Wipe out that credit card debt - quickly

By Mary Holm

Money Matters


Q. My situation is modest compared with some of your correspondents, and I would really appreciate your advice.

I am 52, single, and now that the family has grown up I would like to travel and save more for my retirement as well.

My annual gross salary is $35,000; my property is valued at $220,000, and the $52,000 mortgage will be repaid in 8 years.

I am in the Royal & SunAlliance Global Fund superannuation scheme (Norwich Life Yield when I joined in 1987). I have two small life insurance policies, medical insurance, a 10-year-old car and a few hundred dollars in savings. I have credit card debts of $3000.

I would like to increase my superannuation contribution, currently $100 per month. However, I have the option of joining my employer-subsidised superannuation scheme, requiring 6% of my salary.

Should I join this scheme (there is no guarantee that I will remain in the same employment until retirement) and retain my Royal & SunAlliance scheme at its present level? Or should I just increase the payments to my existing scheme?


A. Neither. Or at least not until you're rid of that credit card debt.

I was worried to read the other day that New Zealanders put 22 per cent more on their credit cards this past Christmas than the year before. That would be fine if they paid the money off in full when they get their next statement.

But many people don't. They reduce the debt slowly over many months or, worse still, let it mount up. That's appalling money management.

When American Express recently launched a new credit card, it promoted its "low" interest rate. OK, its 16.99 per cent is less than the standard rate, around 18.5. But there's nothing low about it.

With inflation down around 1 or 2 per cent, anyone paying 17 per cent on debt is going backwards fast.

I can't stress strongly enough: give top priority to paying your credit card debt.

Then try never again to put more on your card than you can pay off when the next bill comes. If you travel, save the money for the trip before you leave.

Do that, and you'll retire richer.

I'll get off my soap box now. Once you've paid off the card, it's time to weigh up your work super scheme and the Royal & SunAlliance scheme.

You need to find out:

* How much of a subsidy you get in the work scheme. If the company puts in a dollar for every dollar you put in, or even half that much, your savings grow much faster. Well subsidised super schemes are generally great investments.

* How the scheme is "vested." If you're fully vested, that means if you leave before retirement you get not only the money you put in, and the returns on it, but also the full employer subsidy.

These days, says Aon Consulting actuary Christine Ormrod, employees are usually fully vested in 10 years or less, with partial vesting earlier.

It's quite common, for instance, for an employee to get 10 per cent of the company's contribution if he or she leaves after one year, 20 per cent after two years, and so on. And, in most schemes, you're fully vested by age 60, and sometimes in your 50s, regardless of how long you've been taking part, says Ormrod.

So, even if you stay in your present job only a few more years, you may benefit handsomely from the work scheme.

It's likely, too, that the administration charges are lower than on the Royal & SunAlliance scheme. Employer schemes are cheaper to run. In any case, quite often employers pay those fees for you, says Ormrod.

Frequently, too, you get free death and disablement insurance with an employer scheme, she says.

This could make your present life insurance redundant. (Even if it doesn't, consider whether you need that insurance anyway.)

Another point is investment choice. Your Royal & SunAlliance scheme has 28 per cent in world shares, 25 per cent in New Zealand shares, 5 per cent in listed property and the rest in fixed interest investments, the company tells me.

Many employer schemes have fairly similar asset mixes. But some offer you options, so you can pick the level of risk you feel comfortable with.

In light of all this, chances are that your employer scheme will be better than the Royal scheme.

There is, though, one more option to consider. That's repaying your mortgage faster than necessary.

It can be a good strategy - unless you've got a fixed rate loan and would incur big penalties if you pay it off quickly.

Let's say your mortgage interest rate is 7.5 per cent. Paying off the loan faster will improve your wealth by as much as an investment with an after-tax return of 7.5 per cent.

While the Royal & SunAlliance scheme might sometimes bring in returns above that level, it's unlikely the future average return will be that high.

What about the work scheme? It depends largely on the level of the employer subsidy. Ask those in charge of the scheme about average returns to employees, including the subsidy.

The poor old Royal & SunAlliance scheme hasn't fared well in this comparison. Trouble is, you're comparing it with two particularly good alternatives.

You can probably stop contributing to the Royal scheme and just leave it sitting there.

There might, though, still be fees deducted from it. In that case, perhaps you should end the investment and pay off your mortgage with the lump sum. Check with the company.


Q. Your recent reply to a question about having some fun with investments sparked my attention.

My reaction was that the couple were hardly going to raise a heartbeat about their new fun investment in equities.

They had asked about equities, so your answer was very fair and correct. But I just wish that the couple had the ability to consider a small discretionary investment that would give them a real reason to get up in the morning.

I have a vested interest in mentioning this as I have set up a web site to encourage discretionary investment into that most dangerous industry - the thoroughbred. I do not for one moment think that you will be recommending in print to your readers that they should take their hard-earned savings and plunge on the horses.

However, in the case of the couple, they could have taken, say, $5000 of their $20,000 and invested it in a share of a horse. Not only does this give them an investment, but also a range of social activities.

Naturally there are the full range of safeguards required before any such advice can be given to anybody, let alone a retired couple, but the opportunity does exist.

As long as you can afford to lose your money and not depend on it for income, then the experience can be part of life's reason to get up in the morning.


A. Why not, indeed, get up because you're off to the race course to see how Neddy will perform today?

Actually, there are a couple of reasons. One is that if you don't know much about horses, it might be difficult to invest wisely.

Another is that you'll have all your money in one animal. That's pretty risky.

Then again - as the recent news of a colt selling for $3.6 million shows - there can be big bucks in the thoroughbred game. It's a classic high-risk/high-return situation. The key is, as you say, that you put in money you can afford to lose.

Picture your nag in a truck bound for the glue factory. If you can cope with that, then a horsy investment might be for you.

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