I'm a 29-year-old single mum with a two-month-old baby. I have $95,000 saved from the sale of my ex-husband's and my house (this includes KiwiSaver money withdrawn under the first-home Government scheme). I have this money invested in a 12-month term deposit for 3.55 per cent.
I am not very knowledgeable about investments outside banks. This money is my entire nest egg, and there are several things to consider:
• I receive paid parental leave and working for families tax credits as my only income.
• I have moved to another city to live with my parents for support. I pay $150 in rent and expenses a week.
• I will apply for child support midway through the year (once my PPL runs out) from my ex-husband, but don't want to rely on this because I've heard circumstances can change long-term. But he is very willing to pay.
When I return to work, I face the decision of moving back to the city where my full-time job is and losing the support of my parents (they are amazing with my son), or looking for work full or part-time in the city I'm in. I most likely will work part-time so won't have the same earning power as before.
Finally, my question: What are good options for investment considering my life circumstances? At this point I'm not interested in investing in property or anything that will involve debt such as a mortgage.
I would like to use some of my money for holidays with my son and in case his dad stops paying child support eventually.
There are so many unknowns in your near future — what city you'll live in, what job you'll take, what sort of accommodation you'll have — that I think you should treat your $95,000 as short-term money, which you might spend within the next couple of years.
I'm not talking about squandering it on treats, but perhaps spending some on getting yourself resettled. And, while you're ruling out buying a home, that might change.
You might decide in a couple of years to buy a unit, townhouse, tiny house or other affordable option.
The best and simplest place to park short-term money is where it is now, in bank term deposits.
I suggest, though, that when your 12-month term expires, you "ladder" the money. Here's an example of how to do that:
• Divide the money into four lots of $23,750.
• Go to interest.co.nz to see where you will get the best interest rate.
• Reinvest a quarter of the money for six months, a quarter for 12 months, a quarter for 18 months and a quarter for two years.
• As each lot matures, reinvest it for two years.
Laddering gives you several advantages.
One important one is that you'll have access to a chunk of money every six months.
But at the same time, after a while all the money will be invested for two years. And in the present market, that will give you higher interest rates than on shorter terms.
It also means that if interest rates rise — which is what some experts are predicting — you'll have some money maturing every six months to roll over into the new higher rates.
By the same token, if interest rates happen to fall, you'll still have some money locked in at the old higher rates.
In other words, you're protecting yourself from getting badly hit if interest rates change in either direction.
A couple more points:
• Your ex-husband won't be able to wriggle out of paying child support all that easily, although it does happen, so you're wise to allow for it.
• You should definitely have some good times with your little boy, but I hope you don't splash out too much on holidays.
That $95,000 is your chance to get back into a secure set-up for the two of you. I would hate to see it gradually disappear.
Half and half
You say in connection with the deduction of mortgage interest for tax purposes that it would be unfair not to allow deductions for landlords.
A counter argument is that the investor gains significant benefit from the use of money that is not theirs and that their competition for money affects the cost of borrowing.
My solution, for what it is worth, would be to allow a partial deduction, say half of the interest, and to use the money gained from that as an allowance for deduction by first home buyers in their earlier years of the loan.
An interesting idea. It's half-pie for landlords and half-pie for homeowners, so I suppose that's fair. For others' thoughts on this, read on.
Signs of a poor system
The answer to your interesting question about why homeowners can't deduct interest they pay on their mortgage is simply that New Zealand Inc cannot afford it. New Zealand would be wiping billions of dollars of tax off the books.
The banks earn X billions in interest payments on mortgages. If the Government allows mortgages to be deductible, that in effect cancels out all the income the banks earn and the tax they pay.
I think even suggesting NZ Inc goes down the path of deductible interest for all risks opening a Pandora's box. Before you know it people will be asking for repairs and maintenance, insurance, interest on loans for a new bathroom, etc, to be included in the deductions. Without tax increases elsewhere it cannot be done.
I agree with your business comments. And I would suggest to your readers that if they want the business deductions, they take some business risk and rent their homes out.
I used to be envious of the deductions investors received, so I moved out of my home and now get the deductible interest — at the cost of privacy and non-deductible rent, a problem I am yet to solve.
I don't think affordability alone is an argument for not making a tax change. If it would make things fairer, we would just have to raise tax rates across the board to cover it. Your last paragraph is interesting. It seems you've made a move you didn't want to make solely for tax reasons. That's a sign of a bad tax system.
Tax on interest
With regard to the discussion about taxation of interest, there is a good argument to be made that no interest payments should be tax-deductible. The Economist ran a thought-provoking feature on it a year or two back.
After all, interest deductibility is essentially a Government subsidy for businesses. It randomly favours debt over capital, and I'm not sure I agree that it is an essential business cost like wages or power.
A business can choose various means of funding, so why should one type come with a tax break? In fact, it encourages companies to borrow, perhaps being part of the reason for our highly-leveraged society.
The deductibility of interest is often abused and, combined with our lack of a capital gains tax, allows businesses, particularly farms and property investors, to borrow big, pay little or no tax for many years as all profits go on interest repayments, and then reap a tax-free capital gain on sale.
There is no such reward for the everyday wage earner who also pays tax on the meagre interest they might earn from their savings.
Don't think I am anti-debt — it is vital to our society, I just don't think it should be given a tax break.
Some good points, especially about the encouragement to borrow and the lack of a capital gains tax skewing things.
I'm fine with the idea of allowing a mortgage interest deduction for homeowners, but only if the homeowners pay tax on any gains when they sell their property (just as speculators — I mean "investors" — do). And in fairness, renters should then also be able to deduct their rent payments.
Like the correspondent above, you're pairing the deductibility of interest with a capital gains tax.
Okay, I'm convinced. I have been for years actually. Let's start taxing capital gains properly.
You are mistaken in your belief that driving landlords out of the market will improve the housing market. What many commentators fail to consider is that there is a large pool of people who will never be able to own their own homes and another pool who are years away from being in a position to buy. These people need rental properties.
It has been calculated that for every former rental bought by a first-home buyer, 1.8 tenants are displaced.
This is a result of unequal housing density between owner occupiers and tenants.
Therefore if 10 landlords each sold a rental to a first-home buyer, that would put 18 more people out and into an increasingly tight rental market.
The fact is, society needs people to provide rental property, and muddied information leads to regulatory change that hurts the people who are trying to provide it.
Don't forget the eight new homeowners who would be subtracted from the tenant total.
Still, I'm not surprised that rented properties tend to house more people. But I've never wanted to drive landlords out of the market. I just want fair taxes.
You recently remarked in passing that few of your readers would be involved with FIF (foreign investment fund tax rules).
That is surely no reason to ignore the fact that the process is ridiculously complicated, even for the IRD. Why should Australian investments (only some of them) be exempt?
Frequent movements in exchange rates are also involved. Most accountants have to pass the work on to specialists, at a cost to the taxpayer. We should can the whole thing and treat all sources of income the same.
I agree that complex taxes are bad. I also think taxpayers shouldn't have to pay accountants, let alone specialists, to work out how much tax they owe.
It's weird when you think about it. I don't mind contributing money to be spent on education, health, social welfare and so on, but why should it cost me to do that? New Zealand actually does well on that count, compared with many similar countries.
At least most wage earners here don't have to fill out tax returns. But there's plenty of room for improvement. Here's hoping the Tax Working Group gives high priority to simplicity.
- Mary Holm is a freelance journalist, a director of the Financial Markets Authority and Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. Her website is www.maryholm.com. 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 firstname.lastname@example.org or Money Column, Private Bag 92198 Victoria St West, Auckland 1142. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.