Graduating from university is a great time to level up your financial skills. Photo / Getty
OPINION
Q: While visiting my son for his university graduation, we scheduled a visit to his bank’s mortgage adviser, as he intends to start saving for a house.
We had set up a weekly budget for outgoings and savings before meeting. The bank adviser guided my son and streamlined his bank accounts, reflecting his changed status as a working man.
My son’s only savings account, opened at school, was no longer offered and gave negligible interest. The bank had advised this, but who reads emails from the bank.
The adviser set up four savings PIE accounts – money bucket (for incoming salary), emergency savings, house savings and personal savings. Transactional accounts were set up for flat rent/utilities (exact amount) and day-to-day spending. His weekly savings were determined from the money bucket account.
Learnings:
I am sure you will add more learnings for the newly working, who are finally starting to accrue money after living frugally as students. A shout out to bank staff who take the time to educate.
A: That is impressive bank support. Others might want to ask their bank for the same.
I’m reluctant to add much to your list. Too many to-dos can be daunting, and then nothing is done. But I have a couple of thoughts.
Late last year I ran a letter from a young man who bought his first house at 23, with no help from others. He had saved almost half his take-home pay in his first “career-type” job, at 20. “I continued doing this for three years until I had saved about $50,000 in a serious savings account,” he said.
“In addition, I was contributing to my KiwiSaver account, which had $13,000 in it. So I had $63,000 for a down payment on a home.” He bought a “$400,000 1980s three-bedroom, one-bathroom house in Palmerston North that needed some work”.
It’s a great idea to start out saving a huge portion of your pay while you’re still used to living on little, and you have no dependents.
Note, too, that the young man also contributed to KiwiSaver. Your son should too, saving at least enough to maximise the government and employer contributions. That money, minus $1000, can be added to his house fund.
Q: I need to ask you about bills. Maybe you have some words of wisdom, because the bills never seem to stop.
Firstly, the insurance bills come in. We have two cars, plus house and contents insurance. That’s thousands of dollars. Then rates and water rates are thousands more.
Okay, now it’s time for power bills, cellphone bills, internet bills. Next will be car registration, warrants of fitness and servicing the cars. Weekly supermarket trips... you guessed it, more bills. Then the kids have bills for their school gear, trips, sports clubs and the school ball.
We’re lucky if there is any money left for clothes or holidays, or – dare I say it – retirement savings. Everyone must have the same bills coming in. Do you have any tips?
A: Don’t despair. My first tip is to change retirement savings from “whatever is left over”, as a top priority. You’ll feel much better about yourself. If you’re contributing to KiwiSaver, great, but it will be too little for a comfortable retirement. Set up regular transfers to, say, a non-KiwiSaver fund. You can then access that money before 65 if necessary. But note that “if necessary”.
Next, read the Q&A above. It’s not just young people who can benefit from setting up specific bank accounts. What would work well for you?
Many bills can be reduced. In exchange for a bit of hassle at the start, you can pay less for years. Perhaps increase the excesses on your insurance cover. Shop around for cheaper cellphone and internet providers. On electricity, go to Powerswitch. “The average saving for Powerswitch users is now a whopping $409 per year,” says Consumer NZ. I used it, and it’s been great.
Supermarket spending is very stretchy. And watch what food you throw away. Could a bit of planning cut that back? On school balls and so on, could the student contribute from a part-time job?
Also, check out the budgeting tools on sorted.org.nz. If they don’t work for you, try other budgeting apps. There are plenty around. You can make it work!
Q: Have the tax bracket changes to which you referred last week actually been passed? Or is that pending for the upcoming Budget (and thus technically may not happen)? I have googled extensively but could not find an official announcement, and the accountancy firm sites say it’s a matter for the Budget.
A: Oops! I jumped the gun here. And you’re quite right – it’s possible the tax changes will differ from National’s proposals. Sorry.
I was misled by several normally reliable websites.
I asked Deloitte tax partner Robyn Walker to put the record straight. “Budget Day (May 30) is when all will be revealed when it comes to any changes to tax rates and tax thresholds,” she says. “Each of the coalition parties had different tax policies, and it’s possible that what will be announced on Budget Day will be different to the changes proposed in the National Party Tax Policy.
“Most tellingly, the coalition agreement with the Act party specifies, ‘ensure the concepts of Act’s income tax policy are considered as a pathway to delivering National’s promised tax relief, subject to no earner being worse off than they would be under National’s plan’, so it is possible that the tax changes may be different from what National campaigned on.
“Act’s tax policy broadly seeks to flatten tax rates and reduce the number of tax thresholds. That coalition agreement also states, ‘the parties confirm no ongoing commitment to income tax changes, including threshold adjustments, beyond those to be delivered in 2024′,” says Walker.
Q: Just finished my Sunday morning ritual of reading your column. I’m pleased to see the tax brackets are being adjusted up, but why from July? Wouldn’t it be more straightforward if they were adjusted from April 1, the start of the tax year? Won’t it make it more complicated doing a tax return?
A: An April 1 change would indeed be simpler. But, says Deloitte’s Walker, “the Minister of Finance has been adamant that the new rates will apply from July 1, 2024″.
“The interesting point here is that there will be a very short window (one month) for payroll software providers to update their systems to ensure tax is calculated correctly from the start date,” says Walker.
“What we saw in 2010, when rates and thresholds were last substantively changed, was that there was a ‘transitional year’, where there were composite rates and thresholds determined for the year. The same should need to apply this time, and consequently, the rates should only truly move to the new thresholds from April 1, 2025.”
Walker adds: “When changing tax rates or thresholds, this has a ripple effect across all taxes applying to individuals, so also expect changes to other tax regimes like fringe benefit tax (FBT), resident withholding tax (RWT), employer superannuation contribution tax (ESCT) and portfolio investor rate (PIR) thresholds.
“The other tax ‘adjacent’ matter to be aware of is the introduction of ‘FamilyBoost’, which was already announced in March. This isn’t technically a tax change, but the system is to be administered by Inland Revenue. Expect further details about this in the Budget – and this additional benefit is likely to be factored into examples given about how much better off taxpayers will be as a consequence of the Budget.”
Inland Revenue says FamilyBoost “will be a new childcare payment made to families with young children to help with the rising costs of early childhood education (ECE). The FamilyBoost payment will be equal to 25 per cent of ECE fees already paid by households. This would be a maximum weekly refund of up to $75.”
Walker adds as a PS: “BTW, under the NZ First coalition agreement it’s generally expected that Inland Revenue will get more audit funding.” We have been warned!
Q: As we know, tax is payable on the sale of an asset if it was bought for the purposes of making a profit on sale.
Your chartered accountant correspondent last week says that any realised gain (from bitcoin or gold) is taxable because there is no income from this type of investment. So the IRD sees the only purpose of holding and then selling such assets is to make a taxable gain.
To him and the IRD, I would say I bought the gold or bitcoin because I was worried about the safety of our banks and I wanted to preserve the value of my cash. Therefore, I’m not paying tax on any profit or, to be consistent, claiming losses on any shortfall on resale.
BTW, I have never touched either with a barge pole.
A: Your argument makes sense, but would Inland Revenue buy it? It’s a good illustration of how confusing our current law is.
A BTW back to you: the “he” accountant you quote is actually a “she”. Assumptions, assumptions!
Q: I’m surprised you don’t ever mention the current capital gains tax – or “wealth tax” (that’s even worse) – on foreign share investments.
It’s a nightmare to determine. It’s unreasonable the values are affected by exchange rate variations that are often the result of our Government’s economic policies. Further, the presumption that foreign shares pay an average dividend of 5 per cent is wacko.
You seem to be a big supporter of capital gains tax and your logic is odd too. Whilst I feel CGT is not a good thing and too complicated generally – especially if it includes wine, stamps, artwork and cars – gains on land where the gain is attributed to changes in zoning etc then yes.
One last thing: In a recent column you implied that the wealthy make gains on investments without having to put in the hours of say a tradesman. I had to work and save to get the capital to invest in the first place. We don’t have inheritance tax – so that tradie could have received a “windfall” to invest. So it’s not just the wealthy who might be investing, hopefully for the long term.
A: This topic certainly does bring out a variety of responses.
On the tax on foreign shares, it is rather complicated – although at heart I think it’s fair. But let’s not go into it, and bore the vast majority of readers. To avoid calculating that tax, do your overseas share investing the way most people do, in a New Zealand-run share fund – in or out of KiwiSaver - that makes the investments for you. The fund takes care of the tax. And you get broad diversification.
You’re right that a CGT might include wine, stamps and so on, and that could be tricky to calculate. But, as I’ve said before, New Zealand is at a huge advantage, coming late to the game. Pretty much every country like us taxes capital gains, so we can look around the world and adopt the best practices.
On your last point, sure, many people work and pay income tax so they can later invest, often with tax-free gains. But some people never get past the working and income tax phase, while others get past it quickly. I don’t think it’s fair to tax one sort of income and not another – especially when the first sort is the result of working, while the second sort just happens while the investor lies in a hammock reading.
On Saturday, June 15, I will be speaking about my latest book, A Richer You: How to Make the Most of Your Money at the New Plymouth Winter Fest. For info and to book, go to tinyurl.com/TalkNP
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.
Meanwhile, the post-election rally cooled in the United States.