QOn last week’s Q&A about reluctance to spend, I have friends who actively shop because they say they are “buying local”, or “supporting local business” and “money makes the world go round” etc. So I guess it is all about balance.

Possibly I loathe shopping because:

  • I detest clutter, and at this stage of life having cleaned out multiple dead relatives’ homes, I don’t want to buy more stuff and leave too much of my rubbish for anyone else to clean out.
  • If I go clothes shopping nothing fits or suits my short waisted long legged body, so clothes shopping is a nightmare I avoid unless essential. (I’m also not into makeup and jewelry, so that’s easy!)
  • I’m anti “posh” brands, eg elite expensive European brands of cars, clothes etc. In my experience Japanese cars have always been more reliable, cheaper to service and less showy. Brand victims seem to trap themselves into wasting money.

My parents instilled in us a savings habit from a very young age with the old Post Office Savings Bank school account.

As a single woman aged 25 I bought my first home in Auckland in 1981 with a $10,000 deposit. I managed to pay the mortgage by renting out the other two bedrooms for a number of years, but then decided a small apartment would be easier to manage.

When I met my husband in my thirties we paid off the mortgage and bought a townhouse and were debt free by the age of 40. We are still in that house.

And as I got older the realisation that I truly had no interest in acquiring stuff, buying a bigger house or trying to be fashionable was a huge relief and a plus for the finances.

I confess I do regularly spend money on the Five Gs:

  • Groceries — obviously! We cook from scratch and eat most meals at home and eat/freeze all leftovers.
  • Golf — $100 annual membership, and playing at public courses is not too expensive.
  • Gardening — tools and plants — including quite a few vegetables which have replaced two ornamental beds and save on groceries.
  • Gym membership — $16 per week at the YMCA — essential fitness for doing all the above.
  • Giving — Family and charities.

I understand that for young people trying to make ends meet it is so much harder now with so many more tempting choices on offer than in the simpler life of 50 years ago. And that the housing market is comparatively very expensive.

But if we all bought only what we needed (rather than wanted), stopped trying to “keep up with the Joneses” and yes, still have a few treats in life, the planet might actually survive a little longer.

P.S. I always advise young people (girls especially) to keep their own bank accounts as well as have a joint account for shared essential costs if in a relationship.

AThere is so much wisdom in your letter.

On buying local, it’s a lovely idea, but not great if it means you buy stuff you don’t need.

I totally agree about brands. My watches were two for $32 at the Warehouse. I think they look fine and, most importantly, they work.

QI agree with your recent reply suggesting a reader buys into the Smartshares NZ Top 50 ETF instead of direct share holdings.

Just thought as another option to buying an ETF share, involving brokerage costs for buying and selling the shares, you could buy Simplicity’s NZ share managed fund. The fees are low and you can transfer to another fund or add to the fund at a later date.

AYou’re quite right, although the Simplicity share fund is not the only good option.

The reader was interested in investing in shares, so that’s why I suggested a couple of exchange traded funds. You buy and sell shares in ETFs just like other shares, but they in turn invest in a wide range of companies, so you get good diversification.

Most ETFs invest in the shares in a market index, such as the NZX50. These types of funds are cheap to run, so they charge low fees, and research shows that over time they perform better, after fees, than most actively managed share funds, whose managers pick shares to buy and sell.

But there’s another type of fund that also invests in an index and operates like a KiwiSaver fund. You invest directly with the provider. Providers include Kernel, Simplicity and SuperLife, and some InvestNow funds. We’ll call these unlisted index funds.

Which is better — an ETF or an unlisted index fund? I asked Dean Anderson, CEO of Kernel, which offers index funds, and Simon Beattie, head of investor relations and communications at NZX, which offers ETFs:

  • Anderson: “Unlisted index funds typically have lower total costs for investors. This is because ETFs require additional expenses such as broker fees and bid-ask spread every time you buy and sell. Brokerage rates in New Zealand vary between 0.20 per cent and 1.00 per cent per trade.

    “With unlisted index funds, you purchase units directly from the manager or through some investing platforms, with no brokerage fees.”

  • Beattie: “It is true that an investor will incur brokerage costs when they buy and sell listed units in an ETF. However, transaction costs can also be involved for investors buying and redeeming units in unlisted index funds.

    “When an investor buys or redeems units in an unlisted index fund, the fund manager may need to incur costs in purchasing or selling assets in the fund to either invest the new money coming in from a new investor or to fund the cash payable to a redeeming investor.

    “The index fund manager might apply an adjustment to the fund’s unit price that reflects their estimate of the transaction costs incurred by the fund — this is known as a ‘buy/sell spread’. If a manager does apply a buy/sell spread to its unit prices, then this should be expressly permitted under the fund’s governing documents and clearly disclosed to investors.”

  • Anderson: “NZ ETFs are also classified as listed PIEs, meaning the fund is automatically taxed at a fixed 28 per cent. Investors on a lower PIR rate may be able to claim a credit at the end of the financial year, if they have other taxable income.

    “With an unlisted index fund, your tax will automatically be calculated using your actual PIR rate. This can result in greater tax efficiency for the investor.”

  • Beattie acknowledges this, adding, “For investors with a PIR rate lower than 28 per cent, this can make life a bit easier from an administration perspective, as the fund manager will handle all aspects of PIE tax on the investor’s behalf.

    But he adds, “For unlisted PIEs, it is the investor’s responsibility to tell the manager their PIR rate when they invest or if their PIR changes. If an investor does not tell the manager, then a default rate may be applied.

    “If the rate applied to an investor’s PIE income is less than their correct PIR then the investor will be required to pay any shortfall as part of the income tax year-end process. If the rate applied is higher than the investor’s PIR then any tax over-withheld by the manager will be used to reduce any income tax liability the investor has for that tax year, and any remaining amount will be refunded.

    “For listed PIEs, the amount of tax that each fund pays is calculated at the rate of 28 per cent. However, for NZ tax purposes, certain tax concessions apply to distributions made by listed PIEs.

    “For NZ tax residents, these concessions mean that if you are currently paying tax at a rate of less than 28 per cent the excess tax paid by a fund may be able to be used to reduce the tax payable on other income that the investor earns at the end of each income year. To do this, the investor would need to include the fully imputed portion of any distributions (including bonus issues) from the fund in their own tax return.”

    Beattie adds that people should get expert tax advice on their situation.

So where are we? All of this is really chipping around the edges. If you like buying shares, an ETF might be your choice. If you’re happier with a KiwiSaver type of investment — but one you can withdraw from whenever you want to — go with an unlisted index fund.

Both are excellent long-term investments.

A Comment on Capital Gains Tax

I’ve received a few letters about a possible capital gains tax, or CGT. But I’ve decided not to run them for now. So many replies will be “it depends what the government proposes.”

The last time such a tax was on the table this column was full of letters about it. Readers came up with all sorts of situations where CGT might not be fair, or were just puzzled about how it would work.

If this government, or whatever government we get after the election, proposes a CGT, we’ll come back to the topic. And, I might add, whoever drafts the legislation might want to keep an eye on the issues that readers brought up a few years ago, and new ones that will come through this time.

In the meantime — and this is unfair, I admit, given I’m not letting readers respond in print — I want to just say that broadly I support a CGT.

Some commentators are pointing out that many of the wealthiest people work hard, give to charity and create wealth and jobs, and we don’t want to discourage that. But would they not do that if they were taxed on their realised gains — gains made when you sell something? They would probably still get to keep most of the money.

CGT happens in practically every other country we compare ourselves with, so the wealthy can’t easily run away from it.

And don’t mothers in South Auckland who work two jobs, on low pay, to feed their families also work hard — doing much less pleasant tasks in much less pleasant surroundings? Is it really fair that their income is taxed while that of people whose assets grow in value while they’re taking a break on their yachts is not?

Don’t forget, too, that if we bring in a CGT, the government will almost certainly reduce revenue from income tax, so that total tax revenue is unchanged. Many people — especially the less wealthy — will be better off.

It’s true that it’s hard to come up with a totally fair and easily administered capital gains tax. But New Zealand — as a late adopter — is in a great position to learn from other countries about what works best and adopt it.

I do hope we do that.

A Reader’s Story

Since mid April, to mark the 25th anniversary of this column, we have run some readers’ stories of how the column has helped them over the years. Here’s another.

QThanks for your consistent, simple advice you’ve given us over the past 25 years.

You’ve made it clear that building wealth is not “rocket science” and that if you adhere to a few basic rules (diversification, use ETFs if not knowledgeable in shares, contribute to KiwiSaver, have some fixed interest or bonds, and/or property if you have the temperament) then your wealth, or financial independence, will build slowly with time.

But you need to be patient, and stick with it over the long term. As you said in one of your columns, it’s another example of the age-old tale of the hare and the tortoise.

Keep up your good work

AYou’ve summed up many of my messages well.

Funny about the tortoise and the hare. You may have noticed in the April 15 column that marked the 25th anniversary, that a picture of those two creatures illustrated my very first column!

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Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former 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.