in the same nice but ordinary house for decades, often ran small businesses, and kept their debt low.

So what’s all this got to do with you? To keep it simple, we’ll say you have:

• Assets: long-term bank deposits of $30,000.
• Debts: $10,000 of credit card debt.

As we said above, your wealth — sometimes called your net worth — is your assets minus your debts. So your net worth is:

$30,000 — $10,000 = $20,000

One day you hear that your sweet old Auntie Mabel — bless her — has died and left you $5,500. What do you do with it?

Firstly, you blow $500 on a party or a weekend away. Life is for living, and not every penny needs to be spent sensibly! But should you put the remaining $5,000 into term deposits or pay down debt?

If you put it in term deposits, your assets will grow to $35,000. So your assets minus debts look like this:

$35,000 − $10,000 = $25,000

If you use it to reduce your credit card debt, that debt will fall to $5,000. So we have:

$30,000 − $5,000 = $25,000

Key message: Reducing your debt has the same effect on your wealth as adding to your savings.

So which is better? Here’s where it gets interesting, or should we say interest-ing? Look at:

• The interest you could earn if you put the $5,000 into a term deposit. We’ll say it’s 3% after tax.
• The interest you will avoid paying if you put the $5,000 into paying off the credit card debt. Let’s say 20%.

The choice is obvious. It’s far better to reduce 20% debt than add to 3% term deposits.

In fact, reducing 20% debt boosts your wealth as much as adding an investment that pays you 20%. No sound investment can promise 20% without big risk, but reducing debt is risk-free. It’s a no-brainer “investment” for anyone with high-interest debt.

A couple of quick points.

The first point is that when I said you’re lucky for having this debt, I didn’t really mean it! You’re actually unlucky, to put it charitably. Many would say you’re stupid, but I’m not that mean. Whatever we call you, it’s not clever to have high-interest debt. You’ll often end up paying twice as much — or more — for something because of all the interest you pay.

You’re lucky only in the sense that you’ve done something so bad that changing it will be so good!

The second point is for anyone wondering how mortgages fit into this. A mortgage is certainly debt. But it’s a far cry from credit card debt for a couple of reasons: the interest rate is much lower; and you’re buying an asset that will almost always grow in value over the years.

Still, it’s a good idea to get rid of a mortgage quickly, too.