Most Kiwis have been back at work for a week. All those good intentions about getting fit, being nicer to others, or sorting out or improving their financial future have started to dissipate. A week back at work is a long time.
We can all boost (or start) our savings. Even retirees can make their savings work harder and last the distance - too many have all their liquid assets in fixed-interest investments.
I certainly haven't been boosting my savings in the past four weeks. I feel like I've been spending money like confetti. It's time to grab those New Year's resolutions and actually make something of them this year.
It's easy to slide down that slippery slope. Now is the time to write down your resolutions, set out a plan that involves dates for achievement of certain steps, and to make it happen.
1. Cut one leak from your budget. It's that old chestnut.
Cut out the unnecessary spending, but not all at once, because that just leads to burnout. I'm often amazed, for example, at the number of people I know who automatically buy a book when they want to read one. Buying books is good for authors, of course, but I don't want to shell out $40 every time I want to read something. I go to the library, or if I really must own it I put a search on Trade Me for the copies that were bought and devoured the minute the book was released. I'm never that desperate that I need a new release. As I wrote this, I managed to avoid trotting off to the Calliope Road Cafe to have a morning coffee. For those who frequent the cafe every day, this would save a stunning $1387 this year.
2. Invest, not save. Over the long term, shares outperform savings - especially in inflationary times. Our year-on-year inflation was 4.6 per cent at the end of the third quarter. That soon starts to eat away at the value of savings, earning a measly 3 per cent or less. Inflation shouldn't erode the value of well-run businesses at the same rate, which makes equities, businesses and possibly property investments better long-term bets than savings accounts, debentures, or bonds/debt securities.
3. Cut penalties and fines out of your life. I've referred recently to speeding fines as "idiot taxes". A reader even emailed me last week and suggested that fines are "voluntary contributions" to running our country. That's certainly the case with any government or council fines such as road-traffic infringement, overdue library books, dog control infringements and so on.
It's not the case with bank penalties, of course. I was hit with an "unauthorised overdraft" fee recently. Apparently my overdraft, which I never use, has to be renewed every year. So when I failed to check my account balance while huddling in a rained-out campground after Christmas, ker-ching, the ASB rang up a nice little earner in the form of an "honour" fee for letting my direct debit go through. That reminds me: I must buy some shares in those Aussie-run banks to keep some of the profits on our fair shores.
4. Use banks' electronic tools. Work your accounts to your advantage. Technology really has changed the way we operate - including our financial lives. There are some very good tools around, including services that sweep money over a certain amount from your low-interest current account into a higher interest account. At Kiwibank, for example, you can set up your accounts so that money is automatically transferred over a certain amount and then transferred back in if the account drops below a set figure. This doesn't only help with squeezing more interest from your money, it can help avoid honour and dishonour fees. So can text and email alerts. Beware, however - some banks charge for these automatic services over and above the setup fee. Westpac charges 40c a sweep. Likewise, you get 10 free texts a month at that bank, then pay 25c a text for reminders about your money.
5. Stick two fingers up to your bank. Banks aren't loyal to their customers. Ask anyone who has been through a mortgagee sale. So why is it that customers think staying with the same bank is a good financial move? It's always worth approaching your bank to see if you can get better rates, better deals, or better accounts. If you're paying fees regularly or getting minimal interest on savings, there must be a better account. Likewise, are you on the best mortgage deal? Sometimes the big picture makes it worth changing banks. If not, use your bank's staff to identify more efficient ways to run your accounts.
6. Consider getting a revolving credit mortgage. For those people who can avoid eating their houses by using the capital to buy consumer goods, revolving credit is a great idea. Your savings and part of your monthly pay packet are offset against the capital owing on your mortgage, reducing the amount of interest you pay. The benefits of revolving credit mortgages are twofold. For part of the month your spending money is sitting in your mortgage reducing the amount of interest you are paying. The other benefit is that you can pay down the mortgage faster, thus reducing the overall interest and perhaps repayment term.
There are other options. If you're on a floating rate or a portion of the mortgage is floating, additional capital repayments can be made without penalty, which reduce the interest payments.
7. Make your money more tax-efficient. Look for products such as PIEs (portfolio investment entities) on which you're charged less tax. PIEs don't make a massive difference to returns. For example, a PIE cash account paying 3 per cent works out at the equivalent of 3.09 per cent for a 30 per cent taxpayer and 3.22 per cent for a 33 per cent taxpayer thanks to the favourable tax treatment. I'll probably get some government official in Wellington choking on his muesli for saying it's not worth much. But as the old adage goes, something is better than nothing.
8. Investment properties are tax-efficient. But they're not something to get into lightly. It's hard, even now, to buy a cash-flow positive residential or lower-end commercial property where the rent covers the mortgage and all outgoings such as maintenance and rates. Even if you do find one that fits the bill, it takes management. Owning rental property also makes an investor's accounting and tax position more complex, often requiring expensive assistance from accountants and company formation/trust experts.
9. Be clever with your KiwiSaver. We have few enough tax breaks in New Zealand as it is. So if you're not in KiwiSaver, or are not paying enough in to get the maximum government and employer contributions, then do. You're only short-changing your own future if you've not got a KiwiSaver account. There are plenty of people with many thousands of dollars invested in KiwiSaver already, much of that thanks to government and employer contributions. It's time for those paranoid people out there, who still aren't in KiwiSaver because they "don't trust the Government" or think they can "do better", to give in. Nearly half of what's in my KiwiSaver fund didn't come out of my own pocket. There are very few people who get that sort of return on their investing.
10. Don't spend your pay rise. Not many people seem to be getting these of late. Lifestyle inflation usually goes hand in hand with pay rises, but doesn't really need to. Be happy with what you have and bank the additional windfall.
Happy New Year and work hard on making those resolutions a reality.