No, it's not much fun, but make a regular date to check your finances together - and then get on with life. Photo / 123RF
OPINION:
Q: My husband and I are time-poor, and though I was fully across my own finances before we got together five years ago, we've since fallen into a pattern of him managing all the finances, and I feel I don't know what's going on.
He is completely supportive of me being as involved as I like. What do you think is a responsible and efficient way of assigning financial roles within a relationship, balancing duplication of time and work against the value of both partners being across the partnership's financial processes and status? FYI, we have fully combined our finances.
A: For a busy couple, it makes sense to allocate most of the chores. Perhaps one does the food shopping and the other the cooking. The same with sharing child minding if you have young kids. And the same with housework if you do your own.
But money is different. It's about your resources. If one partner runs the money, they have so much more power and control.
That might not matter much when the relationship is humming along. But many a relationship that starts out sunny ends up stormy. Or ends altogether, because of divorce, incapacity or death. I hate seeing a woman — or very occasionally a man — alone and incapable of running their finances.
I was talking recently to a young professional woman who wants to leave her husband. But she has no idea of how much money she would have, where the couple's investments are, or even whether her husband has salted away some cash that she wouldn't know about if they split. And, she says, she wouldn't know how to handle her money on her own. She feels trapped.
I know, I know ... many people say financial stuff is too difficult. Unfortunately, some in the finance world make it seem hard, perhaps in the hope that people will pay them lots to do the work for them. But there are good, simple ways of running your money.
Others say finance is boring. I agree that it's hardly fascinating, which is why I suggest you get your money sorted and then get on with what really matters in life.
It's not as if money management takes hours. You can set up automatic bill payments and savings deposits — although you do need to make sure you always have enough in the bank to cover the bills. Reviewing investments is best done only about once a year — as long as you've made the right choices to start with.
How about sitting down together on the first of every month, or as soon after that as is convenient, and going through whatever needs going through? Perhaps shout yourselves a nice glass of wine or chocolates or some other treat while you're doing it.
But please do it.
Q: I'm in a position where I can afford to increase my KiwiSaver payments from 4 per cent to 10 per cent.
Are there any disadvantages in putting this additional 6 per cent into a non-KiwiSaver managed fund instead? Besides the temptation of spending this money plus additional fees — are there any tax disadvantages or anything else I need to take into consideration?
A: No. But keep an eye on fees, as they can make a big difference over the years.
As long as you're unlikely to give in to the spending temptation, having the money accessible is a big plus. You never know what lies ahead.
Q: I know you have explained using laddered term deposits (TDs) previously, but even talking to reasonably financially savvy friends I am surprised how few people use them to full effect.
I subscribe to your view that money you intend to spend in the next 10 years should be held in bank deposits and bond-predominant funds, but getting a return that even keeps up with inflation has been challenging lately.
But using laddered five-year TDs or PIEs (portfolio investment entities) can improve returns and still provide reasonable liquidity. I have five five-year term PIEs, one maturing each year. From that I put the next 12 months' spending money into shorter deposits.
Then I replenish the five-year PIE from share or bond funds (provided markets are reasonable) and re-invest for five years.
As an example, I am currently averaging about 3 per cent interest and will "bottom out" at 2.7 per cent in 18 months due to the lag effect, whereas one-year TDs are currently about 2 per cent, after falling below 1 per cent a year ago.
It is even worth considering this as an alternative to corporate bond funds at present as investment grade bonds are frequently yielding less than five-year NZ bank deposits, and if you are using a managed fund then fees will be deducted too.
A: Laddering term deposits can work well both before and during retirement. And the basic idea is simple.
If you are laddering over five years, it takes four years to fully set up. Here's how to do it.
• Divide your term deposit money into five equal amounts.
• Invest one fifth in a one-year TD, one fifth in a two-year TD, and so on, with the last fifth in a five-year TD — which will mature in 2027.
• A year from now, when the first lot matures, reinvest it for five years, so it will mature in 2028.
• As the others mature, reinvest each one for five years. So you will have one lot maturing every year from now on.
In your case, rather than reinvesting the money when it matures, you are spending it, and replacing it with some of your longer-term savings. That works well in retirement.
Why use laddering? Usually, interest rates are higher on longer-term deposits — especially when interest rates are expected to rise, as is currently the case. But most people don't want to tie up all their money for five years. Laddering gives you access to a portion of your savings every year.
Also, you get a spread of interest rates over time. If rates rise, you'll be pleased you have some money maturing so you can reinvest it at a higher rate. If rates fall, you'll be glad you still have some money invested at the old higher rates. While you don't get the best rates on all your money, nor do you get the worst. It removes the risk of bad luck with timing.
For the benefit of others, the term PIEs you mention are like term deposits set up as PIEs, so the maximum tax rate is 28 per cent. This mainly benefits people with taxable income over $48,000, who would otherwise have paid tax at a higher rate. Term PIEs don't charge fees.
By the way, you can also ladder your money over, say, two years. At the start, divide the total in four, and invest one lot for six months, one lot for a year, one lot for 18 months and one lot for two years.
Q: My husband and I are 61 and 60. I work on a modest salary and my husband's business unfortunately suffered badly as a result of Covid and he has had no meaningful work since March 2020.
At the end of 2020 we sold our family home, as we had become empty nesters. We have downsized to a lovely apartment in a good area that will hopefully increase in value over the years.
We plan to invest the residual funds from the sale (about $250,000) in managed funds. However, with the volatility of the market last year we ended up leaving the money in a low-interest account. As things still seem to be quite volatile we are still loath to invest in managed funds, as we may require the money for unexpected costs. We are being very conservative I know.
We would like to generate a small income from these funds whilst retaining the capital. Currently we could invest for two years at 2.5 per cent with the interest paid monthly. If we wait for two or three months interest rates may have even moved closer to 3 per cent. We have three questions:
• Do you think this is a good option?
• Is there any benefit in investing with a New Zealand-owned bank, e.g. TSB, SBS, Co-operative, Heartland or Kiwibank, over one of the Australian-owned banks?
• A number of the banks also mention Term PIE funds. How do these differ from normal investment funds?
A: I suggest you put, say, half the money in laddered bank term deposits, as described above.
Don't wait a couple of months, missing out on higher interest in the meantime. You've already mucked around long enough!
Then put the rest in middle-risk KiwiSaver funds for each of you. Open accounts if you don't already have them. Set aside enough to deposit $1042 into each KiwiSaver account every July-June year, so you get the government's maximum contributions.
Ideally, you would get brave and put long-term savings in higher-risk KiwiSaver growth funds. The markets will always be volatile, but by the time you spend that money it's highly likely it will have grown more than in term deposits.
On New Zealand versus overseas banks, let's look first at financial strength. Some international credit-rating agencies don't rate the locally owned banks. However, Fitch gives Kiwibank its highest AA rating, ahead of ANZ, ASB, BNZ and Westpac — all at A+.
Then comes TSB at A-, and below that are Co-op, Heartland and SBS, all at BBB.
Says Fitch, "BBB ratings indicate that expectations of default risk are currently low. The capacity for payment of financial commitments is considered adequate, but adverse business or economic conditions are more likely to impair this capacity."
In other words, the chance of losing your money in one of the smaller local banks is small, but not minuscule. By next year, bank deposits of up to $100,000 will be government guaranteed, but they are not in the meantime.
Apart from that, it's quite possible the small local banks try harder, and you may get better interest rates and service. In Consumer NZ's latest bank satisfaction survey, TSB came first, followed by Co-operative. Then came Kiwibank, ANZ, BNZ, Westpac and ASB, in descending order.
On Term PIEs, see the above Q&A.
- 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. 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.
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