NZ Herald 17 March 2018

ABy watching every cent. Last week’s correspondent is an extraordinary saver.

After I received your letter, I emailed her to ask how she did it. “I emigrated to NZ 18 years ago (now a New Zealand citizen),” she replied.

“I was on a higher income before and have been living frugally (not everyone’s cup of tea). Family and relatives lived overseas, so no need to spend money on special occasions such as birthdays, Christmas, etc.

“Own a 14-year old car and never eat out. Cook meals in batches to store in freezer. Always check pricing of meats, vegetables and fruits. Don’t like alcohol, coffee and snacks. Make use of off-season deals when travelling once in two years. Avoid Boxing Day or black Friday sales like a plague (haha,ha… it’s just me).

“Switch power and internet to cheaper providers such as Flick and Big Pipe. Wear undergarments, clothes or shoes until seeing holes before replacing them. Always do window shopping for exercise purposes. Look for ways and means to save money, for example, cutting my own hair.

“I do not have a KiwiSaver account, every penny saved goes to the savings and term deposit accounts.”

Shortly after, she wrote again. “Oooops, missed something…. Another example of frugality: three years ago, bought a 4G Samsung mobile phone for $99 (on special offer) and top up $20 each year — meant for emergency use only.

“Have a weekly budget for groceries and challenge myself to spend less than that. Make sure each purchase is value for money i.e. watch every expense like a hawk!”

But still, I wrote back, you must have saved at an extraordinary rate.

Her reply: “With daily compound interest, I could save about 35 per cent of my take-home pay in a year.

“Whenever the savings account reached $10,000, I moved it to a term deposit that pays interest at the end of each month to my savings account. This way my savings account built up funds very quickly.”

That would certainly be true once her term deposit savings had mounted up. Which brings me to an important point. You may be overlooking the power of compound interest.

Another reader — with a similar question to yours — certainly is. To get to $375,000 of savings on a $30,000 income, he wrote, “Even if you were able to save half your income every year, that’s still 25 years of saving.”

He’s obviously divided $15,000 into $375,000 to come up with the 25 years. But that ignores compounding — earning interest on the interest you’ve already earned, which really adds up over long periods.

Let’s say the reader was saving $15,000 a year at an interest rate of 3 per cent a year after tax. It would take about 19 years, not 25, to get to $375,000.

Don’t forget, too, that if we’re going back some years, term deposit interest rates were higher. If they averaged 5 per cent over the period, it would take about 16 years.

As the reader says above, she actually saved somewhat less — 35 per cent of her take-home pay. So how long did she save for? “I saved the house deposit for two decades,” she says.

“Emigrating to a new country 18 years ago, with no family support had used up a lot of my savings to start up a new home, buy a car and support myself when looking for a job. When I got a job, I worked overtime and did shift work, which allowed me to have a higher income to start savings again.”

Since then, her income has sometimes been boosted above $30,000 with overtime, she says. But it can’t have made all that much difference.

Buying a house wasn’t always the plan.

“Twenty years ago, when I started saving, it was intended to be a retirement fund. Never thought of buying a house. However, recently with the high rent and low mortgage rate, I decided to use it to buy a house.”

Now that she has her own home, no doubt she will build up the retirement fund again, for when she stops work in about 20 years.

For all those who say home ownership is beyond their reach, this is food for thought — cooked in batches and frozen, of course!

Three footnotes:

• I suggest our super saver joins KiwiSaver.

  If she had been a member all along, her savings would have been boosted by employer contributions and tax credits. And if she had never owned a home before, she could have used that money to buy her home, and possibly also received a HomeStart grant of up to $5000.

  Too late for that. But she can still get the employer contributions and tax credits from now on. This should more than double her total contributions, which in turn would more than double her retirement savings.

  Take note, others on low incomes. The way the numbers work, KiwiSaver is particularly powerful for you.

• Our reader saved in term deposits. Others inspired by her story might save in a higher-risk fund — in or out of KiwiSaver. Their balance would sometimes fall, but their savings over 20 years would almost certainly grow faster.
• A big thank you to our reader for sharing her story.

AThe reader didn’t say the $600 mortgage payment was her only monthly cost. I was the one who compared that with her rent, saying the rent was probably considerably more.

You make a good point, that I should have taken into account other housing expenses. Still, chances are her rent was higher than your $1000 a month total estimate.

According to the latest Trade Me Property Rental Index, the national median rent was $470 a week in January. In Auckland and Wellington, it was $550 a week.

AI’ve often wondered that. Agents tell you they won’t try as hard if there’s a danger they will lose the sale to another agent. But as you say, competition might actually make them try harder. Next time I sell I plan to use more than one agent.

If there are any agents out there who can counter this argument, let’s hear from you.

On the level of commissions, I’ve often heard that New Zealand agents charge more than overseas. It’s worth looking for someone charging less, as long as they have a good track record. And, as I’ve said in the last two columns, you might want to set up the commission so agents have more incentive to get you a high price.

Auctions have clear pluses and minuses. As you say, if your house goes unsold it can seem tainted — although only to those who know about the auction.

And another reader wrote: “Auctions line agents’ pockets at the rate of two a month and at the emotional expense of the vendor.” I’ll never forget trying to sell a house in an auction back in the days when auctioneers could pretend to be taking bids. All seemed to be going well until he took us aside and said none of the bids was real.

It boils down to this: an auction won’t work unless you have at least two keen buyers, whereas in an ordinary sale you need only one.

On the other hand, in a booming market with rising prices, sellers sometimes get several hundred thousand dollars more than they had hoped for when auction bidding goes crazy. Having the right market conditions is crucial.

A tip from another reader: “I always control the auction reserve (if auctioning). If they insist on a number I tell them $30 million.”

That means, of course, that the property will never sell under the hammer. But the seller and agent can then negotiate with not only the highest bidder but other high bidders — and possibly end up with a higher price or a better deal in some other way.

More on selling your home next week.

AAccording to the Oxford dictionary, professionals need prolonged training and a formal qualification. So let’s see now — in alphabetical order — we have: academics, accountants, architects, doctors, engineers, lawyers, nurses and teachers. That gets us to eight.

I was told roundly once that journalists don’t qualify, but no doubt there are several others.

I agree, though, that the word is misused often. It’s sad the way words become debased.