Is one of your new year’s resolutions to get your finances in order? This second part of the Herald on Sunday’s complete money guide looks at building your nest egg. And don’t forget to enter the draw to win $10,000 cash to get you started. Susan Edmunds reports.

Your savings

Hoping for an overseas holiday this year? A new car or an emergency fund? Growing the balance in your savings account is harder than it sounds.

Jonathan Beale, ASB's head of wealth advisory, says one of the best pieces of financial advice is to "pay yourself first". Many people decide they will cut their spending and save whatever is left at the end of their pay period. Then they discover any surplus has been frittered away.

If you instead decide what you can save and take it out of your account as soon as your salary comes in, you have a better chance of saving, Beale says. "It only hurts for the first couple of weeks. After that you get used to it."

He says changing the way you think about saving might help. "I try not to think of it as 'saving' money. I'm 'redirecting' it into the mortgage, KiwiSaver or saving. It feels a bit more positive."

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Beale says people would be surprised at how much they can save without feeling it too much. "A few years ago, my wife wanted to go to Fiji and I didn't think we could afford to. She said 'let's do a budget and see'." He found he spent $1200 a year buying a daily coffee.

Beale says people can use apps like ASB's Track My Spending to see where their money goes and highlight potential savings. "Do you need Sky TV all year or do you want it for the All Blacks who play four months of the year?"

You'll get the best interest rates for your savings by choosing accounts you can't access every day. ASB's Savings Plus account pays an extra 3.25 per cent interest to savers who have not made withdrawals during a calendar quarter.

David Boyle, from the Commission for Financial Capability, says everyone should try to save three months salary as a buffer. If you have several thousand saved, you could put it in a term deposit to maximise the interest you receive.

Annual Savings:
If you start saving on February 1, what could you have by the end of the year?
• $10 a week: $476
• $20 a week: $951
• $50 a week: $2378.

Your KiwiSaver

It's been estimated that KiwiSavers in default schemes have missed out on up to $200 million in performance returns over the past year because they are in the wrong fund. Higher-risk growth and aggressive funds perform better over the long term than conservative funds that put more money in low-risk investments such as cash. Default funds are invested conservatively because they are designed to be holding accounts.

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Most KiwiSavers' money will be invested for decades but 20 per cent are still in conservative default funds because they haven't made an active decision. You can work out what sort of fund you need by talking to your provider, using Sorted.org.nz, seeking advice from an adviser or using SavvyKiwi.co.nz.

Once you know what type of fund you need, the provider is not so important. The ASB's Jonathan Beale says what people contribute is more important than the fees charged or the return a provider delivers in a quarter. "People focus on the best fund but the real difference in having a great retirement is how much you put in. The more you put in early, the better. People ask 'should I pay off the mortgage or join
KiwiSaver'? You should do both. If you get to 50 you've only got 15 years to save for retirement. You'd have to put an enormous amount in."

New disclosure rules make it easier to compare KiwiSaver returns. But don't assume that because a fund had a great year last year, it will have as good a run this year.

How it mounts up:
A 30-year-old woman who joined KiwiSaver now, earning $60,000 and contributing 3 per cent plus her employer's 3 per cent could expect to have about $260,000 by the time she retires at 65, giving $285 a week in income. The same woman would find after five years in KiwiSaver, she had almost $20,000 available to buy a first home.

Your house deposit

If you're desperately saving a deposit for a first house, the best place to do it is probably KiwiSaver. Beale says many young people don't join KiwiSaver because they don't realise the Government savings scheme is a more effective way of getting their deposit. "That's because you're paying in and your employer is paying in. It's a good way of saving."

To withdraw money from your KiwiSaver to buy a property, you need to have been a member for three or more years and can only use the money for your first home, not an investment property.

First-home buyers can withdraw their contributions, their employers' contributions and - as of this year - the $520 a year Member Tax Credit from the Government. Depending on your income, you may also qualify for a first-home deposit subsidy of up to $5000, or $10,000 if you are buying a newly-constructed house.

If you're in KiwiSaver to save your first-home deposit, you should be in a fund that is invested conservatively to avoid market volatility. Beale says people shouldn't rush into their first home.

"Build up as much deposit as you can to get there and don't stretch yourself.

"Don't buy in the best area, try to find an up-and-coming area."

He recommends looking for suburbs next to the most sought-after spots.

"They tend to become a nice area because there's not going to be any new land."

What you'll get:
If you've been in KiwiSaver for five years, what extra help could you get to help with your deposit?
• $5000 each (or $10,000 each as of this April if you're buying a newly-built home).
• $2600 in member tax credits each.
• Your contributions, and your employer's contributions. If you've been contributing 4 per cent of a $50,000 income, this would be about $20,000 over five years, without taking into account any returns on your investments.

Your investments

Most people who have a mortgage will have heard the mantra that no investment is as good as paying off your home loan. It's hard to get a savings account that pays more interest than the bank charges you on the loan. And the money you save by knocking off the mortgage is tax-free, whereas savings account interest is taxed.

David Boyle, group manager of investor education at the Commission for Financial Capability, says New Zealanders' propensity to pay off a bit of their mortgage and extend the loan again means many aren't mortgage-free until later in life.

"As long as the house is going up in value that's probably okay, but if it's static and you're still in debt close to retirement, that's not a good thing. You need to diversify your investments. Having it all in your house is not a great idea when you need an emergency operation. The house doesn't give you that."

The ASB's Jonathan Beale encounters many people keen on buying investment properties. Landlords have had a good run over recent decades, as strong capital gains bolstered rental returns.

You'll likely need a 20 per cent deposit if you are looking to buy another property, but if you have built up significant equity in your home, you may find you have enough to keep your total loan-to-value ratio below 80 per cent, even with the new borrowing.

The interest you pay on the loan you take out for the second property is tax deductible. The same applies to money you borrow to fund other investments, such as shares, but it's unusual to find lenders happy to do that.

You will need to decide whether you want to invest for cashflow or capital gain. The areas that have the best rental yields, such as Kawerau with a median purchase price of $150,000 and average rent for a three-bedroom home of $193, tend not to experience capital gains anywhere near as robust as those in the bigger centres.
But in Auckland, you are likely to have to top up the rent to meet the mortgage payments for some time.

Barfoot and Thompson says while landlords have increased rents by almost 5 per cent in the past year, the average gross yield on Auckland properties dropped year-on-year from 3.79 per cent to 3.58 per cent. Gross yield is the annual rent collected divided by the cost of the property.

You're probably best to buy in areas you are familiar with. Joining a property investors' group is a good way to get started.

Beale says: "Get some advice. Talk to a bank about what you can afford. Remember property values go up and down. It's not always a dead cert you'll make money."

David Whitburn, past president of the Auckland Property Investors Association, picks Massey, West Harbour, Swanson, Birkenhead and Papatoetoe as potential future hotspots for Auckland.

Apartments can also work, although may offer less capital gain. In the central, east and west parts of the city, median-priced properties sell for about $250,000 and rent for $360.

But other ways to get exposure to the property market without buying a house include buying shares in the newly-listed Kiwi Property Group. Shares were trading this week at $1.30.

Or you could buy shares in retirement village providers Ryman or Summerset.
And it's worth thinking about the wider sharemarket. "Buy good-quality New Zealand companies that are growing. They'll grow well and you'll get good dividends," Beale says.

Banks offer easy-to-use portals to buy shares online. You could also work with an investment adviser to manage your port-folio. Investing in managed funds and shares won't give you the added bonuses of KiwiSaver, but your money isn't locked up until you're 65.

Best shares:
The top five biggest share price increases over the past five years:
• Finzsoft - 2233 per cent
• Diligent Board Member Services - 2204 per cent
• Xero - 897 per cent
• Burger Fuel Worldwide - 630 per cent
• Green Cross Health - 584 per cent

What sort of investor are you?

If you're younger with a long time until you need your savings to fund your retirement, you will do better investing in higher-risk products.

A portfolio of investments such as shares might lose money some years but over time the higher peaks would cancel out the troughs to provide a better return overall.

When you get closer to retirement, you can move your investments into lower risk assets. Most people spend decades in retirement, so it is a good idea to retain some riskier growth assets when you get to 65, to ensure you don't outlive your money.

The key to long-term higher-risk investment is not to get spooked at the sight of a market downturn. The worst thing you could do is pull your investment out at the bottom of a market dip and put it into a conservative fund, or as cash in the bank, because you could lose money and miss out on the riskier investments' higher peak when the recovery eventually happens.

If you know you don't have the stomach for peaks and troughs, talk to an investment adviser about finding a strategy that will provide growth without the potential for a roller coaster ride.

Get started early

Adviser Liz Koh says the sooner people start to save, the better, for five key reasons:

1.Some people argue they will save by continuing to work after 65. it is better to be working late in life through choice rather than having to for money.
2.You can never tell what's around the corner. Health issues or redundancy can cause sudden income drops so leaving retirement saving until the last minute is risky.
3.Saving a small amount regularly into a diversified portfolio over a long period produces a higher return than investing a large lump sum for a short time. This is partly due to a principle called "dollar cost averaging". Growth investments such as shares are volatile over time, and by investing a small amount regularly at different price points, you reduce the average cost of the investment. By investing a fixed amount each month, more shares are bought at low prices and less at higher prices.
4.It is easier to save a little each month over a long period than a large amount over a shorter period.
5.Develop a savings habit early. If you don't, when the time comes to start saving, it is hard to stop spending.

• Read part one of this report here