I was thinking of applying for a credit card to build my credit score and get some practice around borrowing money. What are your thoughts on responsible young people getting a credit card at 18?
A: Some people would say credit cards and teenagers shouldn't mix. There's too big a temptation for a young person to spend all over the place and run up huge bills they can't possibly handle.
But that's underestimating you and others like you. From the few sentences of your letter, I get the feeling you would handle a credit card well. And it would be good for you to have one.
The basic rule is that it's fine to have a credit card, as long as you're confident you will always make the full payment each month.
And by doing that, you build up a strong credit history, which will help you in all sorts of situations. If you want to go flatting, or apply for a job, or sign up for an electricity account, the landlord, employer or power company is quite likely to run a credit check on you. Later on, you might want a mortgage, and the lender will definitely check out how you've handled loans in the past.
While having no credit history is better than having a bad history, it's better still if you have proven you can responsibly handle a credit card.
A good way to be sure you always pay your credit card bill in full is to set up an automatic direct debit from your bank account. But, of course, you must have enough money in the account on that day. Perhaps make a note in your diary — or some kind of electronic reminder — to check a couple of days before the payment date.
What if you're in a short-term crunch, maybe because you've lost your job? Make sure you pay at least the minimum amount that month. Stop using the card, and plan to pay off all your debt in the next month or two.
While we're on the topic, other readers might want to check their credit score. If you Google "credit record NZ", you'll get lots of advice on this, including from the Government, the Citizens Advice Bureau and the sorted.org.nz website.
You can check your scores with three different agencies free, and there's advice on what to do if your score is low, or if there's incorrect information about you.
I have borrowed your book again, and other than giving me plenty to think about, I have decided to make sure the kids read it. So I have proposed a family quiz in September, when we can get together.
Both have partners, and my 24-year-old son is engaged and planning to get married in February next year. I know that my daughter's partner has already finished reading her copy.
We set them up with KiwiSaver when they were young, and have contributed the minimum amount until they are earning. They are very excited about that nest egg.
So, finally, my query is: can you help me with questions? What should they know about their finances at their age? What should I want them to most understand from your book?
Also, have they taken an active enough interest in their KiwiSaver, and do you have some clues on what they should be doing now with their finances?
A: Gosh, this all sounds a bit school marmish — if you don't mind my saying! But hopefully the young ones will play along.
Here are some suggested questions aimed at the young, and notes on the answers:
• When is the best time to start saving? Today. Delaying for a year or two makes a big difference in the long run.
• What is Rule No 1 about credit cards? See the previous Q&A.
• If, unfortunately, you have run up credit-card debt with a 20 per cent interest rate, how good is paying off that debt? It improves your wealth as much as having savings that earn 20 per cent interest. In other words, paying it off is a really, really good thing to do. And don't run it up again!
• What about paying off a student loan? If you live in New Zealand, you pay no interest. So it doesn't hurt to just pay the loan off gradually through deductions from your wages. But if you think you should pay it off faster, good on you.
• What categories of savings should you have, apart from KiwiSaver? It's good to have a rainy-day fund — ideally three months' income — for unexpected expenses like car repairs or a dental bill. Also, have a fund for treats. If you save before you spend on travel or a new-to-you car (brand new cars are money losers), you'll end up much better off.
• Can you get high returns with low risk? No! Anyone promising that is deluded or a scammer. Read in the book about other scam warning signs.
• Is home ownership the be-all and end-all? No. You can do well financially without ever owning a home.
Time for a break from the family quiz, and something to drink, before we move on to KiwiSaver questions:
• Do you know how risky your fund is? Find out using the KiwiSaver Fund Finder or the Smart Investor tool, both on sorted.org.nz.
• Have you checked that you are in the right type of fund? Ditto.
• Are you in one of the lowest-fee funds of your type? Ditto. This is the best way to choose a KiwiSaver provider.
• Why not go for the provider with the highest returns? Because past and future returns are often quite different. That's why it's best to go for low fees, which don't tend to change.
• What should you do when your KiwiSaver balance falls a lot? Nothing. Do not switch to a lower-risk fund. In time it will come right.
I could go on. But by now I think it's time for a quiz-free dinner.
Perhaps one last question as everyone relaxes: does having more money make you happier? Not necessarily. In fact, some research says that beyond a certain point, it tends to make you unhappier.
By the way, you mentioned contributing the minimum amount to your children's KiwiSaver accounts. That's great. But so other readers aren't confused, there's no minimum contribution for children or adults.
What you might be referring to, though, is that, from 18, everyone is eligible to receive the Government contribution. And I often suggest that parents of students try to put in $1042 a year — automatic monthly payments of $87 work well — into their children's accounts at that stage so they receive the maximum $521 from the Government.
I've read a lot of Mr Money Moustache, but it's great to get a New Zealand, and female, perspective. You might want to pass that on to the questioner.
Also, I couldn't understand her/his plans. If they are retiring when they reach $1 million, and spending 4 per cent a year, how are they ever going to reach $2.5m? I can't imagine the interest on $1m is going to grow that fast, especially if they are spending 4 per cent a year. Am I missing something?
A: Thanks for the recommendation.
On the maths, I assume our correspondent plans to continue to use index funds for most of his investing. These low-fee funds usually invest fully in shares, and in recent years their average returns have usually been well above 10 per cent. So the excess over 4 per cent will keep his money growing.
Mind you, the long-term average for such funds is more like 6 or 7 per cent after fees and tax. If — or we should say "when" — average returns go back to that level, with losses in some years, it could take a long time for our correspondent to reach his goal.
The great thing, is, though, that it doesn't matter much. As I said last week, "if things don't work out as you hope, you can always go back to work".
Media reports this week state that the Salvation Army is calling for a 30 per cent increase to benefits as "desperate" Kiwis struggle to feed and house themselves. Further, the Government's own Welfare Working Group recommended last year the reform of benefits, by "increasing main benefits by between 12 per cent and 47 per cent" (Recommendation 20).
Finally, rather than following your suggestion that individuals could assist a beneficiary with KiwiSaver contributions so the beneficiary gets the Government contributions, I could counter by suggesting that non-beneficiaries cease to contribute to KiwiSaver, thereby freeing up more Government money to apply directly to supporting beneficiaries now.
A: It will be interesting to see if beneficiaries get a substantial pay rise in this year's Budget. I hope so.
But I think you might be dreaming with your last suggestion. Perhaps, though, wealthier people in KiwiSaver could — once they reach 65 — make substantial donations to charities that support beneficiaries, in gratitude for all the Government money that went into their KiwiSaver accounts.
Opening an ASB personal share-trading account, associated cash account and Australian dollar foreign-exchange account for share trading can be done online and is free.
Standard ASB fees apply when transferring money into and out of the account, but the account allows me to buy and sell ETFs in Australian dollars, avoiding further foreign currency fees.
Brokerage fees are 0.3 per cent, or A$30 if buying ETFs worth $10,000 or less.
Computershare looks after the paperwork. There is no charge for this service if dividends are deposited in an Australian bank account. Dividends can be sent to a New Zealand account at very competitive exchange rates.
New Zealand FIF (foreign-investment fund) tax is perceived by most people to be very complex. However, in practice, most years the tax is easy to calculate as the value of my foreign ETFs, once dividends are added, will have increased by more than 5 per cent for the tax year, thus the FDR (fair dividend rate) calculation method can be used. My tax rate is 17.5 per cent. I do not use an accountant. However, I did engage one to check my very first FIF tax return.
A: Thanks for all that helpful information.
- 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.