Money may not be necessary for happiness but it sure does bring a lot of anxiety, stress, and fear. Do I follow the herd and save up for a home deposit, then what? Or, do I give into an existential dread and travel the world? Should I be saving? Am I spending too much? Retirement? The list continues.
You may have been in University and you are transitioning from somewhat independent student to a standing-on-their-own-feet adult with a much more sizable and consistent paycheck. Or, you might have been working for a few years now in your selected trade.
After the lustre of a new lucrative income fades, what follows is a bleak crisis. It did to me. I had big financial insecurities.
What helped me was following these small simple steps, which helped me on the path of financial responsibility.
The best time to plant a tree was 20 years ago. The second best time is now.Chinese Proverb
Growing your finances is like growing a tree. It will take time. And trust me, you will thank yourself later for getting started now than later. Another pertinent point is the stop thinking and start doing. So when you take on this advice, the best time if not tomorrow, next week, or next month. It starts now!
Please do not take this as formal financial advice. I have no financial qualifications. I want to share my experience with you and hopefully, you can benefit from my ideas on the matter. I would share this with my younger self. This article also contains Amazon, Inc. affiliate links.
Avoiding Bank Fees
I had this idea that all banks are the same. They aren’t. Some charge services for this, some charge services for that, some don’t at all.
It is really important that you are with a bank that does not charge you fees unnecessarily. To understand why this is important, firstly, let’s take a look at how banks, being some of the wealthiest companies in the world, make their profit.
For the price of keeping your money safe in the bank and accessible when you need it, the bank will bundle your money with other’s money and lend this out in the form of mortgages and loans. Through interest they charge on these mortgages and loans, the bank will collect a tidy profit1.
To get an idea of how much money is made on interest, here’s an example. If a bank loans an amount of $400,000 for a mortgage at an interest rate of 4.0% per annum over a 30-year term. Over the life of the mortgage $286,151 of money made just on interest! If the mortgage was paid off faster, say a 20-year term, the interest decreases to a still-sizeable $181,255 – all the more reason to pay your house off a bit faster.
On top of this, some banks will charge a regular monthly account fee. These fees may have been waived if you were a student if under the age of 18, but if you are working don’t expect the same benefit.
Alternatively, these fees may exist in exchange for free in-store services like depositing cheques or transactions made over the phone. But you have to ask yourself how often will you use these services since you have easy access to money via an app on your smartphone?
Be with a bank that does not charge you fees for simply having money in an account.
These days all you need is a copy of identification like your passport and a proof of address stored on your smartphone and you can apply to a new bank without even stepping in the front door.
Simply doing the research and joining a bank with no account fees can easily save you money down the line.
What I do? I use a combination of three banks. I use TSB for my regular chequing. I use Heartland Bank for my short-term and medium-term savings, and I use Kiwibank for my emergency fund. I do not have an affiliation with these banks other than being a customer at the time of writing.
Getting Clued up on KiwiSaver
If you asked me who my KiwiSaver provider was or what type, I would not have been able to tell you.
KiwiSaver is an incentive scheme to prepare New Zealanders for retirement. A small sacrifice is made to your pay (usually 3% of this) to build wealth over time. You also get contributions from your employer to match and the Government.
You can access your KiwiSaver at the considered retirement age, which is at 65. You can also use your KiwiSaver much earlier for buying your first home.
I was lucky enough to have joined the KiwiSaver scheme when it was introduced in 2007.
Selecting the right KiwiSaver provider and fund type for you is important to you. This decision influences tens of thousands of dollars down the line.
Three factors when selecting the right KiwiSaver provider and type is:
- Risk is the amount a fund will fluctuate. A higher-risk fund will have greater fluctuations but will have high average returns over a period of time.
- Management fee is usually a fixed rate and/or a percentage of your total money in the fund that is deducted over a certain period to pay whoever manages your fund.
- Return is money made from all your money is invested.
When selecting what KiwiSaver fund, it is tempting to base this of the return made in the past year. However, past returns are not good predictors for future financial performance. This is even disclaimed by most KiwiSaver funds.
The return is based mainly on luck. No fund has shown to consistently perform the best. Some years it may be on the top and some years it can be in the middle and some years it can be at the bottom.
The more important variables to consider are the amount of risk and the management fees. These are a lot more controllable than returns. You only want to make sure your fund is consistently returning above average compared to other providers, or they are doing something wrong.
Picking risk depends on the time you plan to realise that financial goal. For example, if you are planning to hold you KiwiSaver until retirement and retirement is over a decade away. A high-risk fund would be appropriate such as a growth fund.
Yes, a growth fund will fluctuate more. There might be downs where you lose money. Remember, on average there will be an increase over a period of time. Since your money will be in the fund for a long time, it will grow more than in a lower-risk fund.
The problem comes when you need that money tomorrow or in the next year, like for purchasing a home. If there is a dip in your KiwiSaver and you need to purchase your house in less than five years with your KiwiSaver, then you would want to be in a lower-risk fund such as a balanced fund or conservative fund.
The longer the time you have to meet your financial goal, the more risk you can tolerate.
Additionally, management fees, even by a single percent, can leave tens of thousands or even hundreds of thousands of dollars lost by the time retirement is reached. Therefore, you want to reduce these as much as possible.
Sorted.org.nz has a fund comparison which allows you to rank KiwiSaver funds based on fees, returns, and services, and categorise based on risk.
Another reason for KiwiSaver is for Government contribution mentioned earlier. It is free money! The Government will contribute 50 cents per dollar you contribute (this does not include employer contribution). This is capped at $1,042.86 of your contribution so the Government has contributed $521.43.
If you are self-employed, you will have to organize your own contributions in order to get Government contributions. This works to be just above $20 per week.
In terms of contribution rate, at the moment, there is no benefit of contributing more than the minimum of 3%. Exceptions include if your employer is matching a higher rate or you need to make more contributions to get the maximum Government benefit.
If you do not have KiwiSaver and you want to get KiwiSaver, please get in touch with your employer or contact a KiwiSaver provider directly.
Switching KiwiSaver is as easy as contacting the KiwiSaver you want to join. They do the move for you and at no penalty.
What I do? I switched Simplicity KiwiSaver Growth Fund from my default provider in the middle of 2018. I do not have any affiliations with Simplicity KiwiSaver other than being a customer to them at time of writing.
Having a Financial System
I had two check accounts. One for everyday expenses and one for savings. Good is in the simplicity but the main problem was when could I use the money and for what.
Weeks I would not want to spend anything, turning down dinners and coffees, really restricting myself. Other times I would go overboard, spend far too much and really feel the guilt later on.
Now, I have a more vigorous system. I have a stronger intent with money instead of having it sit in two passively in two accounts. What did I change?
I avoided sitting down and looking hard at my finances because I wanted to turn a blind eye on how much money I was spending. By not looking at what I was spending on, I wasn’t really helping myself. Having an honest look on what I was spending on would allow me to save more money in order to get on track. This is what I had to tell myself.
I was able to see how much I spent on necessary expenses like rent, food, and the bills. I would have a cheque account that would be dedicated to these expenses. My income would go into this account as well.
With the money left over after accounting for the necessary expenses, I would dedicate a portion of the money that I could use without financial consequences. In the Barefoot Investor by Scott Pape, he calls this money, Splurge. I also had other portions for short financial goals.
This system was all automated using automatic payments. Every paycheck, the money for free-spending was sent to another cheque account linked to a card I would carry with me normally. The money for financial goals was sent to separate savings accounts.
I had a saving account set up for each goal:
- Big items (e.g. a new set of headphones)
- Gifts (e.g. Christmas gifts for your family)
- Holidays (e.g. Holiday to Japan)
- Home deposit
Building a system is more important than focusing on the goal. The idea of saving up to $1000 may be daunting and something we want to avoid. Instead of focusing on that looming target, focus on the process of simply saving $100 each week – if you can automate this, even better!
The idea of having multiple goals helps because you can get so fixated on one goal such as getting a deposit for a home that you forget about taking a holiday.
Having this system set up, made the decision to save much easier. In fact, since it was automated, I didn’t have to make that decision at all. It was all done for me.
Ramit Sethi in his book I Will Teach You to be Rich, talks about spending graciously on things you love and cutting costs on things you do not. Thanks to this system set up, I knew exactly what I could go all out on and still keep my other goals in check, as well as not starve and get kicked out for not making rent.
Another point I want to stress is when you are setting up your savings accounts and automatic payments, start small. Aim for 10% of your pay. If you fall off the wagon, please be kind to yourself. The idea is to get better and no aim for perfectionism.
From knowing my essential spending, the next thought would be what happened if I had an emergency?
I was reliant on my car and if a tire popped and I had a warrant of fitness due tomorrow, what would I do?
The emergency fund is vital in your financial toolkit to prepare for the unexpected. The emergency fund provides security and peace of mind in case something goes wrong.
Emergencies are not new shoes from that flash sale or a new second monitor for your intense gaming set up now that you have been accepted into that guild. Emergencies are more like the example used before: a car needing a new tire so your car is legal to drive. Another example is needing some dental work that you cannot put off, which can often snowball and get worse.
A general rule is to have about 3 months of essential spending in a separate bank account at a minimum. This could be made longer to 6 months.
The account needs to be accessible in case of an emergency but not too easy so you will spend it by impulse. It helps to have this account within an account in a bank different from the one you normally cheque with.
This is thinking of the worst-case scenario if you were to lose your job. How long would it take you to get up on your feet and get another job?
It is important that if you do dip into your emergency is to replenish immediately by diverting savings and non-essential spending to this.
What I do? I have an emergency fund of about 6 months emergency expense in a Kiwibank Notice Saver account. I also have 3 months of emergency expenses in my main cheque account as well for good measure. I like to err on the side of safety. I do not have any affiliations with Kiwibank other than being a customer to them at time of writing.
Starting to Invest Early
Once a healthy emergency fund is set, the next stage is to look into investing.
Back then, when I thought about investing, I immediately thought this was all about being an expert in the stock market. You had to be savvy with company profit-and-loss statements and knowledgable about current events and how this would influence economies. In reality, Mary Holm’s states it very well in her book Rich Enough?: it is as boring and uncomplicated as watching paint dry.
Firstly, why invest? Cash in the bank is losing value as you work, as you sleep and even while you read this. We can thank this to inflation. Inflation, simply put, results in your money being losing a small amount of value as time goes on.
Before you get angry with inflation, lots of inflation is bad. You do not want your money to be worth below a bar of soap tomorrow. The opposite of inflation, deflation, is even worse.
Deflation is where money increases in value over time. No one would want to spend it in this case. Nothing gets bought, and since nothing is bought, nothing is made, and since nothing is made, no one needs to be employed to make the certain thing, and then you can see the dominoes falling causing the economic gears to grind to a halt.
Inflation promotes spending. This is what regulatory agencies like The Reserve Bank of New Zealand aim for as this promotes economic growth.
Inflation averages at about 2.15%2. At the time of writing, some banks offer an interest rate of 0.1%. So you aren’t really winning by putting money in a bank, in the long term, anyway.
On the flip side, cash in the bank is not a bad thing. It is liquid, which means that if you need access to it, you have it straight away. This is good in case of emergencies, which we covered before.
Now, let’s talk about what investing really is.
This does not mean complex arrays of graphs and numbers from the monetary gains they made from investing in individual stocks. You do not need to be tech-savvy or well researched in finance, economics, and accounting to invest.
Investing is a lot more simple than this. The only thing complicated about it is explaining why it is so simple. We are going to be using the power of Index funds.
Why Index funds? Index funds are passively managed funds. Also for simplicity, we will consider Exchange Traded Fund (ETFs) the same thing even though there are differences.
Let’s dissect this down: Passively Managed Fund. A managed fund is where money is pooled together from lots of people. This money is then invested in a group of stocks. A stock is share ownership of a publicly-traded company. Money is made on the dividends you receive from the stocks owned and from selling stocks when the value has appreciated.
The benefit of investing in a managed fund over individual stocks is that managed funds are diversified, meaning that they are invested in shares of multiple companies. For example, the Vanguard Total World World Stock ETF is invested in thousands of companies.
Diversification reduces your risk. Instead of relying on one company or even one country’s economy in case they do poorly, you can spread the risk among other companies and even the world.
Money can also be lost in a managed fund if the value of the stock decreases. The fund will exchange a slight fee as they have to look after your money and invest on your behalf requiring work.
When we are looking at a passively managed fund, we have to draw comparisons between passive and actively managed funds. An actively managed fund involves a team of experts. They try to make predictions on the market. Actively managed fund tend to have higher fees since these experts have to be paid as well.
A passively managed fund involves investment of a group of stock of different companies following a stock index. Examples of a stock index include our very own S&P/NZX50 which measures the performance of the top 50 largest companies in New Zealand. Another example is the more notorious S&P 500® which follows the top 500 largest companies in the United States.
Predicting the market is a very difficult thing to do. 4 out of 5 actively managed funds performed poorer than passively managed funds over a 20-year period. In fact, the less active management, the better the performance3.
Now, that you can see passively managed funds are strong investment vehicles. We are going to look at two concepts: compounding, and dollar-cost averaging. Knowing the former will motivate you to invest, the latter will simplify the process.
A managed fund investing in shares can expect an average return of about 6%4, accounting for dips in the market and taxes. Also, remember that the 6% is an average, and this can fluctuate if you are looking year by year.
Instead of pocketing the return and spending it on another electronic gadget you didn’t need, the return is reinvested back into the mutual fund. Now the return will be based on the initial investment plus the return. This will continue and the money will grow slowly at first then exponentially. This is known as compound interest.
Time in the market is more important than timing the market5.
We’ve established before that market trends are difficult to predict. The adage, “buy low, sell high” is mitigated by averaging our investments over a period of time. Knowing when to buy or sell investments is not thrown out the window. This simplified investing significantly.
Just like putting money away into our savings account by automatic payment every time you get paid. All you need to achieve is putting money away for investment at a regular period. This is known as dollar-cost averaging.
If we were to put $500 away every month to invest in an index fund that tracked stocks around the globe, this would lead to one million dollars all on its own in 30 years. So, the best time to start investing is now.
It is important to make sure you have an emergency fund, and the money you put away for investing is not what you need immediately. The key to investing is to not touch the money for a long period of time (some say never). Having to sell your investment will seriously slow your ability to gain wealth, so please make sure you have emergency money and have considered all other aspects of your finances.
What I do? I put 5-10% of my take-home into InvestNow every time I get paid. This is money I can live without during my paychecks. The money put into InvestNow automatically gets invested into the following funds (the percentage of investments is shown):
- AMP Capital Australasian Property Index Fund – 10%
- AMP Capital NZ Shares Index Fund – 10%
- Smartshares Global Aggregate Bond ETF (AGG) – 10%
- Vanguard International Shares Select Exclusions Index Fund – 70%
I do not have any affiliations with these InvestNow other than being customers to them at time of writing.
Being Smart with a Credit Card
I had a sense of false-joy when I had my shiny credit card. Every time I swiped, I would collect some reward points while spending unnecessarily more.
I viewed a credit card as a right of passage, a symbol status of a working-class professional. Turns out nobody but I noticed.
I was lucky enough not to get into debt by paying off my balance in full when it was due.
I got rid of my main credit card and switched to paying with cash through a debit card because it made my budgeting easier.
The main reason for dropping my main credit card was due to the dreaded annual fees. Sure I was making rewards but you have to make sure that you spend enough to reap the rewards.
For example, at the time of writing, the BNZ Advantage Platinum Visa has a $45 half-annual fee ($90 per year). There are cash rewards for every $90 spent you earn back $1. You will have to spend $8100 to just break even.
Now you might spend double this and that is great. When you are trying to reduce spending, why do you want something that incentivises spending? The credit card does not work in my philosophy.
It might work for you, you just need to do your research and see if it will work for you. You just need to weigh up the advantages. You also get set travel insurance based on the credit card company but you might be better off with freedom of choosing your own travel insurer.
What I do? I have a Zero Visa credit card by Kiwibank that I keep in my bedside cabinet and use for work travel, which I get reimbursed later on. It has no fees but it does not accumulate any points either.
At this stage, you have been considering piecing together your emergency fund.
However, an emergency fund can cover so much. There will be unfortunate happenings that you will not be able to cover.
This can relate to your health, your vehicle, and your belongings.
The mindset to adopt comes from Mary Holm’s Rich Enough? Insurance companies make money from premiums you pay but they also lose money through claims that others make. Put yourself in the shoes of someone who needs surgery, had their car burgled, or their life accumulated possessions destroyed in a fire. Now you aren’t going to be too mad paying out those premiums to what it is going to be used for.
Unfortunately, there will be people who take advantage of the system. These are the types of who cause insurance to drive up as money has to spend on investigating claims. Insurance fraud is a criminal offense, so it pays to be honest.
I think most people get car insurance as well as contents.
Health insurance is what people skip out on. The earlier you have health insurance means the less likely you will have to declare any pre-existing conditions you develop when you decide to get health insurance later down the track. Pre-existing conditions are more expensive to cover.
New Zealand has a very good health care system. For most issues, you can go through the public system. However, from my experience, it takes almost four months to be seen for cataract surgery. That’s if you are accepted on the waiting list. Why wait when you can get through insurance?
A way to keep those premiums down is by having a higher excess and since you have an emergency fund, which can act as you excess payment and can serve to lower your premiums.
Also, try not to over-insurance (even though it is better to over-insure than under-insurer). Insure for things that you cannot afford, like replacing your car or all your belongings rather than insuring for a GP visit.
What I do? I have contents insurance and comprehensive car insurance with MAS. I have my health insurance with Southern Cross Health Society, Well Being Two program. I do not have any affiliations with these insurers other than being customers to them at time of writing.
I hope that your financial situation has improved from reading this and that you will worry less about money when the time comes. If you already knew this, then you have set yourself up very well.
The key points are to avoid bank fees. Make sure your accounts have no account fees attached to them.
Make sure you are with a KiwiSaver scheme that offers low fees, and that you invested in the appropriate risk-level for your goals.
A financial system is key to think less about money when it is all moving automatically. You will know how much you can spend on certain things while you are saving and still paying your essential expenses.
Have an emergency fund available in case of anything unexpected coming up and have this money easily accessible for those times but not too easy to access that you will spend it trivial things.
After you have developed the emergency fund, look into investing the money you don’t really need immediately. Invest as much feasible and do it often – automate this if you can.
Be credit card free by not buying into gimmicks and understand that you do not need a credit card. If you decide to get a credit card, make sure your rewards far outweigh the annual fee.
The last point is to get insured. You don’t know when the next upset will come up, so it is better to be prepared.
Finally, the time to start is now. The earlier to get this in motion, the happier your will be in the future. And of course, if you don’t follow the plan down to the wire, pat yourself on the back for getting better.
Thank you for reading this and I hope this helps you. If it did, please comment and share with your friends if you think it will help them. If you haven’t, please subscribe to my email where you can keep up to date with all my posts. Wishing you all a fulfilling life!