My wife and I are financially careful. We have a young family, no material debt, modest annual expenses and jobs that, in the current climate, seem secure.
We own a house, have around $100,000 in KiwiSaver growth funds and have recently invested $100,000 with a private company (also our employer). We have about $20,000 in cash. We also have a significant line of credit with the bank as a legacy from our mortgage some years ago (this is fee-free to retain access).
We intend to invest in ETFs (exchange-traded funds) or similar. However, common wisdom suggests three to 12 months of expenses should be held in cash.
For our current lifestyle, this is around $10,000 to $40,000. However, cash returns are poor, and it seems a shame to keep this money idle, especially given that ETFs seem relatively liquid.
The doomsday scenario is that we both lose our jobs and our current eggs-in-one-basket investment due to severe recession. Presumably such a situation could also wipe significant value from any sharemarket investments.
I don't want this thought to keep me awake at night, but I also don't want to stay awake thinking about all the interest I'm missing out on.
How much cash do you suggest we hold as a buffer against these risks? Can you suggest any investments that are relatively liquid in the case of an emergency, but also have the potential to outperform cash?
How much you should set aside for emergencies is a how-long-is-a-piece-of-string question. It depends on:
• Your regular expenses.
• The likelihood of losing one or more sources of income.
• How many other sources of income you have.
• How volatile your investments are. If they are in a share fund, for instance, you don't want to be forced to cash in that money when markets are down.
• How easily and quickly you can turn your investments into cash.
• How much you have in KiwiSaver. If you get into serious financial difficulties, you should be able to withdraw at least some of that money.
• Whether other people - such as extended family members - would help you out financially in an emergency.
Each person or couple should work out their own number, but certainly several months of expenses is wise.
Your situation looks pretty strong in most respects - with your lack of debt and bank line of credit. What worries me, though, is that your jobs and big investment are all with one employer.
I've never forgotten how employees in big US company Enron lost not only their jobs but their pensions and life savings when the company went bankrupt. To them, the company had seemed rock solid. And in a private company it might be even harder for you to really know what's going on. If I were you, I wouldn't put more into your employer.
But I'm getting sidetracked. Here are some ideas of where you could put emergency money:
• Shop around for the best bank returns, perhaps by checking out www.interest.co.nz. Returns vary widely.
• Given that you like exchange-traded funds, invest in Smartshares' NZ Cash fund - or any other cash fund. Returns might be a bit higher than a bank savings account.
• Use bank term deposits. If interest is higher on longer-term deposits, as it is currently, you could use laddering. Invest some money for, say, three months, some for two months and some for one month.
As each deposit matures, reinvest it for three months. Then you will always have some money coming available every month - even though you're receiving the higher three-month interest.In an emergency, you can then use a credit card, knowing that by the time you must pay the credit card bill you'll have a matured term deposit.
A final point: don't get too hung up on the low returns on cash investments. They seem likely to rise a bit. And anyway, they are well ahead of inflation, and that's what really matters.
In the 1970s, it looked great to earn more than 10 per cent on a term deposit, but inflation was higher than 10 per cent. One hundred dollars in savings might be $110 the next year, but that bought less than the $100 the year before. At least that doesn't happen these days.
In the US they recommend having six to eight months income in emergency funds. We don't seem to emphasise emergency funds in New Zealand - I'm not sure why. Anyway, I do. Why? Redundancy, illness, death, earthquake, storm, drought, accident, flood, recession, milk or lamb or beef price downturn, etc.
I'm an authorised financial adviser. I tell people to put into KiwiSaver just enough to get the Government's $10 a week tax credit. Or if you are an employee, contribute the minimum you can to get the Government's $10 a week.
Any other savings should be elsewhere and fully liquid - not locked in. And other savings can double as emergency funds.
If you have a mortgage from a bank, emergency funds must be elsewhere, since banks can help themselves to your other accounts any time if you default.
If you have money troubles, any measure of control you can keep to yourself, and away from your bank, is good, since your bank is not your friend if you can't pay.
Firstly, on KiwiSaver, I generally agree with contributing only enough to get the maximum $521 tax credit and employer contributions, so you retain access to other savings.
The exception is people who don't have the willpower to keep their sticky fingers off their long-term savings. They might want to lock up more in KiwiSaver.
On the possibility of your bank using your savings if you get behind with mortgage payments, Banking Ombudsman Nicola Sladden confirms that, "The bank-customer contract usually allows the bank to set off one account against another."
Does her scheme receive many complaints about this?
"While we receive complaints about a bank exercising a right of set-off between a cheque account and an overdrawn current account or an outstanding credit card debt, we do not receive many complaints about banks exercising a right of set-off between a mortgage loan and a savings account when a customer has defaulted on their mortgage payments," she says.
To read about a case when a bank used money in a cheque account to pay an outstanding credit card debt, see here. In that case, a bank customer "complained that the bank should not have removed the funds without any warning, leaving him short of money to pay his rent and to meet other Christmas-related expenses".
Sladden adds that if the Banking Ombudman Scheme were looking at set-off between a mortgage and a current account, "we would consider whether the set-off had been carried out in accordance with the terms of the contract.
"Further, if the circumstances of the payment default indicate the customer is experiencing financial hardship, we would expect the bank to refer the customer to its financial hardship team in order to discuss the repayment difficulties and explore ways for the customer to meet their loan obligations."
The scheme has a guide for people in hardship and financial difficulty. This includes information on mortgage repayment holidays and whether your bank is obliged to assist you.
"If a customer can no longer meet regular debt repayments because their financial situation has changed, the customer should contact their bank," says Sladden. "The sooner they do this, the more likely the bank will be able to assist." I can only echo that.
Bricks and Brexit
My partner and I have recently returned to Auckland after six years in London. We're both 33, debt-free and are pleased to have found jobs quickly. The next step is to sort ourselves a home.
The big handbrake on this project is obviously the Auckland market, but the second problem is the poor state of the British pound post-Brexit. Combined, we have 70,000 pounds in the UK and very minimal savings here. We are lucky to have a combined income here of $160,000 a year, and are living with family, and saving madly, as we decide what we do next.
We'd love to be in our own home this year, but we are a bit wary about moving money back at a poor rate to invest in what is surely an overvalued property market. Yet the emotional pull of a house is so strong! Any advice, Mary?
There are several possible scenarios here:
• You buy a house soon, and then watch house prices fall and the pound rise and wish you had waited.
• You buy a house soon, and then watch house prices rise and the pound fall and are glad you bought.
• You postpone buying, and then watch house prices fall and the pound rise and are glad you waited.
• You postpone buying, and then watch house prices rise and the pound fall and wish you had bought earlier.Other possibilities are that a house-price change will be offset by a pound change. Or that neither will change much.
There's no way of knowing which scenario will play out. So you might as well do what will make you happier, and that's clearly buying a house now.
The Auckland market seems to be hesitating at the moment, so you'll probably be able to bargain harder with a seller than a few months ago.
In any case, this is unlikely to be the last house you ever buy. I've owned more houses than I care to admit - mainly because of changing cities or countries. I've done well with some purchases and abysmally with others, which were nonetheless great homes. Over the long run it doesn't matter that much.
Through your columns in the Herald you must have told me 100 times the name of the website where I can find out how well or otherwise KiwiSaver providers are doing and the comparisons between them. Can you tell me one more time please?
Shhh. Don't give fuel to the readers who unfairly complain that KiwiSaver gets too much space in this column! It hasn't been quite 100 times. What you want is the KiwiSaver Fund Finder on www.sorted.org.nz. The website is run by the Commission for Financial Capability, so it's unbiased.
I suggest you firstly work through the "Find the right type of fund for you" tool. That will help you decide your appropriate risk level. Then consider all the funds at that risk level.
Compare funds mainly on the basis of fees and services, rather than performance. Sure, you might want to rule out funds that have had poor long-term performance. But a fund that has had good long-term past performance may be just as likely to do badly in the future as any other fund. Fees make a big difference to long-term performance, so a low-fee fund is a good bet.