This article was published on 7 May 2005. Some information may be out of date.

Q&As

  • A letter to give a spouse who is mean with money.
  • Where to get info on interest rates.
  • Returns on share funds, and debt repayment.

QI have a query regarding financial independence for a non-working wife.

Is it appropriate to still feel the need to have some freedom and some independence as regards the finances?

In my generation anyway, which is the sixties-plus, one rarely hears this subject discussed, and I always wonder what others do in this situation. I would appreciate your comments in this area.

AWhenever one spouse is earning money and the other isn’t, it seems to me that there’s a deal between the spouses, whether or not it’s expressed.

One brings in the money, the other does various other tasks, which often include being the main carer of children or other dependants; doing the housework; organising much of the social life; doing community or charity work; and making sure there’s food in the fridge, the bills are paid, the drycleaning is picked up, and so on and so on.

I would hope that the stay-at-home spouse is given not only the money needed for those tasks but also a reasonable amount to do as she — or occasionally he — pleases with, no questions asked.

This is obviously in the interests of the non-earner. But in case any earning spouses think it’s not also in their interests, let’s put up a case. To keep things simple, if not PC, we’ll assume the earning spouse is the husband.

Dear Meany:

Why are you holding back on the money? If you don’t think your wife pulls her weight, how about taking a week off work and taking over her role?

If you think she would waste money on unnecessary things, keep tabs for a month on everything you buy.

After these two experiments, if you still think she gets the better end of the deal, or she would fritter away more money than you do, it’s time to discuss that with her rather than withholding money.

Why should you bother with all this? Because nobody can be really happy if their spouse resents them. And rest assured that if your wife has to answer to you for every dollar she spends, she will resent you.

More than one man has been shocked when their wife left them over this sort of issue. It will be too late then to start giving her what has been rightfully hers all along.

And won’t it be good to receive birthday and Christmas presents for which you don’t know the price?

Yours hopefully, Mary

I hope that does the trick.

QDon’t forget to remind your readers that getting information on home loan and deposit rates is as easy as looking to the right of your newspaper column, where the Herald publishes a table each week.

AFunny how we sometimes ignore the obvious. The info is not as comprehensive as on www.goodreturns.co.nz and www.interest.co.nz, but it’s a great start.

QI always read your column, and regularly recommend others do the same. I agree with most of your points, but have to fault you on a couple.

You mentioned in the column two weeks go that there might be a reasonable chance that a well diversified share portfolio might produce in excess of 8 per cent after tax.

However, the figures quoted on www.sorted.org.nz/invest-options-different-returns.html, provided by Frank Russell Company, imply a net return of 3 per cent for a “growth” portfolio (70 per cent growth assets/30 per cent income assets), and therefore not more than 3.5 per cent for a 100 per cent share portfolio.

Okay, I concede that inflation has been factored onto one and not the other. But even if you were to strip away 2 per cent inflation from your 8 per cent, this still leaves you at 6 per cent, or nearly twice the Frank Russell figure.

That leads me nicely into the other point. We in the banking industry cannot stress enough the importance of inflation on a comparison such as the one you wrote about, between repaying a mortgage and investing in a share fund.

Given that the debt repayment is on a property that is likely to increase in value over the long term at least in line with inflation, if not in excess of inflation, the repayment then essentially produces a net real (inflation-adjusted) return of 8 per cent.

I think there would be few who would expect a share fund to produce a real return of more than 8 per cent per annum.

AGood on you for questioning the return I used. Some people — especially those who are trying to sell you an investment — use too high a return in their forecasts. But I’m sticking to my 8 per cent.

Let’s look at the page from the Retirement Commission’s Sorted website, which you referred to.

It says that the expected gross return on the 70/30 higher risk/return portfolio is 9 per cent. Tax reduces that to 6.1 per cent. Then fees of 1.1 per cent and inflation of 2 per cent bring us down to your 3 per cent.

That table, it turns out, is several years old. If Frank Russell, now called Russell Investment Group, were to compile it today, the starting figures would actually be a little lower, says Russell’s chairman Craig Ansley. The 9 per cent in the above example might now be 8 per cent.

And for an investment fully in shares — as opposed to including 30 per cent in income assets — he would now start at around 9 per cent.

Note that I wrote about investing in “a well-diversified, low-fee share fund”, the best examples of which are index funds, which invest in the shares in a market index.

Such funds pay no tax on their capital gains, only on dividends. So the after-tax return on an index fund holding international shares might average around 8.3 per cent, says Ansley. On a fund holding New Zealand shares, it might be 8.7 per cent, because of imputation credits.

That makes my 8 per cent after tax look pretty sound. Even after fees as well — which on index funds are well below 1 per cent — it still looks about right.

It just goes to show the importance of using tax-efficient products, everything else being equal. In the Sorted example, which covers all sorts of different types of investments, Russell assumed higher taxes.

Note that I said in the column in question there’s a reasonable chance, “over years”, that the share fund return will average more than 8 per cent. I also said that shares, property or higher-risk debentures “might bring in more than 8 per cent, but they might not.”

I don’t want anyone feeling certain they will get such a return, especially over just a few years.

On your second point, you seem to be confusing borrowing money with what you do with it.

Once you’ve got a mortgage, the value of the house is irrelevant to your debt repayment. Whether the house value triples in a year or the house is uninsured and is burnt to the ground, you must still repay the same amount.

Sure, if you’ve borrowed to buy an asset that usually grows in value that’s good borrowing, as opposed to running up a debt for a car or travel.

But whatever you invest in doesn’t affect the debt and how good it is to repay it.

Repaying an 8 per cent mortgage improves your wealth as much as an investment earning 8 per cent after tax. Repaying a 20 per cent credit card debt that financed the high life improves your wealth as much as an investment earning 20 per cent after tax.

The fact that the house owner’s asset grows over the years while the high lifer is left with nothing more than a large waistline simply means that the house owner made wiser use of the borrowed money.

By all means tell your mortgage borrowers that they’ll probably do well with their investment. But please don’t exaggerate the benefits of repaying the loan.

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.