Last week, in connection with a Herald series on women and money, I asked women who had questions about money to send them to this column. Today I respond to some of those questions — and one woman's angry reaction to the last column.
Q: As I prepare to fix my mortgage next month I find myself at a financial crossroads and I'd appreciate your assistance.
I'm a solo mum and have squirrelled away $15,000 over my daughter's lifetime to help her through med school in Dunedin. However, she has decided to study something completely different from the plastic/neuro/heart surgery (I was happy with any — I'm not a pushy mum) I envisaged, and at a university closer to home. And, of course, her first year is free.
So should I:
• Put the $15,000 on my mortgage and possibly get it back if we need it.
• Put it in her or my KiwiSaver.
• Put it towards a new kitchen I've been wanting for a long time.
• Save it for her second and third year of uni.
• Or, as someone has suggested, take out the full student loan she is entitled to and invest it all until she finishes uni?
A: Well done for saving that money for your daughter. And — I have to say it — well done to her for being her own person!
Out of your list of options, there's not one that is clearly the best. So let's look at them one by one:
• Paying extra off a mortgage is always a good idea. Let's say your mortgage interest rate is 4 per cent. Reducing that mortgage improves your wealth as much as a risk-free investment that earns 4 per cent after fees and tax. And it would be great to ask the lender to agree that you can borrow back the money if you need to.
• Putting the money in KiwiSaver might give you a higher return than paying down the mortgage. But it might not. And your money is locked away.
• Splashing out on a new kitchen is appealing, especially if you don't normally spend much on yourself. It's the option that would probably give you the most immediate pleasure. And if your current kitchen is dated and run down, spending $15,000 on a new one might add more than $15,000 to the value of your house.
• We'll combine the last two options, about financing your daughter's studies. I don't think you should feel obliged to pay for this. Your girl can take out a student loan and, rather than investing it, use it in the way it's meant to be used. Sure, she'll graduate with debt, but it will be interest-free, and she can gradually pay it off out of her paycheques. It can be a good way to learn about money.
So, where are we? Without knowing more about your circumstances, it's hard to choose. If you're not extravagant and your kitchen is old, go with that one. Otherwise my vote would be for reducing your mortgage.
Keeping on working
I could probably have my current 25-hours-per-week job for the next five years if I choose to, or need to — which I do. I am only paid $21 an hour, but it's a job I enjoy and it gives me quite a bit of flexibility.
I have a mortgage of $214,000. I paid $290,000 for a cottage on a half-acre, which I have just finished renovating inside and out. I have no other debt and about $23,000 in a balanced/growth KiwiSaver fund and $7000 in another balanced/growth managed fund.
In addition to paying my mortgage, I save an extra $50 a fortnight into each of the above two funds.
I am aware of the advice to pay off the mortgage rather than save into the funds, but I need money for emergencies, and believe I will earn more on my investments than I pay on the mortgage. I have a reasonable tolerance for risk, despite my age.
If I didn't work, I would be in deficit each week (after mortgage, rates, insurance and living expenses), although I also get $400 a week in NZ Super.
My question is, how best do I go forward? Should I continue to plod along paying off the mortgage, staying out of debt and living my life the best I can? And when I am forced to retire and lose the extra income, what then? Take it as it comes and worry about it when it happens?
I am not sure how I could do anything differently but would be interested in what you think.
A: You tricked me! I read the first few words of your letter and thought, "12 houses! This woman is very wealthy and needs no help from me." But then I read on.
You are impressive on two counts. You've found a house for $290,000 — and obviously made it liveable. And you're saving $100 a fortnight on a pretty low income, even when we include NZ Super. You're also staying out of high-interest debt, which is great.
Basically, I think you're doing as well as you can. But I've got a few tips and warnings:
• Be aware that you might not earn more on your fund investments than you would save by paying down the mortgage. Nearly all KiwiSaver and other funds have performed really well in recent years, but they could easily report losses for a while, at any time. Promise yourself you won't panic when they go down.
• You gave me the names of your two fund providers. They both tend to charge fairly high fees, and you won't necessarily get higher future returns — regardless of what's happened in the past. I suggest you go to the Smart Investor tool on the Sorted website and find a low-fee fund. Click on Compare at the top, then KiwiSaver, then Growth or Balanced. Scroll down and click "Sort by Fees (lowest first)".
• If you decide to switch to mortgage repayment, and want to retain access to your money, you could arrange that with your lender — as in the Q&A above.
• If things start looking bleak when you retire, keep in mind that about 40 per cent of superannuitants live on NZ Super only. You have savings, and hopefully a home with little or no mortgage by then.
But what will probably make the most difference is to look after your health, so that hopefully you can continue to work for 10 more years, rather than five. Why not, given that you enjoy your job?
One study a while back found that 45 per cent of 65-69ers work full-time or part-time and many continue into their 70s. And those numbers are increasing all the time.
If your job ends, think about what skills you have that could be turned into a small business. Maybe giving advice on how to renovate cottages!
For every extra year you work, you gain doubly: one more year of saving and one less year of retirement spending that you have to fund.
Beyond the bank
I am also supporting my son, by owning a one third share of his home and paying towards his mortgage, insurance and rates so that he could get on the property ladder. I have advised him he will need to buy me out when I turn 60, if he can.
I have some investments about to mature. Although it is not a huge amount, it seems a bit pointless having it in the bank earning very little interest, and I wondered about managed funds. Do you think this is a good idea?
A: First, good on you for helping your son. And also for setting a date by which you want to get your money out. More people should do that.
There are two big differences between bank term deposits and managed funds:
• The returns on term deposits are usually lower, as you've noted.
• You won't know in advance what returns you'll get on managed funds.
If you want to get appreciably higher returns, invest in either a balanced fund — roughly half shares and half bonds and cash — or a somewhat riskier growth or aggressive fund, with more shares.
The riskier the fund, the more volatile the returns. But the average returns over the years will be higher.
If you invest in one of these funds, be prepared to stick with the investment when your balance falls, sometimes a long way. The market always recovers in the end. But you already own shares, so you probably know about the ups and downs of the market.
You don't mention KiwiSaver. If you're not a member, join to get the government and employer contributions.
KiwiSaver funds are managed funds, so you could put your extra money in there. But if you want to retain access to the money before you turn 65, go with a non-KiwiSaver fund.
To pick a KiwiSaver or other managed fund — or to check if you're in the best one for you — use the Smart Investor tool described in the previous Q&A.
To get help in deciding what risk level is best for you, see the smallish print at the bottom of the "Compare KiwiSaver and Managed Funds" page.
I'd ask, have they or the parents had a look at the cost of a knee or hip or back operation at a private hospital? Would they like to see one parent or both hobbling around in pain, waiting for an operation to relieve their pain in a public hospital?
Furthermore, if one has a severe stroke, and the other is past being able to care for them, the private hospital beckons.
And before you can get a subsidy from the taxpayer, you have to fill out, from memory, about 14 pages, including details of loans to family. You cannot, in good conscience, expect the taxpayer to subsidise you when you can and should contribute yourself.
My memory may be faulty, but I fancy about $6000 a month was the cost of private hospital care. To quote Trotsky, "Old age is the most unexpected of all things that happen to a man."
A: Or a woman!
It's quite true that people sometimes face tough times in their "senior years". Or, let's be honest, their "old age". If it's good enough for Trotsky ...
And it sounds as if you've been through the mill yourself. I feel for you.
However, I don't think you can accuse last week's correspondent of planning to deprive his parents of money they might need. He was suggesting they lend him and his partner a home loan, but added, "Should they require a lump sum for any reason, we could then take out a mortgage if necessary. Our current loan-to-value ratio is under 50 per cent."
Still, you make an important point. In any loan between family members, it's best if the borrower has another source of money if the lender should unexpectedly need their money back.
More next week on loans within families.
- Mary Holm is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. 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 email@example.com. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.