SAVING AND INVESTING - BNZ€¦ · SAVING AND INVESTING YOUR MONEY Setting your sights on something you want and saving up the money to pay for it can be enormously rewarding. This

If you need clarifi cation on any of the words used throughout this document please refer to the Glossary of Banking and Financial Terms on bnz.co.nz/betteroff

SAVING AND INVESTING YOUR MONEY

Setting your sights on something you want and saving up the money to pay for it can be enormously rewarding. This guide to saving money can help you understand the principles of saving so you’ll have a much better chance of meeting your fi nancial goals.

YOUR MONEY

CONTENTS 41

Contents42 Deciding to save

Short-term saving

Medium-term saving

Long-term saving

44 The benefi t of compounding interestPaying tax on the interest you earn

46 Saving a deposit for a houseSetting your goal

Planning to reach your goal

48 Saving for retirementQuestions before joining a workplace super scheme

50 Deciding whether to save or repay debt?

52 Working out how to saveSetting up your accounts

Tips for school students

Tips for tertiary students

56 Saving by keeping track of your spending

58 Making the most of your savings

66 Saving by paying less bank fees

42 SAVING AND INVESTING YOUR MONEY

DECIDING TO SAVE

Everyone wants diff erent things in life. Our guide to budgeting and fi nancial goal setting can help you to identify what you want and put basic money management steps in place, so that you’ll be on the path to achieving your fi nancial goals. Those goals will often involve saving – sometimes for a short while, sometimes for years.

DECIDING TO SAVE 43

Short-term savingInstead of putting things like a pair of sports shoes or a new cell phone on your credit card, a store card or hire purchase, and then paying interest until you’ve paid off the balance, it can cost you a lot less if you save up fi rst. It’s just a matter of gettting the money together before you buy something rather than after. This normally means spending a little less on non-essentials for a while, selling some things you no longer need or fi nding a way to earn a little extra cash.

Medium-term savingWhen you’ve set your sights on something that’s going to take a year or two of saving, it’s important to be realistic about how much you can aff ord to save each week or fortnight. If your regular savings come to a stop for a while, the rewarding feeling of progress goes away and it can be easy to give up on getting to your goal.

Choose a separate savings account that off ers a good >interest rate and little or no monthly base fees.

Give your account a nickname that refl ects your goal, >like ‘Vanuatu holiday’ or ‘my emergency fund’.

Arrange for your regular contributions to be transferred >from your everyday account – maybe every pay day so you won’t be tempted to spend it.

Long-term savingIf you’re saving up over a number of years, for something like a near-new car, the deposit on your fi rst home or a comfortable retirement, it can be a good idea to set medium-term saving goals and regularly move lump-sums you have saved into an investment that locks your money away and pays a higher rate of interest.

To protect the value of your savings, consider moving lump-sums into short, medium or long-term investments. See page 58 for more information on investing.

Tip:A savings account that’s separate from your separate from youreveryday account canhelp you keep track of h l k k fyour progress and stop your progress and stopyou dipping into yourhard-earned savings.h d d i

Tip: TipMost people fi nd Most people findit easier to stay ontrack if they break a medium-term a medium-termsaving goal into monthly targets.hl


THE BENEFIT OF COMPOUNDING INTEREST

Most savings accounts pay the interest you earn back into your account every month. It adds to your total and, if you leave it there, it will start earning interest along with the rest of your savings. In other words, you’ll start earning interest on your interest.

THE BENEFIT OF COMPOUNDING INTEREST 45

Paying tax on the interest you earnTax is how the government collects money to pay for the services it provides, such as schools, hospitals and police.

When you earn interest on the money in your bank account you usually have to pay some of it to the government. It’s called resident withholding tax (RWT) and the bank has to take it out of your interest payment and pay it for you. This means you don’t get all of the interest the bank pays to you. Your RWT rate will depend on how much income you earn overall. On the lowest rate, you’ll pay 12.5 cents for every dollar you earn in interest. Remember to give your IRD number to the bank, otherwise they’ll have to calculate your RWT at the highest rate.

RWT thresholds from 1 April 2009

Income to $14,001 12.5%

$14,001 to $48,000 21%

$48,001 to $70,000 33%

$70,000 and over 38%

* From 1 April 2009 interest payers have the option to withhold RWT at 38%, check with your interest payer which option they will use.


SAVING A DEPOSIT FOR A HOUSE

There are normally two things to consider when you’re thinking about buying a house – the deposit and the ongoing home loan repayments.

Did you know?Did you know?If you worked out that you If you worked out that youcan aff ord the repaymentson a $400,000 loan over $400 000 l25 years, you will need a 25 years, you will need adeposit of $100,000. You’ll be looking for a home b l ki f hworth around $500,000.$ ,

SAVING A DEPOSIT FOR A HOUSE 47

Set a savings goalSaving for your dream home begins with knowing the deposit you’ll need. It might seem a bit back-to-front, but rather than starting with the type of house you want, try starting with the level of home loan repayments that you will be able to aff ord.

Step 1: What loan repayments could you aff ord? >

Find out how much you will be able to put towards home loan repayments by doing a budget to see what your weekly, fortnightly and monthly expenses are compared to your income. Check our guide called ‘Budgeting and setting fi nancial goals’ on page 22 for ideas.

Step 2: How much can you aff ord to borrow? >

Visit a bank or use an online calculator (e.g. sorted.org.nz) to fi gure out how much you could borrow, based on what you can aff ord to repay each fortnight or month.

Step 3: What deposit will be needed? >

Most banks will lend you up to 80% of the value of your home, so your deposit will be the other 20%. This means your deposit will be at least a quarter of the loan you can aff ord, which you worked out in step 2, and a fi fth of the house value.

Plan to reach your goalNow that you know what your goal is, it’s time to start some serious saving.

Use your income vs expenses budget to decide on a 1. regular amount that you can comfortably save towards your deposit.

Have that amount transferred each time from your 2. everyday account into a high-interest savings account.

Ask the bank or use an online calculator to fi nd out when 3. you’ll reach your goal.

As your savings grow, ask the bank about moving some 4. of it into a low-risk investment option, like a term deposit that might pay more interest.

When you get close to having your deposit, start thinking 5. about things like the house size, location and proximity to amenities like schools, public transport and shops.


SAVING FOR RETIREMENT

Most people spend about a quarter of their life in retirement. While the day-to-day expenses may be less during your later years, it’s unlikely that you’ll be still earning income from wages or salary.

It can make a big diff erence to your quality of life if you have income-generating investments in place.

As well as normal saving and investment strategies, there are saving schemes specifi cally designed with retirement in mind.

SAVING FOR RETIREMENT 49

When can I join?

Is there a minimum amount I need to contribute?

Does my employer contribute? How much? Does it depend on how much I contribute?

Can I arrange a salary sacrifi ce (your employer makes contributions but pays you less) to save tax?

Who pays the expenses of the scheme? What are they?

Is there a vesting period (a time before you are entitled to the contributions your employer has been making)? Is it related to employee service or scheme membership?

Do I have to pay any fees? What are they, and how much?

Can I put my contributions on hold?

What happens to my savings if I change jobs or leave?

Are insurance off ers (life, disability, medical) included?

Are my savings locked-in only for retirement? Can I take them out early or before I leave my job?

Where is the money invested? Who makes those decisions? Can I make my own decisions? Can I change those decisions at any time? Are there any costs in changing?

What are the risk levels? Does this level suit my needs?

Do I get a pension (regular fortnightly or monthly payments) or a lump-sum (one big amount) when I retire, and is there a choice?

What happens to my savings if I die before retirement? If I receive a pension but die shortly after retirement, is there a continuing pension for my partner?

With any investment or saving decision, you should fi nd out as much as you can about it before deciding whether it’s the best option for you. Here is a list of questions to ask about your workplace super scheme. If you tick each one off once you know the answer, it will help you to gather enough information to make a decision.

Need more help?

If you’ve worked through these questions and you’re still unsure about joining, ask for advice from your employer.

If you’re interested in a workplace scheme, KiwiSaver or a private scheme, useful websites are: sorted.org.nz, kiwisaver.govt.nzor talk to your professional adviser.


DECIDING WHETHER TO SAVE OR REPAY DEBT?

If you fi nd you have extra money, but already have some debts – like a home loan, personal loans, or credit cards – it can be diffi cult to decide whether to pay off your debts or start saving and investing. Here are some tips to help you decide.

DECIDING WHETHER TO SAVE OR REPAY DEBT? 51

Think of debt payments as an investmentWhen you make a $100 payment on a loan with a 13% interest rate, your annual return is 13% or around $13. That’s because you avoid having to pay that extra $13 in the future, which leaves you $13 more than you would have otherwise had.

First, build an emergency fundBefore you invest or make extra payments to repay your debts, save up some money for an emergency fund. Things may be looking up now, but what if you lose your job next month or you have a family or medical emergency? Many experts recommend that you save enough to cover at least three months of your basic expenses (food, power, fuel, rent/loan).

Pay off debts that have higher interest rates than you can get on savingsList your debts in order, from those that charge the highest interest rates (often credit cards, hire purchase or store cards) to those that charge the lowest (typically home loan payments). Pay off debts that have higher interest rates than the return you could get by saving or investing. Usually it’s quite hard to fi nd an investment that off ers a better return than paying off your high interest rate debts.

Make sure that deciding to save doesn’t mean you get behind on your debt payments If you don’t pay at least the minimum payments on all your debts – on time, every time - it can damage your credit rating (based on your borrowing history, the number used by lenders to rate your ability to repay money). You may also have to pay penalty fees and extra interest called default or penalty interest that will cost more than the interest you earn from your savings.

Example:lWhen Robbie and When Robbie andTheresa fi rst met, being , gcareful with money was about the last thingabout the last thingon their minds. Fast forward a year and a great‘12 months interest free’12 months interest freehire purchase deal isabout to start charginga whopping 20% p.a. a whopping 20% p aLuckily, Theresa getsa $100 a week pay rise. $ k iAlthough their fi rstAlthough their firstreaction is to start savingfor their wedding, theyf th i ddi thdecide to pay off the decide to pay off thedebt fi rst because theywould be unlikely to fi nd ld b lik l t fi dany investment off ering y ga better return.


WORKING OUT HOW TO SAVE

If you have anything left over from your wages or salary once you’ve paid for essential items, remove the temptation to spend everything you earn by “paying yourself fi rst”.

Simply decide on an amount or a percentage of your income you’re going to save each pay and have it direct credited from your everyday account into your savings account. This is a great way to ensure your hard earned money continues to grow.

WORKING OUT HOW TO SAVE 53

How to set up your accountsStep 1: > Start by researching the various banks and fi nancial institutions (investment companies, fi nance companies, building societies, credit unions). The internet is a great source of information and the easiest way to compare what each has to off er.

Step 2: > Make sure there are no hidden fees associated with opening an account (if the savings account is for someone under 13 years-old, they usually don’t have to pay ongoing account fees).

Step 3: > Once you’ve made your choice, you just visit the bank and take two forms of identifi cation with you, including one with a photo of you on it (like a passport, New Zealand driver licence or student ID) and printed evidence of your address. You’ll also need some money to put into the account. If you’re opening an account for a child you may both need to bring some ID.


Tips for school studentsHave a goal. When you fi rst start getting an allowance >eg: pocket money from an after school job, decide how much you will save each week.

Open a savings account; at most banks if you’re under >13 years-old you’ll need your parent’s help. You’ll earn interest on the money you save and your savings will be harder to get to when you feel like splurging.

When you get extra cash on holidays or your birthday, >always try to save at least half. Put the money into the bank – so that you’ll be less tempted to spend it.

Keep saving. Have a goal and spend the money >on something special.

Watch your money grow! Watch your money grow!If you save $40.00 per month at 3.0%If you save $40.00 per month at 3.0%interest, it will be worth $5590 at the end of 10 years, as opposed to $4800end of 10 years as opposed to $4800if you just saved it at home in a jar. y j jThat’s $790 extra!

WORKING OUT HOW TO SAVE 55

Once you know how much you’ll be saving, and things like how often you’ll be putting money in and taking it out, you’ll fi nd it easy to pick an account that suits.

Banks usually help students by off ering accounts with no fees for withdrawals or fund transfers, and no requirement to have a minimum amount in the account before you start earning interest. Make sure online, text and phone banking are available. They make it easier to keep track of your money.

Tips for tertiary studentsTips for tertiary studentsBefore choosing a savings account, fi gure out how much g g , gyou’ll be able to save after you’ve paid your living costsand study expenses each month. Here’s a table to getd t d h th H ’ t bl t tyou started.you started

Living costsLiving costs Study expensesStudy expenses

Rent or boardR b d Course feesC f

ClothesCl h Text booksT b k

FoodStationery and materialsmaterials

TransportT PhotocopyingPh i

Expenses –power, phonepower phone

Internet use


SAVING BY KEEPING TRACK OF YOUR SPENDING

Smart spending can also help you to save. Here are a few tips to get you started.

SAVING BY KEEPING TRACK OF YOUR SPENDING 57

Tips for smart spending:Ti f t diBefore you pay for something with credit, thinkB f f thi ith dit thi k>about whether you really have to get it right nowabout whether you really have to get it right nowor could you wait until you can aff ord to pay cash.That way you’ll avoid paying interest on the loan/credit card/store-card/hire purchase you usedcredit card/store card/hire purchase you usedto get it.g

Using layby (you pay your purchase off , but theUsing layby (you pay your purchase off but the>>store keeps the goods until the full price hasbeen paid) is still better than borrowing, becauseyou won’t pay interest. However, check that you you won t pay interest However check that youwon’t be charged a fee for layby.g y y

If you choose to use a store’s credit scheme, If you choose to use a store s credit scheme>>check out all the fees before signing any deal. Even ‘interest free’ deals can have expensive feesattached. In particular, watch for extra fees if you attached In particular watch for extra fees if youchoose to repay the debt early.c oose to epay t e debt ea ly.

If you can’t quite aff ord something, you might beIf you can t quite afford something you might be>>able to shop around for a better deal or ask for a discount for cash.

Whenever you borrow, fi nd out what your total >cost of credit will be – that’s the total interest andt f dit ill b th t’ th t t l i t t dfees you’ll pay by the time you’ve paid it off , plus fees you ll pay by the time you ve paid it off plusthe amount you’re borrowing.


MAKING THE MOST OF YOUR SAVINGS

If you’ve stuck to a savings plan and built up a reasonable sum, it’s time to think about protecting the real value of your savings against the eff ects of infl ation by moving them into a suitable investment. There’s plenty of choice and having a variety of investments is normally better than putting all your eggs in one basket.

MAKING THE MOST OF YOUR SAVINGS 59

Risk vs returnThe return on all types of investments can fl uctuate over time. Interest rates can go up and down and the re-sale value of some investments can rise and fall. Investments that normally have a greater fl uctuation, such as shares, are described as higher risk investments. It is generally accepted that higher risk investments have the potential for higher returns over the long term, but there are no guarantees.

If you’re investing for a long-term goal like retirement, you might consider some higher risk investments – provided you’re the sort of person who can still get a good night’s sleep when the value of your investment is at a low.

If you’re investing for just a year or two, to save the deposit for a house for example, you might consider lower risk investments. With investments like cash or term deposits there’s much less potential for the value of your investment will be at a low just when you need to cash it up.

Here are the risk and return levels of the common types of investment over longer periods.

High risk, higher return

Low risk, lower return

Shares >

Property >

Fixed interest / bonds >

Cash / short-term deposits >

You should always speak to a professional fi nancial adviser before deciding to invest in anything.


Understanding your investment profi leYour investment profi le is basically a description of your personal investment requirements and preferences. Understanding these things can help you to select the types of investment that suit your needs.

Duration: > how long do you want to invest for?

Income vs growth: > do you want an investment where your original investment pays you a regular income (like a bank deposit), or one where your original investment actually grows in value (like shares in a company that is growing in size and profi tability)?

Liquidity: > do you need to get to your money easily or can you go without access to it for an extended period of time?

Risk: > how much risk are you prepared to accept in order to get a higher return (see risk vs return on previous page)?

Spreading your riskBy spreading your investment across the four main asset classes – cash, bonds, properties, and shares – you can lower your risk of getting caught out at a time when one of them is going through a period of low returns. It’s known as having a “diversifi ed portfolio of investments”. New Zealand has good access to the world’s fi nancial markets, and with today’s technology you can invest relatively small amounts in some of the world’s most successful companies. You can also invest in funds that automatically give you a spread over hundreds of diff erent investments.


Did you know?In the world of investments, a ‘security’ issomething which is one of many things that are something which is one of many things that areidentical in every way, has fi nancial value and cany y,be traded. A New Zealand $10 note is a security.There are heaps of identical New Zealand $10There are heaps of identical New Zealand $10notes around, it has fi nancial value and you canytrade it for other things. A share in a companyis also a security. A diamond is not a securityis also a security A diamond is not a securitybecause no two diamonds are alike.

all


CashIf you put your money into an ordinary bank account you’ll have the reassurance of knowing there is little risk of losing money over short periods of time. Cash is the least risky asset class. It’s a sensible type of investment if you want to be able to access your money in the short term.

Most New Zealanders have at least one bank account that they put their wages or salary into and pay their bills from. A bank account is also our main way of saving.

An alternative is to invest through a cash management trust, which manages how your money is invested for you, within the cash asset class. While off ering the reassurance of relatively low risk, a cash management trust can also off er the potential for a higher return than an ordinary bank savings account. They can do this because they typically invest in a wider range of securities, such as the short-term money market.

Money markets facilitate the transfer of cash between borrowers and lenders.

The short-term money market is a market that invests primarily in short-term money and short-term securities, such as bills of exchange and certifi cates of deposit. In this market, short-term typically refers to investments that last less than 12 months.


Types of investments

Most types of investments fall into one of four main groups, known as asset classes. Here’s an introduction to each of them.


BondsBonds are the most common form of fi xed interest security. Fixed interest securities are typically referred to as ‘income-producing’ investments. There is also the potential for a capital gain (an increase in their value).

What are bonds?Bonds are generally used by governments, banks or companies when they want to borrow money. When you buy a bond you’re actually lending the money to the issuer of the bond for an agreed time. Bonds provide regular income, with potential for a capital gain.

How do they give you an income?In return for lending them your money (by buying the bond), the issuer agrees to repay the amount in full at the end of the agreed time, and also make regular interest payments (known as ‘coupons’) throughout this time period.

How can their value change?When interest rates fall the value of existing bonds rises, and when interest rates rise the value of existing bonds falls. You may hear the term ‘yield’ used in relation to bonds. The yield represents the market interest rate for a bond, and refl ects factors such as the risk of investingin the bond and the term to maturity (how long it is until the original amount will be repaid).



PropertyTo most people, the term property investment means buying a house. But in the world of managed investments the term generally refers to investing in property trusts listed on the sharemarket or in property-related companies.

Property securities fundsFunds which invest in property securities allow you to enjoy the benefi ts of diversifi cation. This means they make it easy for you to reduce risk by spreading your investing across a range of diff erent property sectors, such as commercial, offi ce, industrial, hotel and retail properties. You can benefi t from stable income as well as the potential for returns which, over the longer term, are higher than infl ation.

Increasing valueA property securities fund is considered a ‘growth asset’, which means that although it can provide some income, its main benefi t is an increase in the value of your investment (capital growth). Capital growth occurs when the value of the property rises. This could be due to increases in rents received from tenants or other factors which improve the outlook for property. Traditionally, returns from property have closely followed infl ation. In past decades, high infl ation levels and corresponding rises in property values usually meant that a good return could be achieved when the time came to sell an investment property.

Easier to sell than residential propertyProperty securities tend to be much easier to sell (are more liquid) than residential property, which can be hard to sell quickly if you need to.



SharesWhen you buy shares in a company, you become a joint owner of the business and share in its future. Of all the asset classes, shares are generally known to provide the potential for the highest return. With that comes a higher risk through fl uctuations in their value (see earlier section on risk vs return).

Growing your investmentShares are known as a ‘growth’ asset, which means that over time they tend to grow the value of your investment more than they provide a regular income. The price of a share rises when people believe the value, or future value, of a company is increasing. Shares can also give you a small income through the payment of dividends, which come from the profi ts the business makes.



PIE and your PIR’sIf a managed fund is a PIE (Portfolio Investment Entity), it has special tax rules, which can off er you some valuable tax advantages.

If you are taxed at 33% or 38%, you’ll pay only 30% tax on your PIE incomeUnder current legislation, returns on your PIE investment are taxed at your notifi ed Prescribed Investor Rate (PIR). A PIR is similar to your personal tax rate, but the top PIR rate applied to income from a PIE investment is only 30%.

Even if you are on a lower PIR, by investing in a PIE you could potentially benefi t from paying less tax on income that would normally fall into a higher personal income tax bracket. Refer to the Inland Revenue website ird.govt.nz for up-to-date details of PIRs and PIE tax rules.

Some PIEs let you compound your full interest each monthThe tax on your PIE earnings is generally paid either when you cash up your units or at the end of March each year, whichever comes fi rst (although some PIEs make voluntary payments before this). This means that, unlike traditional investments that pay interest minus tax each month, PIE interest may be compounded on the full amount each month. So even if you’re on a 12.5% or 21% tax rate you could still get a small tax advantage.

The tax paid by a PIE on your behalf is in most cases a ‘fi nal’ taxThis means you won’t have to start fi ling a return because of our PIE investment income. Investors on a 0% PIR and trusts that notify a PIR of less than 30% may have to calculate and pay their own tax on the income earned.

Your PIREach year the PIE managers will ask you what your PIR will be for the coming year, and explain how to work that out. That rate will be either 0%, 12.5%, 21% or 30%. If you don’t supply your PIR, the PIE will tax you at 30%. If you hold PIE investments jointly with your spouse, de facto or civil union partner, tax will be calculated at whichever PIR is the highest.

We recommend speaking to a qualifi ed fi nancial adviser before deciding to invest.


SAVING BY PAYING LESS BANK FEES

Understanding bank fees and how to avoid paying them unnecessarily can help to free up extra money for your savings.

Combine and reduceIf you no longer actively use an account, close it and move the money to one of your other accounts. If you have a number of smaller debts – such as personal loans, hire-purchase, credit cards, store cards – it may be a good idea to combine them into one loan at the lowest possible interest rate. Or check with your bank if you can combine other debt with your home loan, which is usually at a lower interest rate. It’ll be easier to manage, you’ll pay less interest and you could save on fees.

Pick the right sort of accountThink about how you will use your bank account and choose one that charges little or no fees for those services. There are three main types of accounts: current accounts, for everyday banking; online accounts and savings accounts.

Current accounts, also known as transaction accounts, usually have lower fees but pay little or no interest.

Online accounts tend to have the lowest fees of all, provided you do all your banking online.

Savings accounts pay you more interest, but charge a fee when you do things like take money out of the account or get a statement printout from a bank teller.

SAVING BY PAYING LESS BANK FEES 67

Think about how you pay for thingsIf you pay fees each time you buy something with >EFTPOS, they can add up to large sums of money over the year. You can save by getting enough cash from an ATM to cover several purchases at a time.

If you just want a small amount of cash, you can ask >a retailer if you can get cash out when you’re paying for something by EFTPOS. It’s up to them, but it can save you paying another withdrawal or ATM fee.

If you pay for something by cheque, direct debit >or automatic payment and there isn’t enough money in your account, you’ll have to pay some kind of fee such as an honour or dishonour fee to the bank for sorting it out. To help avoid fees being charged you could consider getting an overdraft facility. An overdraft lets you overdraw your account (borrow) up to a certain amount to cover spending blowouts. There are costs attached to an overdraft – interest charges, ongoing maintenance and set up fees. But these may add up to less than paying fees when you don’t have enough funds in your account to cover withdrawals such as cheques and direct debits.

An overdraft facility is a form of lending, so the bank >will use normal credit/lending criteria to assess your credit-worthiness.

Did you know?Did you know?To help children to get p gstarted, most banks off er special savings offer special savingsaccounts for under13 year-olds that don’t usually charge fees. usually charge feesThere are also low-costsavings accounts iavailable to helpavailable to helpstudents and retiredpeople.l

Tip:iRemember, it’s always betterRemember it’s always betterto keep spending within thep p glimits of your income. Don’t use an overdraft unless youuse an overdraft unless youreally have to.y

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SAVING AND INVESTING - BNZ€¦ · SAVING AND INVESTING YOUR MONEY Setting your sights on something you want and saving up the money to pay for it can be enormously rewarding. This