Mary Holm: Belt-tightening beats alternative

Investments should be spread around to reduce risk

After listening to Kerry McDonald on the news on Tuesday night, and then reading the headline "NZ at dire risk of financial crisis" in the Herald the next morning, I'm seriously worried about what to do with our hard-earned money.

We came to New Zealand 25 years ago with nothing, and have worked really hard to get where we are today. We have absolutely no debts.

My husband isn't so concerned, but New Zealand doesn't have the European Union to bail us out. Will Australia come to our aid?

We have $500,000 with a fund manager, and $900,000 sitting all in one bank on term deposit. The $900,000 is to buy a house, but we are hesitant to buy at the moment, so we are renting at $350 a week.

If New Zealand goes the way of Greece and Ireland, will our money be safe? Should we open a bank account in Australia and transfer the $900,000 over there?

Should we divide the money among many New Zealand banks? In which case, which ones are the most financially secure?

Please write something in the Herald this week to allay people's fears, because I'm sure I'm not the only one thinking of getting their money out of New Zealand at the moment.

I wish I could say that everything will be fine. But after five months of reading, writing, talking and thinking - as a member of the Savings Working Group of which Kerry McDonald is chairman - I'm worried too, and I don't think we can rely on Australia to prop us up.

As the group's report, released on Tuesday, says, the New Zealand Government and people have been borrowing more than we've been saving. The gap is filled by money coming in from overseas. But if that flow dries up - and there are several scenarios under which that could happen - our economy will be in big trouble.

That's why we've recommended that the Government make changes to reduce our vulnerability. Nobody enjoys belt-tightening, but it beats the alternative.

What should you do in the meantime? Just to be on the safe side, you could spread your $500,000 around two or three fund managers. And invest in shares and/or bonds in many different countries. I always advocate that - regardless of what's happening - as a great way to spread risk.

On the bank deposits, all our major banks look pretty solid. RaboDirect has a credit rating of AAA (extremely strong); ANZ, ASB, BankDirect, BNZ, National and Westpac all have AA ratings (very strong); and Kiwibank has AA minus (strong to very strong). Still, it wouldn't hurt to invest with a couple of other banks - and get a bit of competition going on the interest they offer you.

However, I don't recommend moving the money to Australia. Why? Foreign exchange risk. While the New Zealand dollar is high relative to some other currencies, it is unusually low relative to the Australian dollar. That doesn't necessarily mean it will rise against the aussie, but it might - cutting the value of your money when you bring it back to New Zealand.

Hang in there, and keep an eye on the Government and the changes it proposes.

Disincentive to saving

Bill English, who regulates fiscal policy, and Alan Bollard, who governs monetary policy, it seems to me as a layperson, don't talk to each other.

My wife and I have about $250,000 to invest. We have no debt whatsoever, no mortgage, and we live well within our means.

Bollard has created a big disincentive to saving, with New Zealand bank interest rates forced down by a low official cash rate. We have been offered a pathetic 3 to 4 per cent by the bank, a rate simply too unattractive. I have been considering sending the money across the ditch where I can get around 6 to 6.5 per cent on call, and I have even considered buying a rental property.

The reason NZ bank deposits are a no-no is that of the 4 per cent, tax takes a quarter, leaving 3 per cent net. Then with inflation at 3.8 per cent, our yield is actually a negative 0.8 per cent. Anyone putting their money into a mainstream New Zealand bank is eroding their money. They might as well throw it into the Waitemata Harbour. Bill English says he wants New Zealanders to save and invest, and I quote him from a Herald article a while back: "This trend towards saving and exporting more, and spending and borrowing less, is what New Zealand needs to build stronger long-term growth."

Well, I suggest he has a chat to Bollard, so they can get their act together, because the way Bollard is going about things, getting New Zealanders to save and invest is wishful thinking.

The recently lowered tax rate has been noticed in our interest income, so the Government should be recognised positively for this. But I still feel the tax on savings should be more favourable than, say, tax on your wages. It is unfair to penalise people who live within their means, forgo consumption and save something for a rainy day or future health or retirement expenses.

Let's face it, when one considers the NZX as an investment option, and we look at what has occurred in Feltex, Allied Farmers and others, you are left with the perception the NZX is something of an unregulated, ungoverned casino run by a local equivalent of the mafia all wearing expensive suits, and it's a sure way to lose your money.

Keeping savings in cash is not an option in this artificially low interest rate environment.

All that is left is a rental property, which is still looking attractive, where capital gains remain tax-free, and the interest expense can be offset against our other income.

Hmmm. Our previous correspondent is reluctant to buy even her own home, but you are considering buying a rental property. While she might be overly cautious, I wouldn't suggest rushing into the rental market right now.

Property prices seem unlikely to continue to rise at anything like the pace of the past 10 years. Experts predict anything from slow growth to falling prices.

Nonetheless, I agree that at least one of your alternatives - bank deposits - don't look attractive. That prompted the Savings Working Group to recommend tax changes, so that people don't choose one type of investment over another for tax reasons.

We also suggest continuing to increase the GST tax on spending and decrease the tax on income - particularly income earned by savers and investors. While the Government has ruled that out for now, we're hopeful it might change its mind in future.

One of our suggestions is the indexing of investment returns and expenses to inflation. That would mean:

* People would pay tax only on interest earned over and above inflation - which would increase returns on bank deposits and bonds. In your example, you would be taxed on only 0.2 per cent of interest - the difference between 4 and 3.8 per cent.

* Deductions for interest expenses - including mortgage interest on rental property - would be allowed only to the extent that the interest exceeded inflation. If, for example, you were paying 7 per cent interest, and inflation was 3 per cent, you could deduct 4 per cent. While landlords wouldn't like such a change, it would be fairer to all.

Interest rates - at least before tax - would still be lower than in Australia, but there's a good reason for that. Alan Bollard is trying to get a stalled economy moving, and lower interest rates encourage growth. Australia, with its healthier economy, doesn't have the same worries.

Still, as outlined in the first Q&A, I don't recommend moving your money over the Tasman. Instead, look for higher interest rates at home. Websites such as www.interest.co.nz tell you who offers what. You might also look into highly rated corporate bonds or a fund that invests in those bonds. They usually pay higher interest with not too much risk.

Another alternative, despite your scepticism, is shares. If you invest in lots of different shares, or a low-fee share fund, you will probably do well over time. Increasing regulation is coming, with the new Financial Markets Authority. And in any case I suggest you invest more than half your share money in overseas shares or an international share fund - as mentioned above.

On the English-Bollard difference, it's not as simple as: "Put up interest rates, and everyone would save, and all would be well." That would discourage business investment, and probably push up our dollar, hurting exports, and so on.

I'm not an economist, but I know enough to know there are no easy answers. Otherwise, all countries would thrive all the time. Keep in mind, too, that the Reserve Bank governor is independent of the government, and his main role is to keep inflation down. As you've pointed out, inflation hurts savers, and it's important we don't let it run amok.

So where are we? You got a bit carried away suggesting throwing money in the harbour. Despite your protests, even interest below inflation is better than no return at all. And you don't lose the principal. But you can do better than that - by shopping around, and looking into bonds and shares.

And like the woman above, you might want to keep an eye on Government announcements, particularly in this year's Budget.

Stinky message

I'm a little disappointed that you advocate sending postage-paid envelopes loaded with "sticky, stinky or otherwise horrid contents" back to predatory share purchasers who offer way below market price for shares.

Do you really think the Big Evil will be opening envelopes him/herself? All you're doing is making life (more) miserable for some poor minimum-wage minion, and, I suspect, providing Boss Nasty a good laugh as the running tally of the variety of unsavoury envelope contents mounts.

Send the envelope back empty - yes, as it hits where it actually hurts, albeit on a minuscule scale, but sending them loaded with grot is ill-conceived.

Like your column though.

I was rather hoping that the minimum-wage letter-opening minions might quit if it all got too horrible, leaving the Big Evil with no choice but to do his or her own dirty work. But maybe not, in this tough job market.

In any case, as noted last week, mailing nasty stuff may be illegal. So we've moved to a new plan, a reader's suggestion of sending a formal letter telling the company "to cease and desist sending unsolicited mail". Any other ideas?

Mary Holm is a freelance journalist, part-time university lecturer, consumer representative on the board of the Banking Ombudsman Scheme, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her 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 Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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