NZ Herald 25 October 2014

AThe first rule of lending to family members is to put a loan agreement into writing, and each person should have a signed copy. This makes it clear that you expect to be repaid — that the loan is not just a gift in disguise.

The agreement should say how and when the repayments will be made. It’s a good idea to require the borrower to set up an automatic transfer from their bank account to yours. In your case, the repayments might start in three or four years and be made monthly.

Given that you’re adding the money to your mortgage, it seems only fair that you charge your son the same interest rate as you’re paying the bank. In any case, it’s a good idea to charge interest to give the borrower an incentive to get the loan repaid.

With some family loans, the lender might want some sort of security or collateral that they can sell if the loan isn’t repaid. However, your son might not have anything suitable.

Having said all this, some experts say it’s best to quietly tell yourself that you might never see the money again.

That happens all too often with family loans, and not always because the borrower lacks integrity. They might be hit by unexpected hard times, and the family loan is likely to drop well down the list of priorities. That’s why you shouldn’t lend to family members money you can’t afford to lose.

Some other points:

• If you have other children, discuss the loan upfront with your son and his siblings. Tell the others whether you would lend to them under the same conditions, and if not why not. The feeling that one child has received favourable treatment can do permanent damage to family relationships.
• It’s probably best to lend the money gradually, as your son needs it, rather than in a lump sum. That will keep down the interest he pays you and the interest you pay the bank.
• Once your son starts his repayments, discuss it right away if he misses a payment. It’s far better to renegotiate the repayment terms, if necessary, than to let the problem fester.
• One idea is to give your son an incentive to repay. You might, for example, tell him that for every $100 he repays you will forgive $20 or $50 of the debt. This is perhaps something to consider later on, at repayment time.

As you say, other readers might also have ideas on this, or experiences to share.

AGood question! To get other readers up with the play, Warren Buffett is the chairman and chief executive of a US holding company called Berkshire Hathaway that invests in shares in many other companies.

He has been called “the most successful investor of the 20th century”, is amongst the world’s richest people, and is an excellent communicator.

Buffett is a classic “buyer and holder”. In his 2013 letter to shareholders, he writes about small investors’ futile attempts at timing their share purchases or sales.

“The main danger is that the timid or beginning investor will enter the market at a time of extreme exuberance and then become disillusioned when paper losses occur. (Remember the late Barton Biggs’ observation: ‘A bull market is like sex. It feels best just before it ends.’)

“The antidote to that kind of mistiming is for an investor to accumulate shares over a long period and never to sell when the news is bad and stocks are well off their highs.

“Following those rules, the ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results. Indeed, the unsophisticated investor who is realistic about his shortcomings is likely to obtain better long-term results than the knowledgeable professional who is blind to even a single weakness,” says Buffett.

Note the reference to professionals, which would include many KiwiSaver fund managers.

Buffett continues: “If ‘investors’ frenetically bought and sold farmland to each other, neither the yields nor prices of their crops would be increased. The only consequence of such behavior would be decreases in the overall earnings realized by the farm-owning population because of the substantial costs it would incur as it sought advice and switched properties.

“Nevertheless, both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm.”

To apply that to KiwiSaver, you can invest with a “passive” fund manager who doesn’t frequently trade shares. Usually passive managers invest in all the shares in a sharemarket index, and trade only when the index changes. Their funds are called index funds.

Generally their returns are as good as those of active managers. And, because they avoid Buffett’s huge “frictional costs”, their fees are usually considerably lower. So their after-fee returns are often amongst the best over the long term.

I say “generally” because experts say there might be an exception for New Zealand shares. In our small market it’s possible for active managers to find under-researched companies whose shares are better-than-average buys.

Still, according to Buffett’s advice, the fund managers should buy and hold those shares, rather than trading frequently. Many active KiwiSaver fund managers trade way more than Buffett would.

The easiest way to find KiwiSaver funds that more or less follow Buffett’s advice is to look for the words “passive”, “index” or “tracker” in their names or descriptions.

The last time I surveyed providers, the three providers that did a lot of passive investing were ASB, Smartshares and SuperLife. If any others would like to be added to the list, let me know.

AUnfortunately there’s not a lot you can do except wait.

Inland Revenue says it can’t comment on individual cases. But, a spokesperson says, “While every endeavour is made to ensure employer monthly schedules are processed in a timely manner there are often issues with the information provided by the employer that require manual intervention. Some of these can take time to correct and therefore delays the processing of the employees deductions and contributions.”

It seems your employer is blaming Inland Revenue, and Inland Revenue is blaming your employer. What’s more, your provider and Inland Revenue’s dates are inconsistent. You and I have no way of finding out more, but I would be astonished if things don’t come right in the end, and hopefully soon.

Meanwhile, you will receive a little interest on your money. Says the website www.kiwisaver.govt.nz, “Interest on:

• employee contributions is paid from the 15th of the month your contribution comes out of your pay packet
• employer contributions is paid from the first day of the month the employer contribution arrives at Inland Revenue.”

The timing of interest on employer contributions means that sometimes you win — when your contributions actually occur later than the 15th of the month — and sometimes you lose — when they occur earlier in the month.

The timing on employer contributions means you always win.

On the other hand, the interest rate is hardly generous, at 1.57 per cent a year. Still, when you balance that against the kick-start and tax credits the government puts into KiwiSaver accounts, you normally do okay by the government — even if it doesn’t feel that way at the moment.

For an explanation of why it normally takes about three months for a KiwiSaver contribution to reach your KiwiSaver account, see tinyurl.com/kscontribs.

Other readers interested in tracking their KiwiSaver contributions can register for My KiwiSaver, on the top right of the home page of www.kiwisaver.govt.nz.