In reference to "getting a home on a $30,000 income" last week, I thought this was misleading to say the least.
The couple had a 75 per cent deposit on a $500,000 home and income of $30,000. Thus the deposit was $375,000. How did they save $375,000 on a $30,000 income?
By watching every cent. Last week's correspondent is an extraordinary saver.
After I received your letter, I emailed her to ask how she did it. "I emigrated to New Zealand 18 years ago. I'm now a New Zealand citizen," she replied.
"I was on a higher income before and have been living frugally — not everyone's cup of tea. Family and relatives lived overseas, so there was no need to spend money on special occasions such as birthdays, Christmas, etc.
"I own a 14-year-old car and never eat out. I cook meals in batches to store in the freezer. I check pricing of meats, vegetables and fruits and don't like alcohol, coffee and snacks. I make use of off-season deals when travelling once in two years and avoid Boxing Day or Black Friday sales like the plague, haha, it's just me.
"I switch power and internet to cheaper providers such as Flick and Big Pipe and wear undergarments, clothes or shoes until seeing holes before replacing them. I always do window shopping for exercise purposes and look for ways and means to save money; for example, cutting my own hair. I do not have a KiwiSaver account — every penny saved goes to the savings and term deposit accounts."
Shortly after, she wrote again. "Oops, missed something. Another example of frugality: three years ago, I bought a 4G Samsung mobile phone for $99 on special and top up $20 each year. It's meant for emergency use only. I have a weekly budget for groceries and challenge myself to spend less than that. I make sure each purchase is value for money; that is, I watch every expense like a hawk!"
But still, I wrote back: "You must have saved at an extraordinary rate." Her reply: "With daily compound interest, I could save about 35 per cent of my take-home pay in a year. Whenever the savings account reached $10,000, I moved it to a term deposit that pays interest at the end of each month to my savings account. This way my savings account built up funds very quickly."
That would certainly be true once her term deposit savings had mounted up. Which brings me to an important point. You may be overlooking the power of compound interest.
Another reader — with a similar question to yours — certainly is. To get to $375,000 of savings on a $30,000 income, he wrote: "Even if you were able to save half your income every year, that's still 25 years of saving."
He's obviously divided $375,000 by $15,000 to come up with the 25 years. But that ignores compounding — earning interest on the interest you've already earned, which really adds up over long periods. Let's say the reader was saving $15,000 a year at an interest rate of 3 per cent a year after tax. It would take about 19 years, not 25, to get to $375,000.
Don't forget, too, that if we're going back some years to when term deposit interest rates were higher, if they averaged 5 per cent over the period, it would take about 16 years.
As the reader says above, she actually saved somewhat less — 35 per cent of her take-home pay. So how long did she save for? "I saved the house deposit for two decades," she says.
"Emigrating to a new country 18 years ago with no family support had used up a lot of my savings to start up a new home, buy a car and support myself when looking for a job. When I got a job, I worked overtime and did shift work, which allowed me to have a higher income to start savings again."
Since then, her income has sometimes been boosted above $30,000 with overtime, she says. But it can't have made all that much difference. Buying a house wasn't always the plan.
"Twenty years ago, when I started saving, it was intended to be a retirement fund. I never thought of buying a house. However, recently with the high rent and low mortgage rate, I decided to use it to buy a house."
Now that she has her own home, no doubt she will build up the retirement fund again, for when she stops work in about 20 years.
For all those who say home ownership is beyond their reach, this is food for thought — cooked in batches and frozen, of course!
•I suggest our super saver joins KiwiSaver.
If she had been a member all along, her savings would have been boosted by employer contributions and tax credits. And if she had never owned a home before, she could have used that money to buy her home, and possibly also received a HomeStart grant of up to $5000.
Too late for that. But she can still get the employer contributions and tax credits from now on. This should more than double her total contributions, which in turn would more than double her retirement savings. Take note, others on low incomes. The way the numbers work, KiwiSaver is particularly powerful for you.
• Our reader saved in term deposits. Others inspired by her story might save in a higher-risk fund — in or out of KiwiSaver. Their balance would sometimes fall, but their savings over 20 years would almost certainly grow faster.
• A big thank you to our reader for sharing her story.
Ongoing costs of owning
Your correspondent who managed to buy their first home on a low income deserves to be congratulated on their success. However, it is optimistic of them to think that their housing costs will now sit at the quoted $600 per month. The cost of owning a home is far more than just the cost of the mortgage.
Most people who rent are quite unaware that the ownership of property entails the payment of the considerable and unavoidable costs of rates, insurance, water connection charges and maintenance — all of which were the obligations of the landlord when you rented and were included within the rent that you paid. Even with a modest property, these charges can easily reach $5000 a year, so it's highly likely that the anticipated $600 a month ownership cost will in reality be nearer $1000 a month.
The reader didn't say the $600 mortgage payment was her only monthly cost. I was the one who compared that with her rent, saying the rent was probably considerably more.
You make a good point, that I should have taken into account other housing expenses.
Still, chances are her rent was higher than your $1000 a month total estimate.
According to the latest Trade Me Property Rental Index, the national median rent was $470 a week in January. In Auckland and Wellington, it was $550 a week.
Two is better than one
Last time I sold a house in the UK I was living in New Zealand. At the time the UK market was in a slump. The house needed to be sold and I would have preferred an auction. But auctions are unpopular in the UK and tend to be used to sell abandoned or run-down properties.
Auctions are also a real pain if the house doesn't sell. Nothing says unwanted or overpriced more than a house unsold at auction.
How was I going to get the best price and get a quick sale? I researched the local estate agents and picked two. Within a couple of weeks, both agents had a serious buyer and we sold the house quickly for the full asking price.
The estate agents both charged slightly higher commission than usual, but in the big picture I didn't really mind about the fees.
As is almost always the case, when you decide to sell a property, the most important thing is to sell it quickly and move on.
There was a real incentive for both agents to sell the house themselves for the highest price, knowing full well that while the house remained on the market there was the possibility of the other agent selling the property and claiming all the commission.
Interestingly in the UK sale, the only cost to us was a commission of 1.75 per cent.
This was as agreed before the sale and not negotiated downwards by us. There were no other charges.
In a slowing market, two competing agents have to be better than one. Why in New Zealand are sellers encouraged to use only one agent?
I've often wondered that. Agents tell you they won't try as hard if there's a danger they will lose the sale to another agent. But as you say, competition might actually make them try harder. Next time I sell I plan to use more than one agent.
If there are any agents out there who can counter this argument, let's hear from you. On the level of commissions, I've often heard that New Zealand agents charge more than overseas.
It's worth looking for someone charging less, as long as they have a good track record.
And, as I've said in the last two columns, you might want to set up the commission so agents have more incentive to get you a high price.
Auctions have clear pluses and minuses. As you say, if your house goes unsold, it can seem tainted — although only to those who know about the auction.
And another reader wrote: "Auctions line agents' pockets at the rate of two a month and at the emotional expense of the vendor."
I'll never forget trying to sell a house in an auction back in the days when auctioneers could pretend to be taking bids.
All seemed to be going well until he took us aside and said none of the bids was real. It boils down to this: an auction won't work unless you have at least two keen buyers, whereas in an ordinary sale you need only one.
On the other hand, in a booming market with rising prices, sellers sometimes get several hundred thousand dollars more than they had hoped for when auction bidding goes crazy. Having the right market conditions is crucial.
A tip from another reader: "I always control the auction reserve if auctioning. If they insist on a number, I tell them $30 million."
That means, of course, that the property will never sell under the hammer. But the seller and agent can then negotiate with not only the highest bidder but also other high bidders — and possibly end up with a higher price or a better deal in some other way. More on selling your home next week.
Let's be professional
I think your comment last week on the definition of a professional is a classic.
All sorts of vocations and careers are now called professions. In my day I think perhaps eight were thought of as true professions.
According to the Oxford dictionary, professionals need prolonged training and a formal qualification. So let's see now — in alphabetical order — we have: academics, accountants, architects, doctors, engineers, lawyers, nurses and teachers. That gets us to eight.
I was told roundly once that journalists don't qualify, but no doubt there are several others. I agree, though, that the word is misused often. It's sad the way words become debased.
- 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.