Q&As
- Repaying debt should be Number One priority — with one important exception
- Money can’t buy the most important things in retirement
- Last week’s numbers on NZ Super were incomplete — sorry
- Let’s demystify share trading, and share holding
- One more advantage of owning shares
QGiven the recent topic of the Savings Working Group, I thought I would ask a very basic question about why are we householders are not being more encouraged to fully concentrate on paying down all that accumulated debt incurred in the last thirty years. BTW — I am 39 years old, married, working wife, two kiddies — typical kiwi.
Fundamentally I understand the need to save. But when you have large debt, as we do, the question I have is why financial gurus are not stronger in selling the message “pay down ya debt” (thereby reducing net foreign liabilities), before committing to medium- and long-term saving for retirement, or in continuing contributions to KiwiSaver for your kids after grabbing the $1000 kick-start?
Last time I looked I was paying 6.5 per cent on my $240,000 mortgage and only getting 3.5 per cent on my small but growing and available $10,000 emergency fund. Hence — in my opinion — before saving, maximise available funds for “paying down ya debt”!
AYou’re quite right — except in one important way, which we’ll get to in a minute.
First, though, the Savings Working Group would love to see more people paying down their mortgages. But we didn’t do a song and dance about it, because most people can’t spare enough money to make big dents in their home loans.
Nonetheless, over the years debt repayment could make quite a difference to New Zealand’s foreign liabilities situation and to individuals’ wealth.
A basic financial “rule” is: pay off debt as fast as possible — unless you feel confident that you can earn a higher return in an investment than the interest charged on the debt.
As you point out, paying 6.5 per cent on a mortgage while earning 3.5 per cent in a savings accounts leaves you going backwards. Generally you can’t make a return on savings — after fees and tax — that’s higher than mortgage interest rates without taking considerable risk.
However, there’s an important exception — KiwiSaver. The scheme’s incentives — the $1000 kick-start, tax credits of up to $1043 a year and, for employees, contributions from employers — boost the return so that for most people it’s higher than mortgage interest rates. And if you are worried about risk, you can invest in a low-risk KiwiSaver fund.
The only people this doesn’t apply to are non-employees under 30 who have mortgages — which must be a small group. Number crunching shows that they should put savings into extra mortgage repayment, but join KiwiSaver after about 30.
Note, though, that it’s best for mortgage holders to contribute just 2 per cent of their pay to KiwiSaver — topping it up to $1043 a year if necessary, to get the maximum tax credit. Any further savings are best put into mortgage repayments.
Some further points:
- An extra advantage of KiwiSaver over mortgage repayment is diversification. Rather than concentrating on property, you can spread your money over shares, bonds and so on. You’ll also learn something about how markets work over the years — useful knowledge for when you finally pay off your mortgage.
- On the other hand, KiwiSaver’s big disadvantage is that you lock up your money, usually until NZ Super age. If you might need access to your money, perhaps to develop a business, mortgage repayment is preferable. You can usually borrow that money back again.
- If you want to make large extra payments off a fixed-rate mortgage, you will probably be charged a penalty. It’s usually best to wait until the fixed term has ended, and then switch at least part of your loan to a floating rate, on which repayments are free. Discuss this with your lender.
- You mentioned an emergency fund. Despite the fact that you can often add to your mortgage if you unexpectedly need money, that may take time to arrange. It’s good to have a few thousand dollars at hand, even if it earns less than the mortgage interest rate.
QYour correspondent last week, writing about the need for personal savings, says, “try living on NZ Superannuation”. You are in agreement with his argument and list six necessities — meals out, movies, plays, concerts, trips, books — as the “stuff of an enjoyable retirement”.
Wrong, Mary. The secret is developing an absorbing interest which may well be one which was out of reach in an earlier life, with all the responsibilities of that time, and now lies open to venture and adventure. With this passion, such pastimes as movies and trips become irrelevant.
I savour a weekly meal with family at our local and fabulous Indian restaurant at minimal cost. And as for books — please check out the revamped Auckland City Library — whose service has gone from great to super-excellent since the Auckland merger. Request today and read tomorrow!
But then, perhaps I am just lucky.
AIt sounds as if you have made your own luck. Well done. And you’re right. When you look around, the people who seem happiest after 65 are either still working — part-time or full-time — or are passionately involved in a project, charity, hobby or similar.
This might be partly because they are healthy enough to do such things, but such activity might also keep people healthier. And health and happiness are surely linked.
If we weigh up being deeply involved in something against having more money, the former probably contributes more to a fulfilling retirement.
However, in my defence, I didn’t call the list necessities. The opposite, really. Movies, trips and so on are non-essentials that bring pleasure to many — even you, with your Indian treat. Having extra money in retirement also gives people more health care options and the ability to financially help out others. It’s got to be a plus.
On books, it’s great to hear about the library. But for the sake of struggling authors I need to say, “Please buy books sometimes, especially books written by New Zealanders.”
QYour last column stated that a couple on NZ Super are paid $1022 per fortnight. Could you please tell me why my husband and I only receive $946.72 per fortnight as a couple. We pay provisional tax so would that have anything to do with it?
AMea culpa — and sorry if I’ve raised hopes of getting more. Last week I wrote: “Currently, a single person living alone gets NZ Super of $668 a fortnight after tax, and a couple gets $1022.”
After receiving your letter, I went back to the Work and Income website and realized those numbers apply to people using the M tax code. If I had scrolled down, I would have found other tables for those paying more tax.
Your $946.72 puts you in a middle tax bracket. In the highest bracket, single people living alone receive just $514 a fortnight after tax, and couples — with both people qualifying for NZ Super — receive just $773.
All of this strengthens the argument that it’s not easy to live on NZ Super alone — although, of course, those in higher tax brackets must have other income.
If you want to check the tables — which also have totals for singles living with others, couples in which only one person qualifies and so on — go to http://bit.ly/aV8WSC. And don’t forget to scroll down.
QI was appalled by the recent offer for Vector shares at a knock down price and wondered how this situation could arise.
A perception of the stock market is that it is mysterious and that only the “in the club” dabble in shares. There is a case for demystifying share trading.
My points are:
- Share buying and selling is easy. Why deal with the Bernard Whimps of this world?
- The current value of your shares is in the newspaper or on the web.
- Be wary of selling around dividend time and decide if you want to take your dividend in shares.
- Stockbrokers are easy to contact and extremely customer friendly. Advice is free.
- If you don’t want to use a stockbroker, most banks have a share and bond trading service. The National Bank gives me instant service on their website. So ask your banker for advice.
- There’s two main ways of earning from shares, viz:
- Annual dividends. Sit back and wait for the yearly dividend
- Market speculation on price fluctuations. One needs to study the market on a regular basis.
My main gripe with the market is that share prices are manipulated by the large players. Take Lynas, an Australian rare metals company. It is not unusual for this company to have over $40 million per day trading, by a very large shareholder playing the market, who maybe makes 8 cents per share. This equals about $1.6 million profit each time — a nice little earner! So one has to live with this and maybe profit from it.
AI don’t recommend share trading, as opposed to share holding, which I do recommend for those with 10 or more years to play with and a stomach for ups and downs. Generally, traders do worse than buyer-and-holders, especially after allowing for the expenses — and taxes — of trading.
Still, I agree with most of your points — which could generally apply to either traders or holders. My main disagreement is with the idea that studying the market is likely to bring gains from “market speculation on price fluctuations.”
Research suggests that professionals — who do this all day — get it wrong quite often. And the chances of amateurs learning enough to gain from their knowledge are pretty slim. I advocate buying a broad range of shares — rather than trying to pick winners — and keeping them for years.
Diversification also helps you cope with Lynas situations. You don’t care much if any one holding is just a few per cent of your total.
QI would like to make the point that if an individual wishes to buy a new car, and has purchased some shares in the past, he/she can sell some or all to finance the purchase. The funds will be available in two or three working days, that is, the proceeds will be in the bank and available for use.
I know of no other investment where this is possible. Money under the mattress, or in current account is not an investment.
AThat last point is debatable, but no matter. You are quite right — an advantage of share investment is that you can usually get your hands on the money quickly. It’s quite different from rental property in that respect — especially these days.
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Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to [email protected] or click here. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.