Money makes the world go round, but many of us struggle to manage finances. How best to pay today's bills is something often wrestled with, and saving for the future can seem out of reach. Avoiding and clearing debt, getting a mortgage and investing wisely can be daunting tasks. Dawn Picken delves into the world of financial triumphs and failings, and reveals 10 of the biggest mistakes you can make with your money.
Overspending and Digging Out
"It was the stress of knowing you weren't getting anywhere fast."
After years of struggle, Jo decided to clear her debt.
Jo, who asked not to be identified, once had $50,000 in credit card and consumer loan debt. Her bank loan incurred about 25 per cent interest.
She says she and her husband used to pay for car repairs and home renovations with credit cards.
"We did go on holiday to Australia, ticked up the spending money. We saved for the airfares but I applied for two new credit cards at the time. I wanted to have surplus money in case something happened. I ended up using both. It was ridiculous when I look at it now and I have no credit cards any more."
The 41-year-old bought things on hire purchase when she was younger and used one credit card to pay off another. "It must've been my generation. We want everything yesterday."
She was making minimum payments and getting nowhere, which led her to seek help from Rotorua Budget Advisory Service. "I guess [it was] the ongoing reminders, and the stress of knowing you weren't getting anywhere fast."
She says she knew she shouldn't have been paying interest on dining out or on her teenaged daughter's shoes.
The couple got a mortgage holiday from their bank, which Jo says did not solve their money problems - "the burden of this is going to take longer than we ever expected".
They had both worked fulltime but started taking on debt in 2009 when Jo returned to school to train as a healthcare professional.
After graduating in 2012, she used the budget service to get back on track.
"It was probably over a five to seven-year period, we were not quite drowning. It was more around literacy around finances ... a lot don't know what they're spending, like how much they spend on takeaways or personal cash."
Jo and her husband stuck to a spending plan. Her new qualification allowed her to double her income. She earns about $70,000 a year, which will help knock out about $20,000 in student loan debt.
"I've done the maximum payments with the student loan since I've been working."
Jo says she always wanted to work in healthcare but lacked confidence to pursue a qualification in her 20s. "When I was working as an administrator, I thought, 'Shit, is life always gonna be like this? I want to do more things."
Today, the Rotorua family is debt free, aside from a $240,000 mortgage. They're able to save $400 each fortnight for a holiday.
"It's like we've been given the opportunity to do it right this time."
Jo encourages other people to seek budget advice, too. "It's an important conversation you need to have."
Hard Work = Clean Slate
- Scared Straight After Massive Student Loan
Dana Lambert took on debt for university in the 1990s, a few years after the student loan scheme was introduced and before, she says, it "became sensibly regulated".
Back then, loans still carried interest.
"I was very naive about debt and had an unrealistic expectation of what the future held. I lived totally for the moment and completely disregarded the consequences of getting into debt."
A Bachelor of Arts in history and politics from Victoria University wound up costing $60,000, an amount that kept Lambert awake at night. She got a good-paying job in the insurance industry, working hard to banish a "dark cloud of debt".
For much of her 20s, Lambert says she lived cheaply. She chose cheap rental accommodation, never bought new things, drove a "bomby" car and carefully planned her social life, avoiding dining out and other luxuries.
"My friends were travelling overseas, doing all sorts of stuff and I just got my head down, bum up and paid it off. I've never regretted it. And as a result of being in that much debt, I've never had a credit card as an adult and I'll only buy something if I have money in the bank to pay for it."
Lambert paid cash for the car she's been driving for 10 years and is debt-free except for her mortgage.
"I don't like that feeling of being in debt because it just dominated my life for so long. I would encourage young people to think really carefully before they get into any kind of debt. Be realistic and live within your means even though it's really, really hard. It's so worth it in the long run."
She and her husband live in Whakamarama and share a similar money philosophy. The couple has at times lived off one income. And while she doesn't consider herself wealthy, she's happy.
"We've got what we need but we don't have high incomes because of the lifestyle we've chosen to live. We don't chase the money."
Don't buy what you can't afford is a lesson they share with their children, aged 12 and 14.
"If you make do with what you've got, you can only improve the situation. You might be able to afford things you want later. Having that massive debt is what's got me to where I am today. I learned so much from it and am kind of thankful now."
Advice from the Experts
- Perils of Payday Loans
Tauranga Budget Advisory Service (TBAS) reported 2309 clients on its books as of June 13, an increase of about 500 people from 2017/18. Current collective debt sits at $27 million.
Service manager Shirley McCombe says taking on excess debt is a top money mistake. Other blunders include focusing on today, not tomorrow; confusing needs with wants; failing to ask soon enough for help; and not having a Plan B.
"People often make commitments to things on the basis that they're earning money at the time, perhaps they've picked up seasonal work, but don't have a plan for when that ends."
McCombe says payday loans also cause tremendous distress for those already living pay to pay. "People borrow a small amount but after fees and interest it can become out of control very quickly."
Business and economic research organisation BERL found the small, high-cost lending market had grown to an $8.5 billion industry that was hurting many vulnerable Kiwis.
The report states, "We find many instances where short-term, high-cost loans have amplified the financial distress of borrowers, pushing them deeper into debt and prolonged financial distress. This situation, along with accompanying psychological stress, can lead to long-term harm to individuals, families, whānau, and communities."
In one of the report's case studies, a single mother in her late 40s working fulltime ended up on a benefit because of disability. Her new income covered just over half her expenses, so she took out two high-cost loans. She accumulated significant interest and was passed on to debt collectors.
Data from Fincap, which supports budgeting services nationwide, showed borrowers with high-interest debt had a median of six loans. Nearly half these borrowers owed at least one debt to Work and Income New Zealand (WINZ).
The BERL report suggested Government introduce an interest rate cap of 0.8 per cent a day. Payday lenders, it says, often charge 1 per cent a day, which can amount to roughly 800 per cent a year.
Changes may be coming - slowly. For one thing, the Commerce Commission has taken legal action against payday lender Ferratum New Zealand. Due to a case backlog, a hearing won't happen until June next year.
Interest.co.nz reports the commission alleges Ferratum failed to make reasonable inquiries about borrowers' requirements and objectives, failed to exercise reasonable care in advertising loans and failed to assist borrowers to reach informed decisions as to whether or not they should enter into loans.
It also alleges this conduct, together with interest rates in excess of 183 per cent, is oppressive.
Ferratum did not respond to requests for comment before deadline. Its website says customers can apply for a loan online of $100 to $1000 with fast approval times and repayment terms of up to 45 days. Missing a payment results in a default fee ranging from $20-$70 and a default interest rate on the credit of 182.5 per cent.
Parliament is considering a bill that would make changes to the Credit Contracts and Consumer Finance Act. Provisions include capping high-interest lending so people could never be required to pay back more than twice what they borrowed.
WINZ Debt Looms Large
Rotorua Budget Advisory Service manager Pakanui Tuhura says his advisers are helping people build financial capability as well as dig out of debt.
"Clients wind themselves up in complicated issues that we help to untangle and then work alongside our clients to work through their money issues one at a time."
Tuhara says clients make their own decisions once they have information and advice specific to their situation.
"We focus on ensuring the needs (food, accommodation and power for warmth) are covered and then work with clients to see if they are making the best possible use of the rest of their income through our budgeting tools."
A senior budget adviser, who spoke on condition of anonymity, says some clients are buying hire-purchase items as well as drawing money from their KiwiSaver accounts.
"They apply for hardship to pay their debts."
She says the withdrawal can't be used to pay off credit cards, but can go towards living costs such as rent. She says each KiwiSaver scheme and case is unique.
Some debtors declare insolvency to try to wipe the slate; others have Work and Income debt that must be repaid. The adviser says the Rotorua budget service last month had more than $1 million in debt linked to clients.
"A lot is government [debt] - a lot would be beneficiary type stuff," she says.
Consumerism plays a role, too. One man with debts of more than $106,000 bought one vehicle for nearly $48,000, and a second car for almost $14,000. The same client has Work and Income debt of $39,000 and unpaid rent of $4600, according to the budget organisation's records.
"There's not a lot we can do by the time he got to us. For most, it would be a bankruptcy-type thing. He hasn't asked for that. He's quite happy paying nothing."
The adviser says the man pays $5 per week on WINZ debt. "That'll never be paid off."
Saving and Investing
On the other side of the debt divide stand people who can pay living expenses with enough money left over to save and invest.
These are the people Craigs Investment Partners financial adviser Jon Murie sees. He says common money mistakes among clients include waiting too long to save.
"The earlier you start on investing, the better it is because all the benefits of things like compounding interest over time. Those who don't have a plan earlier have to think about it just before retirement. That gets difficult."
He says retirees who've made money on property have a lump of cash - and face low interest rates. Interest.co.nz shows many banks paying around 3 per cent interest on term deposits ranging from 12 months to five years.
"Even a million dollars, it's difficult now to earn an income that's sufficient to what they want for a lot of them," says Murie.
And it can be tough to enjoy a comfortable retirement when you still have a mortgage. In 2014, 64 per cent of New Zealanders were still paying their mortgage, according to the Commission for Financial Capability. This year, it's 67 per cent.
According to the last census, more than half of over-65s rely on the $400-a-week pension as their sole source of income.
KiwiSaver has helped greatly to create a pattern for consumers, says Murie.
"What you need to do is have a regular habit of investing, be it 3 per cent of your income, or whatever. It's just getting into that regular habit will help you significantly when it comes to retirement. Start building that nest egg in different ways."
He says putting money into investments, property and businesses are ways to diversity and build income for the future. "You've just gotta start early."
Murie says New Zealand has been ranked as one of the worst OECD countries in terms of investment in share markets.
"We're so concentrated into property, and from that there's so much risk. Property's been relatively lucrative, but people are able to borrow at high levels, as well."
Murie says average Kiwis spend 40 per cent of their income on mortgages, one of the highest levels worldwide. "From a cash-flow perspective, once you get that mortgage, it's a noose around your neck."
Investment manager Slade Robertson wrote last month in the Herald that Kiwis would benefit from recognising the success of New Zealand's sharemarket, whose performance has surpassed the housing market by a wide margin.
"Since January 2009, the S&P/NZX50 has outperformed the residential house price index by a massive 167 per cent (255 per cent vs average house prices rallying 88 per cent)."
Running your personal finances is no different from running a business. Murie says it's about managing costs.
"Those costs are going up at least at the rate of inflation, 1.5-2 per cent every year. If you've just got money in the bank, after paying a bit of tax and accounting for inflation, you're nearly going backwards ... your money isn't keeping its purchasing power over time."
Lambert hopes young people, in particular, will learn from mistakes of former borrowers such as her who bit off big debts. She says some of her peers in their mid-40s still wrestle student loans.
"You just have to not bow down to that pressure and live within your means. If you're comfortable going to bed at night and knowing you have debt and knowing your financial situation is a bit shaky, that's fine. But for me, it's too unsettling."
Borrowing for a Home
The amount you can borrow for a home depends on how much you can afford to repay on your current income, and how much a lender will lend on a property. Lenders want to be sure that you'll be able to keep up with your repayments and still have enough money left over to live on.
Some experts say mortgage repayments (plus other loan payments or hire purchase) should be no more than 30-40 per cent of gross income.
But other home expenses must be budgeted for, too, like property and water rates, insurance and utilities.
Talking to one or more lenders, or to a local mortgage broker, can provide a good idea of lending limits for types of property you want to buy and the area you want to buy in.
People who can afford mortgage repayments but are unable to save the 20 per cent deposit required by most lenders may be eligible for a Welcome Home Loan. Lending criteria are different to standard loans; there are income and house price limits.
Members of the KiwiSaver scheme may also become eligible, after three years of contributing, for a KiwiSaver HomeStart grant. This is in addition to a first home savings withdrawal option, also available after three years' membership.