Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a best-selling author on personal finance.
OPINION
Fun lesson for grandkids
Q: When we were about to fly home after visiting our grandchildren on
Planting the seed of how to invest can start at a young age. Photo / Getty
Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a best-selling author on personal finance.
OPINION
Q: When we were about to fly home after visiting our grandchildren on the Gold Coast in May 2013, we were having a coffee with our daughter and the three young kids at the Gold Coast airport.
The two boys, aged about 10 and 12, asked their mother for $2 each for a slot machine dispensing soft toys. The older lad put his money in and it disappeared with no reward. I asked the younger boy to give me his $2 and I put it in my pocket. He asked for it back, and I pulled out $2.20, and then put it back in my pocket. He again asked for it and I pulled out $2.30.
Then I explained how it was earning interest as long as Grandpa was allowed to borrow it. And if Grandpa could take it back to NZ, he could invest it and earn him more interest.
The lad agreed to that. When I got back, I waited until spring, when I bought two packets of seeds with the capital plus interest. I planted out the parsley and lettuce seeds, and when the kids came over in September for a week, I got Brayden to prick the seedlings out into half-dozen lots in pottles to sell. He even employed his brother and sister, until they decided they weren’t being paid enough!
When the plants were big enough, I sold them at our local community centre, with the proceeds going to the centre. I still paid Brayden. After selling the plants, he had turned his $2 into $170.
I made a photobook story of it. The kids are now all university graduates and still love reading the story when they visit.
A: Great story! I suspect it not only taught the young ones some lessons, but gave Grandpa hours of entertainment.
I hope, though, the grandkids don’t expect to always get quite such big returns - although, of course, you really have to take the labour into account.
Q: Well, it’s been a great run for safe bank term deposits for the last two years or so, with interest rates for one year rising to over 6%.
With the Reserve Bank now cutting the OCR and banks having dropped their term deposit rates clearly in anticipation, and the Reserve Bank signalling it will progressively drop much further, there are two courses for depositors.
Either go for longer-term deposits, currently around 4.60%, or as soon as the Government’s guaranteed deposits scheme becomes law, take the finance companies offers, which are currently over 7% and will always be above the trading banks’ offers. The latter option appears to be common sense.
A: As I said in a recent column, the news is not all grim for term deposit holders. Interest rates have dropped because inflation is softening, so we should all see slower rises in costs. But still, the good news for people with mortgages is bad news for those with savings in the bank.
What should you do with your term deposits? Normally, long-term deposits pay higher interest than short-term ones. The banks reward you for tying up your money for longer. But at the moment we have “an inverted yield curve”, with longer-term rates being lower. This tells us the experts predict interest rates will keep falling.
Your choice might be between, say, a one-year deposit at 5.6%, a three-year one at 5%, and a five-year one at 4.7%. If you go with one year, you could well find next August rates have dropped considerably, and you’ll wish you had picked a longer term. Then again, interest rates might not fall much, and you’ll be happy with your choice.
Most of the time, though, you’ll probably do better with longer terms.
Then there’s the issue of the Depositor Compensation Scheme, coming into effect in mid-2025. As you say, that will make it tempting to deposit with a non-bank that is covered by the scheme and pays higher interest. If it goes belly up, you will be reimbursed.
Still, I imagine there’ll be some disruption during that process. So I expect some depositors will stick with their banks. But if you’re more adventurous, you may want to time your deposits to mature about a year from now, so you can then look into moving your money to a non-bank.
Q: With so many KiwiSaver providers in the market, I wonder if I can switch providers whenever I want.
Some providers offer incentives, such as $100 or $200, for switching to them. Is there a catch? Should I consider switching providers based solely on these incentives?
Additionally, I am concerned about the transfer process. Since the transfer can take up to two weeks, does this mean my KiwiSaver money will be uninvested during that time?
A: Yes, you can switch KiwiSaver providers as often as you like, just by contacting the new provider. You don’t need to tell the old one, or Inland Revenue.
However, I don’t recommend switching often, and I wouldn’t let a $200 gift guide me. Ask yourself why a provider feels the need to do this. Is it the only way they can get new members?
A really good reason to switch providers is because the new one charges lower fees. That makes a big difference over the long haul. Also, check out how good each provider’s services are - their communications and help with investing. The KiwiSaver Fund Finder on sorted.org.nz gives you service ratings, based on regular surveys.
But don’t move providers because one has performed well lately. Often, the good performers in one period perform badly in the next period.
On the transfer process, it usually takes about two weeks, but can be as long as a month. And during that time, you are “out of the market”. Occasionally you’ll be happy, when the markets fall. But given they rise more often, you will usually miss out on some gains.
One other point: a few providers charge a transfer fee if you leave them. At Booster, for example, it’s $30. But I wouldn’t let that stop you from moving.
In short, then, switch providers occasionally because of lower fees and perhaps superior services. But I wouldn’t bother for any other reason.
Q: I’m looking for advice on what to do with my parents’ house now they have passed away.
It is a 1980s-era two-bedroom property in a good suburb in Invercargill. It is ideal for a retired couple. Would it be better to rent out the property or sell it?
I live in the North Island so it’s not easy to keep an eye on it, and I would need a property manager. Maybe selling it and investing the money would be better. I’m expecting not to need the money for about 10 years. Is it worth hanging on to the property for capital gain?
A: Did you see last week’s Q&A about whether to sell a rental property now or wait, in the hope of house prices rising? That might happen, but nobody knows for sure. And most experts are ruling out really rapid increases for at least the next few years.
Meanwhile, you’ll own a house a long way from home at a time when most landlords are not making much money year by year. You of course won’t have mortgage payments, which will make a big difference. But you’ll have to pay the property manager. And I’ve heard worrying stories about both distant tenants and property managers.
What about the state of the house? While it’s easy to diversify shares by investing in a share fund - so that if one share goes bad, it doesn’t matter much - you’ll have just the one rental property. You never know when it might suddenly need expensive work on the roof or wiring or whatever.
I suggest you choose a low-fee non-KiwiSaver fund - so you can access the money at any time - by using the Smart Investor tool on sorted.org.nz
You might say in 10 years, “I could have done so much better if I had kept the house.” But equally you might say, “I did so much better in a share fund.” And - provided you sit tight through sharemarket downturns - there shouldn’t be any complications.
By the way, the bright-line test, under which gains on a rental property are taxed if it’s owned for less than two years, don’t apply to inherited property.
Q: I absolutely loved reading your article last week regarding “two tips on painlessly building wealth”.
Is it possible to talk with you more on this to have a plan for myself? I don’t mind paying you but at least I’ll have a robust plan in place. Eagerly hope to hear from you really soon.
A: Sorry, but I’m not a financial adviser, I’m a journalist, so legally I’m not allowed to give one-on-one advice. But here’s a step-by-step guide so you can easily make your own plan.
Opportunities like the two we have now - making the most of the tax cuts and mortgage interest cuts - don’t come up often, and I would love to see as many people as possible make the most of them.
Firstly, the tax cuts, which took effect on July 31.
Step one: Find out roughly how much you’ve benefited from the tax cuts. One easy way is to compare your after-tax pay earlier in July with your pay for the first pay period covering just August dates - not a period that includes July dates. Or use the tax calculator on budget.govt.nz.
Step two: Ideally add a bit more, say, $5, $10 or $20 a week - an amount you won’t miss.
Step three: Through your bank, set up a transfer of that amount out of your account every payday. Where to?
Step four: To see how much your debt will dwindle or your KiwiSaver balance grow, use the Debt Calculator, Mortgage Calculator or KiwiSaver Calculator (see “Top-up” under “Change your Future”) on sorted.org.nz. Over the years, there’ll be a significant difference.
The second opportunity is for people who are coming to the end of a mortgage term.
Step one: Find out how much your new payments will be. They’ll be lower because interest rates are decreasing.
Step two: Tell the lender you want to keep your payments at the old level. And perhaps - as in step two above - add a little extra to your payments.
Step three. Use the Mortgage Calculator on sorted.org.nz to see how much faster you will get rid of the mortgage, and how much less interest you’ll pay over time. The numbers can be startlingly good.
One last point: Whenever you get a pay rise, use at least some of that extra money to either boost your transfers or mortgage payments still more.
Mary Holm, ONZM, 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 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 mary@maryholm.com or click here. 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.
From Z Energy to data centres: Infratil's 18.7 per cent annual return journey.