Q&As
- Couple can do better with big emergency fund
- Is it worth it to renovate a house?
- Student has share investing sorted
- Another share investor enjoys his lattes
QHelp! Please could you help ease my savings frustration? As a couple aged 50 and 47, we are in an excellent position financially, owning outright our own modest three-bedroom house in the provincial north island.
We also outright own a modest three-bedroom house in Birkdale, Auckland, which my partner bought to live in some 20 odd years ago. It is currently rented for just under market rent, and as we have a three-year-old child, my partner is a stay-at-home mum and uses this money as a small income.
We have both worked incredibly hard and have managed to save over the years, and from one source or another have collected about $120,000 in cash. This is currently held in an online bank account earning a not very exciting 3.15 per cent, which in real money is around $200 a month after tax.
We’ve been sitting on this money for a number of years. I know nothing about investing and — having seen a number of financial companies disappear with clients’ life saving over the years — I’m quite nervous about giving it to someone to “look after”.
We also look at it as our emergency fund, and are reluctant to tie it up in a term deposit for a number of years as we would like to have it readily available. Again, the less than exciting interest rates for term deposits fail to make this an appealing choice for us.
As retirement is not that far away, and bearing in mind that at 60 we’ll have a 13-year-old in the house, we’d like to help our money grow a little faster than it is at present. Could you suggest how we could make our savings bigger, but allow them to be available when or if we need them?
I’m terrified to make a move in case it’s the wrong one and we see our very hard-earned money reduced.
AYou could just do more of the same. When you retire you can sell the Birkdale rental property. Even if Auckland house prices fall in the meantime, the proceeds of that plus your current and future savings — which are earning interest well in excess of current 1.9 per cent inflation — should give you plenty for a comfortable retirement.
But it seems a pity not to grow your savings faster. You might want to start living the high life in retirement — although somehow that doesn’t sound like you! But perhaps you’d like the option of retiring early, or building up a large sum to give to a charity.
Let’s start with your thoughts about an emergency fund. Most experts would say you don’t need anything like $120,000 readily available.
Around three to six months of household expenses is recommended. And given you have two mortgage-free properties and could almost certainly get a mortgage if you unexpectedly needed big bucks, three months is probably enough for you. We’ll say that’s $30,000.
Nor do you need the $30,000 sitting in a bank account. If you can earn higher interest, you could use a one-month term deposit, and put any emergency spending on a credit card. By the time you have to pay for it, the term deposit will have matured.
What should you do with the remaining $90,000, and future savings?
You make no mention of KiwiSaver. If you’re not already in the scheme I suggest you both join, and deposit enough to get the maximum tax credit and perhaps employer contributions. That means you would put in 3 per cent of your pay if you’re an employee, and $1043 a year if not. For your partner, it’s $1043 — perhaps transferring in $87 a month.
Beyond that, you could invest in a non-KiwiSaver managed fund, as that would keep the money accessible to you whenever you want it. Managed funds spread your money over a wide range of investments. And the managers take care of all the admin.
What about safety? In last week’s column I quoted the Financial Markets Authority as saying that both KiwiSaver and licensed non-KiwiSaver managed funds “have to ensure that a scheme’s money and property are held at arm’s length by the independent supervisor of the scheme or a custodian approved by the supervisor.” That means “the investments are retained even if the company managing the money goes under.”
In other words, under new regulation, the money is much safer than in the finance companies you write about.
So which KiwiSaver and other funds would suit you?
Despite the fact that most of your money will be outside KiwiSaver, I suggest you use the “Find the right type of fund for you” tool in the KiwiSaver Fund Finder on the Sorted website.
By answering three questions — about how long you are investing and your attitude to risk — the tool tells you whether you should be in a defensive (lowest risk), conservative, balanced, growth or aggressive (highest risk) fund.
You’re clearly financially conservative, so you’ll probably come out in balanced or lower risk fund. If it’s a conservative or balanced fund, your account balance will sometimes fall a bit as markets fluctuate, but stick with it and it will recover. Over time, you’re highly likely to end up with more than if you stuck with your bank account.
Next use the Fund Finder’s “Compare funds” tool to find out about all the different KiwiSaver providers’ funds of your type. I suggest you choose one of the funds with the lowest fees and a good score for services. You’ll also get the funds ranked by recent returns, but because past returns aren’t a guide to future returns, I wouldn’t take much notice of that — beyond avoiding a fund with particularly bad long-term returns.
Once you’ve worked out which fund is best for you, transfer your KiwiSaver money to that fund if you’re already in the scheme, simply by asking your new provider to do if for you. If you’re new to KiwiSaver, approach the provider to join.
At the same time, ask if the provider has a similar non-KiwiSaver fund. Most do. That would be a good choice for the rest of your savings.
QFurther to last week’s comments on renovation or other investment in property, there is a bit of distorted thinking out there.
In the late 1980s I had a house in Grey Lynn and so did my friend and workmate, another builder. He sold up, bought a house in Birkenhead, subdivided, built and sold a new house, and renovated and sold the original. When we compared our accounts, I had made far more money than him by doing nothing.
Someone I know bought a house near Eden Park a few years ago. They happened to catch a real surge of house price inflation, about 20 per cent per annum. They also renovated, in very fine style, and sold at a good price. But even if they had done nothing they would have been smiling. They may have made a small amount off the renovation, but at a cost of massive disruption and effort and many many hours making choices.
My point is that most property inflation is based in the land. Renovations are very expensive. They come with very large additional costs, if you value your own time. They actually narrow your market to the few who like your style, because most people can’t bring themselves to pay for expensive stuff then rip it out.
Unfortunately, some people — including some well known celebrities and sports stars — do up a house in a rising market, then feel they have what it takes, perhaps a special gift.
Some go on to build big businesses, but don’t have the experience and skills to survive in a contracting market. Even the best can go down then. The tradies suffer then, the top goes off their income again, no Christmas for the family.
AI’m not sure that it’s wise to reach conclusions based on a few case histories.
You’re right that property gains are often largely the result of gains in land value. You’re also right that people often mistakenly think they’re brilliant when they do up a property and sell at a big profit, when it was mostly luck. But does that mean it’s never worthwhile to do up a property before selling it?
There seem to be some basic rules about renovations. Obviously it tends to work well if you start with a badly run down house, in a good street, that you can buy cheaply. Putting in a new kitchen and bathroom in such a place, and giving everything a lick of paint, could pay big dividends. Experts also say adding a deck is often worthwhile.
I take your point, though, that renovators narrow the market to those with similar tastes to theirs. Painting the bathroom dark purple might not be clever.
You’re also right about the hassle and time factors. Doing up a house while you live in it is not for the faint hearted.
As for timing, that’s really tricky. In the time it takes to buy a place, polish it up and then sell it, the market can turn. Before taking on such a project, it’s wise to work through a worst case scenario and see how you would cope with it.
QI don’t have a question, but just wanted to say I enjoyed your recent answer to the shares vs property question.
As a uni student, investing in shares is the only option for me at the moment. and I have really enjoyed taking the plunge and investing some savings over the past couple of years.
If only more younger people knew the power of reinvesting dividends and the effect of diversification over the long term and were not spooked so easily by tales of losing everything and “gambling” on the market.
AYou make some good points. It’s certainly easier to invest in shares than property if you are starting out in a small way.
And reinvesting dividends — which is done automatically in KiwiSaver and other managed funds, and can be set up in some direct share investment — makes a huge difference to returns.
Investing in shares can be far from gambling if you buy a wide range of shares, or let a fund manager do that for you, and hold them for the long term.
QProperty versus shares is an apples versus oranges debate. I prefer shares. I love touching the carousels at my airport in Auckland. I find the culinary appeal of a double down exquisite in my role as part owner of KFC. My power bill hurts less in the appreciation that I am paying myself.
But I can appreciate the joys of property ownership and interest payments — being the part owner of several listed banks. Mowing lawns, painting, wallpapering, removing ex-tenants’ rubbish and P fumes are joys I have sadly never experienced as a committed Bourse dweller.
My dull weekends are spent sipping lattes, eating brunch, socialising and watching the dividends roll in.
Gay versus straight, married versus single, religious versus atheist, shares versus property. It’s simply a different way of living. Neither right nor wrong.
ACan’t argue with that.
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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.