By the way, you're lucky your employer puts in more than the required 3 per cent. That makes quite a difference over the years.
Buying a rental
We are a couple with a child aged three living in Auckland. I am 36 and my wife is 30.
We both work full-time and together have an annual income of around $140,000 (before tax) and a mortgage of $417,000.
We have been recently advised by someone to top up the mortgage and buy a rental property (not in Auckland - say in Hamilton or Taupo) by using that as the deposit.
I did some maths and realistically I don't see rent itself paying the second mortgage. While we think we can afford to pay a bit extra towards the mortgage of the second property, we are a bit unsure if buying such an investment property is a good idea or not.
It all depends on how much risk you're willing to take.
On the one hand, your total income is pretty high. And you're young, so there's plenty of time to recover if things go wrong.
On the other hand, you've already got a hefty mortgage. Just because Aucklanders have become used to mortgages of several hundred thousand dollars, that doesn't mean they should make light of their debt. Adding to that mortgage raises your risk.
If all goes well, you'll manage to meet the mortgage payments, everything else will run smoothly and you'll end up selling the rental many years from now for a big gain. Even after paying tax on that gain, you head into retirement much wealthier.
But what if your tenant stops paying rent for a period, or the property needs big spending on maintenance, or mortgage interest soars, or one of you loses your job, or for any other reason you can't make ends meet.
At that point, you sell the rental. That might be okay if the housing market happens to be buoyant at the time. The trouble is that bad economic things sometimes happen together. For example, a big rise in mortgage interest could push down house prices. So could increasing unemployment.
Landlords who are forced to sell sometimes find they've gained little or nothing after years of hassle. Sometimes they even end up with a debt to the bank after selling the property.
Sorry to be pessimistic. But I would rather see you get rid of your current mortgage, or at least reduce it a lot, before you take on more debt.
Here's a thought: Pretend one of you has lost your job, so you have to get by on one income. Pour all of the other income into paying down the mortgage fast. Then get into rentals.
Muslim investors
I consider myself a good saver who lives within her means. We are a family of four, with two daughters aged 15 and 17 at college. I am 46 and my husband is 50.
We were mortgage-free within 18 months, having borrowed $100,000 and invested $200,000 in 2009 when the housing market was down, in Avondale, on our medium incomes. We rented for eight years before this, and the interest factor in mortgage/borrowing keeps haunting us. Our only major expenses are on travelling overseas, which we enjoy doing as a family.
Since being mortgage-free, we have savings of $200,000 in an interest-free bank account. Because we are Muslims, we don't want to "sin" by gaining the interest.
What options are available for us to invest this money? Are there any investments which don't have an "interest" component?
Your advice is much appreciated. We are all in KiwiSaver as there was no other option when employed.
The only suitable New Zealand-based financial investment that I know of is a unit trust called AmanahNZ.
"Amanah New Zealand is an ethical and strictly Shari'ah compliant investment," says the website. "Our mission is to provide a long-term (10-plus years) investment of up to 50 US listed stocks that are conservatively selected and managed and comply with our ethical mandate."
It avoids investing in money lending, alcohol, gambling, tobacco, weapons of war, pornography and pork. So far so good from your perspective, I imagine.
However, I have one concern, and that is that its use of the words "conservatively selected" could lead you to think this is a conservative investment.
Sure, the shares are "diversified across multiple industrial sectors and geographic economies", which considerably reduces risk. But all share prices are volatile. While your balance will probably grow nicely over any period of 10 or more years, it will decrease over shorter periods, and sometimes it will fall quite far before recovering.
The very fact that the website says "Amanah New Zealand targets 10-14% (USD) average annual growth after fees, taxation and expenses" is telling. That's a high target. There's no way anyone can receive average returns at that level without expecting the returns to be highly volatile.
Take note that the website calls this a "10-plus years" investment. If you invest shorter-term money, there's a considerable chance that when you withdraw it your balance will be lower. The shorter the period, the bigger the chance.
Even with money you're happy to tie up for a decade or more, you must be prepared to watch your balance fall at times and not panic and bail out. If that sounds too worrying, you may want to put, say, half your savings in the Amanah fund and leave half in the bank account to water down the volatility of your total savings.
By the way, Amanah also runs a KiwiSaver fund, so you could consider switching your KiwiSaver money to that fund.
Novice investor
Thanks to an inheritance, I have been lucky enough to receive about $125,000.
I am in my 30s and have already paid off my student loan. I have about $20,000 in KiwiSaver and work full-time. At this stage, I do not feel ready to buy a home as I still want to do some travel.
Would you suggest investing in shares rather than a savings account, or is the safest thing to do just to put it in KiwiSaver in a growth fund?
How does a novice go about investing in shares?
PS. I am not sure if I will ever feel ready to buy a house.
You certainly don't have to buy a house. As long as you reach retirement with enough savings to cover your accommodation as well as other costs until you die - or to buy a home at that stage - you'll be fine.
In the meantime, it seems safe to assume that you won't be buying a house within the next 10 years or so. Do you plan to spend part or all of the $125,000 on anything else - such as travel - within 10 years?
If yes, I suggest you put that portion into either bank term deposits or a conservative or balanced non-KiwiSaver fund.
To find such a fund, start by using the KiwiSaver Fund Finder on www.sorted.org.nz. Then ask the provider you've chosen if they have a similar non-KiwiSaver fund. Many do.
For money you're happy to tie up for more than 10 years, there are a couple of good options.
One is to find a non-KiwiSaver growth fund the same way - via the Fund Finder. While you could use a KiwiSaver growth fund, that ties up the money until you retire. And who knows? Between now and then you might change your mind about that house.
The other option is direct investment in shares. I reckon you need at least $100,000 to be able to get enough diversification, and you've got more money than that. You should aim to invest in at least 10 or 15 different shares that are in a range of industries.
Approach two or three sharebrokers and ask to meet an adviser. Discuss how they could help you to choose shares and run your portfolio. Tell them you want to buy and hold, rather than trading frequently. They make more in brokerage if you trade more. But you're likely to do better if you don't. Go with the adviser you relate best to.
If you want to know more about investing in shares, I suggest you search online for the writings of Warren Buffett. One of the world's richest people - through share investment - he probably understands the sharemarket more than anyone else. And he's very readable.
Costs coming down
Just to add some balance to recent Q&As, we have been retired for 20 years. I spend quite a bit of my spare time growing a lot of our own fruit and vegetables. There are no significant price rises there. Homegrown is so much better for good health and wellbeing than bought.
When I first started this gardening many years ago, my New Zealand-made garden sprayer cost $26. At the time my annual gross income was $8000. In today's dollars that sprayer would have cost $260. With import restrictions etc, that was the only suitable garden sprayer on the market at that time.
Today, a cheap imported sprayer costs $15. And it's better. There are many other similar examples of costs coming down while quality has gone up.
Our income in retirement is more than sufficient. Yes, some things like healthcare do cost more, but no dependent family and no mortgage payments more than offset the few things that have gone up in price.
Sooner or later retirees will learn that floating interest investments are not very sensible. Our dividend income from a diversified portfolio of New Zealand and Australian shares has slowly increased year by year, even through the recession. We are now able to give more to charity than ever before. What are we doing wrong?
Nothing. It all sounds great to me. As has been discussed in this column lately, living off dividend income from a diversified share portfolio is fine if you have money to spare, which seems to be the case for you.
However, I wouldn't like to see people who are struggling financially putting most of their savings in shares in the hope of living from the dividends. It's too risky for them.
But you're quite right about the price of many household items.
Broadly speaking, most New Zealanders' standard of living has risen considerably over the last few decades, as incomes have grown faster than expenses. It's easy to overlook that.
Mary Holm is a freelance journalist, member of the Financial Markets Authority board, seminar presenter and bestselling author on personal finance. Her website is www.maryholm.com. Her opinions are personal, and 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 Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name.
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