Mary Holm: Always take care of the pennies

Before we know it, old piggy banks will be raided all over New Zealand as everyone rushes to cash in on their new-found riches.

Under the mattress

A piece in the paper recently about the cost of producing coins getting close to their face value got me thinking.

The best deal in terms of metal weight must have been the old pennies. Each penny weighed 9.45g, so a tonne would contain 105,820 pennies or £441 which translates to $882.

From what I can gather, the penny was an alloy of 95 per cent copper, 4 per cent tin and 1 per cent zinc. The weighted average price of the alloy at the moment is $10,992 a tonne.

Thus, if you had converted all your spare cash in 1967 to pennies and stored them under your bed, you would have made a compound return of 6.04 per cent a year in the 43 years since.

The old adage about taking care of the pennies seems to have had some validity to it.

And there we were saying "under the mattress" meant a zero return. Before we know it, old piggy banks will be being raided all over New Zealand as everyone rushes to cash in on their new-found riches. The only problem is converting the coins back to the metals.

Most of the rest of today's column is full of readers' suggestions on how last week's correspondent can get her big-spending partner in line. Some of their ideas might also be helpful to couples with no such problems - they are simply good money management tips. Readers of this column can be so wise!

But maybe your letter will be as helpful as any in terms of encouraging thrift.

Revolving credit

Partners and budgets - an interesting topic. A lot of people I know had and still have many arguments over discretionary spending.

In my first marriage as our fortunes swirled, we always had two rules:

* The mortgage was on a revolving credit arrangement and all earnings went into that account. As a result, various mortgages over the years were paid off well ahead of time. Debt was always to be managed and reduced as quickly as possible.

* We always gave ourselves "pocket money". This was our own money to do whatever we wanted with. I saved sometimes to buy that over-priced putter or single malt; she would go to expensive spas for her massages. No questions, no comments, it was one's private money. For many years, it was only $100 a week, now it is $250.

I found that we had far fewer arguments about money than our friends - in reality only one or two over 20-plus years of marriage - because we kept some personal control over a small amount.

Major items - overseas holidays and new cars - were always financed against the revolving credit, which had targets to be reduced to on a quarterly and annual basis. Credit cards were always paid in full every month.

All common expenses were paid out of the revolving credit account. Revolving credit was the best financial planning system the banks ever provided.

Nowadays I am retired and, while my wife still works, we still have our "pocket money". Why change a working system?

You didn't mention using pocket money for gifts to one another. Somehow it kills the romance when your partner's gift is sitting there on the joint credit card bill.

I agree that revolving credit is great - for those who can handle it. By including the mortgage in the same account as everyday money - so that the balance might be minus several hundred thousand dollars - all your income can be credited against your mortgage until it is spent. This considerably reduces total mortgage interest.

However, some people have trouble paying down their revolving credit mortgage, as you can always borrow back up to the limit. Read on.

Separate account

My husband and I have been using a system that has worked for us to pay back extra on our mortgage for the last six years.

Our concern was that we were spending to the limit of our revolving credit portion of our mortgage, despite good salaries, and weren't very aware of where our spending was going.

We worked out - after going through three months' spending - how much we were spending on fixed costs like mortgage repayments, insurances, car WOFs and what was discretionary, or day-to-day spend (groceries, petrol, clothing, going out).

We then decided on a realistic (but relatively generous) amount as our fortnightly "allowance" for day-to-day spending - an amount that still leaves us with an overall surplus. This amount gets deposited in a separate account that we have an eftpos card for.

We put the money in fortnightly, not weekly, as this provides for inevitable fluctuations, such as purchasing an expensive piece of clothing one week but just everyday spending the next.

Although this means that the total in our revolving credit is not quite as high as it could be, it has meant that:

* We are tracking our spending better, as we can easily check where we are at for day-to-day spending by looking at one account balance.

* We can spend without feeling guilty. In fact, our intention is that the allowance money is all for spending. Once that money has gone in a particular fortnight, we are aware that we have overspent and will only spend on essentials (any additional spend goes on our credit card which is paid off through the allowance). By the way, you do have to be able to stomach being told that your eftpos card has declined occasionally.

* We haven't increased our discretionary budget often, although we have had salary raises in the past few years, so we have been able to save more each year.

We do occasionally come unstuck if we have a large purchase on the discretionary account, so we usually agree on large discretionary purchases going through the mortgage account.

This type of system does probably rely on your correspondent doing an initial "spending audit" on her own and there is still self-control required from both parties. But it is a bit less constraining than slicing up a budget into different categories and tracking each from the same account.

This system has helped us be more self-aware about the total dollars we are spending on a fortnightly basis and we have paid off thousands of extra dollars on our revolving mortgage account as the surplus just automatically builds up without us really being aware of it.

Also, you made no mention of moving the mortgage from monthly to fortnightly payments, which will also help a bit in paying off the mortgage quicker.

Thanks for a great example of how to make a revolving credit mortgage work for you. As you say, what you do means you don't get every last cent out of the concept, because the money in your allowance account isn't being credited against the mortgage.

But much more important is that you are making the system work for you. And - interestingly - in the end you're paying the mortgage off more quickly. The spending without guilt would probably appeal to the partner of last week's correspondent, too.

For the benefit of others, most lenders will let you put some of your mortgage on revolving credit, leaving some as a traditional mortgage - either fixed or floating. Revolving credit works particularly well if you receive income infrequently - say monthly or irregularly - as you often have large sums being credited against your mortgage for several weeks.

On your comment about moving a mortgage from monthly to fortnightly payments, that is sometimes over-rated. You are simply paying more per year. Still, it works well for some people.

The idea is that you pay half the monthly payment every two weeks. That gives you 26 payments a year of, say, $1000, instead of 12 payments of $2000.

Generally, I think the best plan is to make mortgage payments as frequent as your pay, perhaps making the payments the day after your pay goes into your bank account.

Management software

A suggestion in reply to your article "Budgeting a turn-off", is to use a home version of some financial management software.

We've been using Quicken Personal Plus for the last five years. It does exactly as it says - "an easy home finance and investment organiser". It produces reports, graphs and piecharts to track spending. Fixed outgoings can be entered to appear each month and it's easy to see what is left for discretionary spending.

We have found this a great tool. It still requires some discipline with spending though.

I'm assuming you are not a salesperson for this company! Your recommendation sounds genuine enough. Software like this obviously suits some people well, while others wouldn't go near it. As you say, discipline is needed. The software won't be standing next to Mr Spender while he's in the shop. But maybe the thought of confronting the screen on returning home would do the trick.

Buying first house

Yet another KiwiSaver question ... my partner and I are looking at buying our first house. We are both fortunate to have a considerable amount sitting in our combined KiwiSaver accounts which we would like to withdraw and put towards our first mortgage.

However, given the markets have been somewhat suppressed due to the global financial crisis/recession, I believe we would be better off leaving the money in KiwiSaver for another couple of years while markets recover (and fingers crossed - we make some decent gains). Can we withdraw these funds at any point with our first home or do we have to do it within an allotted time period?

You've got it slightly wrong. Money withdrawn from KiwiSaver for a first home must go towards your deposit, not towards your mortgage - and it all happens at the time you buy the home.

The money goes directly from your provider to your lawyer, who then transfers it to the seller.

If you want to "time the market", the only way is to delay buying the home. Would that be wise?

It's a bit of a gamble. There's no way of knowing what will happen to KiwiSaver returns, house prices or mortgage rates. And don't forget you have to pay rent in the meantime.

Given that you might just as easily lose as win by waiting, I suggest you forget about timing and buy when it suits you. These days, house buyers are in a strong position to bargain - which might change in the next few years. That, in itself, might be a good reason to buy soon.

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 (pref daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.

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Send questions to mary@maryholm.com or Money Column, Business Herald, PO Box 32, Auckland.