Just Wondering: Sorted Money Week Q+A
23 Aug, 2020
As part of the Sorted Money Week, I recently asked you to send me your money-related questions, which of course you did. I’ve selected a bunch of them and given my thoughts on each, plus added in a few links and resources to round out the answers for you.
If you are new to my blog, it’s probably timely that I explain that I’m not an authorised financial advisor, so these are just my thoughts and opinions, I’m just a person with a strong interest in being a good steward of my money and helping others work out how to do the same.
Thanks to everyone who took the time to get in touch. I hope you find this Q+A helpful!
Lynn Asks:
Where is the best place to be holding my house deposit savings, considering the bank’s interest rates right now are next to nothing? I’m not wanting to buy this year but maybe in the next two years…
Renee Also Asks:
Hi Ruth,
I have around $25,000 sitting in a savings account. I plan to add to it further for another year or so to use as a house deposit. Because I want to use it in the short term, I don't plan to invest. But I do wonder if there's something else I could do with it in the short term. Or is a savings account (even with the very low interest) the best plan?
My thoughts on this:
The bank is still the better place for your hard saved cash, despite the non-existent interest rates. The reason being that you will be looking to use your money within the next two years. The alternative - which you didn’t say Lynn, but were probably thinking - is the share market and but it’s just too volatile at the moment and not the right place for your house deposit money.
You both need certainty that when the time comes to put a deposit on a house, ALL of your saved money will be available. If you were to instead chase gains and invest in shares, if the market drops, right at the time you want to buy then you may fall well short in your deposit. It is a short term goal you are saving for and the rule of thumb is that you don’t put money into the share market that you will need within 5-10 years.
Just forget all those Youtube clips you see of 20-somethings at their computers giving you a tutorial on day trading and making your fortune. It just is not going to be worth your while (nor theirs if I’m honest).
Perhaps consider instead getting your calculator out and doing some quick calculations around the:
The price you are willing to pay for a house.
The deposit you will need to achieve it.
The size of the mortgage you will be taking on.
This will give you the timeframe until you hit your deposit number.
Therefore you can have an end date in mind and know that in August 2022, for example, you will be ready to withdraw all of your money and get into your own home.
Having a firm goal in your own mind will cut out all the noise we are hearing at the moment around “your money has to be working for you”. It is already working for you in the bank Lynn and Renee, giving you the certainty that it will be there, fully intact when you need it, plus growing with every $100 you deposit in it!
Kathryn Asks:
H Ruth,
My question is around KiwiSaver.
We've been told by a mortgage advisor that we have managed to save too much money in our KiwiSaver to be able to buy our first home.
How can this be?
This will mean that we will have to sell all our shares even the ones that have gone down in value? We have saved an almost $200,000 deposit and have $130,000 combined in our KiwiSaver.
Are there any assets they wouldn't expect us to sell?
It’s almost worth splashing out to lower our amount in savings.
We are in our late 40s, never owned property in New Zealand and just sold our rental property in the UK, not much profit and small fry in comparison to NZ prices.
Thanks.
My thoughts on this:
I think it’s nigh on impossible to save too much for your first home unless of course, that mortgage advisor is actually referring to the first home grants that are available? They do come with rules regarding income levels and the price of the home you are looking at has a cap on it too. I suspect that is what it is Kathryn, so go back to them and ask for clarification. Also, if your mortgage advisor is causing you confusion, go and find another one. They are supposedly the experts and it’s their job to aid and assist you into a mortgage that is appropriate for all parties involved.
Regarding your KiwiSaver, as long as you have been members for at least three years and leave $1,000 in your fund, I can’t see any reason why you can’t withdraw funds for your first home. Personally, given you are in your late 40’s, I would love to see your KiwiSaver left intact for your retirement but that’s a whole other conversation! You do run the risk of becoming house rich and cash poor if you pile everything into your house don’t you think? And if you take on too large a mortgage you may justify to yourself that you can’t “afford” to invest in your KiwiSaver… So, maybe have a think about your entire long term plan, of which having a house is just a part of a bigger picture.
I think splashing out and spending money in order to lower your investment value so that you appear poorer than you are is, ah, shall I say, bordering on unethical and you run the risk of making buying a home more mathematically complicated than necessary. Instead of coming at this from a position of poverty, come at it from the position you are actually in, you have done a great job of saving and are in the fortunate position of having the ability to put down a very high deposit on a property. So my thoughts would be to find the cheapest property you are happy to live in, pay as high a deposit as you possibly can, take on as little debt as possible and pay it off as fast as possible.
Leigh Asks:
With my marriage recently ending I now own 50% of my home with a $400,000 mortgage. My Mum has offered to buy half of my house, essentially paying off the mortgage. I would then pay her ‘half rent’ and halve all expenses with her (insurance, rates, maintenance etc). Of course, we will have a legal agreement drafted and signed. All up I’d have $700 a month extra and plan to invest in a few ETFs.
I think this is a no brainer but I want to get your thoughts - am I missing something?
Thank you!
My thoughts on this:
That’s an interesting one to get my head around Leigh. So, essentially, instead of your husband owning half of your house, now your Mum does right? Making you mortgage-free, but only owning half of your house. Again. Your Mum has more or less bought herself a rental property with a wonderful tenant, her daughter. It is an incredibly thoughtful gesture, in what is often a pretty tough time, but from an outsider looking in, there are a few things to consider.
I’ve personally seen these sorts of arrangements and they tend to start out well, solving an immediate financial need but they change as the years pass when both parties start to have different views of the decisions being made. For example, if you want to replace your kitchen but your mother does not agree, yet is expected to pay half and she has a say because it’s half her house. Or if/when your Mum needs her cash out for some reason. For example, wanting to change her own home or is moving into aged care and needs the money for that. There are implications for her financially, particularly if rest home care is needed and Work And Income become involved, so it’s worth thinking through that as well. If she were to pass away, her Will also needs to take this financial arrangement into account, as would yours.
What are your options if the situation changes? Selling your Mum’s share to someone else, at the current market rate? Or you taking on a mortgage to cover it again? If the years have rolled on and the house has increased in value, would you be buying her out at $400,000 or at a higher rate taking into account capital gains on the property? If you have siblings this could get quite complicated quite quickly.
It’s tricky without knowing any more about your situation Leigh (do you have children at home and what is your earning capability) but my first thought upon reading your question would have been to sell the home and buy one outright with your $400,000 (or take on the smallest mortgage you can to get into a cheaper home). Then you are done answering to someone else: either your husband or your Mum.
Presumably, you had a house of that value ($800,000) due to you and your husband having two incomes, but now with only one income it sounds like you have too much house and It feels like you are deferring a financial decision that needs to be made and the longer you put it off the tricker it would get. Ideally, you want to work yourself into the position of owning your own home, growing investments for retirement and having the cash flow to cover daily life.
Personally, I’m absolutely in favour of whanau helping each other out, but it needs to be a very well thought through arrangement, that has longevity. I would talk to a lawyer and seek a LOT more advice about the implications of this decision because although it sounds like a short term answer to your problem, the long term implications have the potential to be quite far-reaching.
Dean Asks:
Hi Ruth,
I'm 30 and I've saved up $40,000. I am wondering what to do with it.
I've narrowed it down to 3 options:
1. Buy my first home. A tiny apartment in Auckland CBD is what I'm thinking about. I'd aim to live in it for around 10 years.
2. Buy an investment property in one of the regions e.g. Invercargill with a high rental yield, which I would aim to hold for at least 10-15 years.
3. Buy a freehold car park in the CBD as a sort of dress rehearsal for having a big home loan someday.
If I was purely motivated by money, I would go with option 2. However, I am leaning towards options 1 and 3. Option 1 because I like the idea of the security of owning my first home. Plus, my partner (who has no savings) has said she would be happy to pay rent (we currently rent together). Option 3 because I love the idea of owning a car park in the city (even though I don't have a car) and it's a legitimate investment (as opposed to owning your own home.) Also, I like the idea of investing in something that I might actually use someday.
The choice I make of course depends on what my investing goals are. And that has been the hardest part so far. I'm really good at saving (currently saving on average 60% of my weekly income) and in every other area of my life, I'm great at setting goals. But setting goals for the life I want to live when I'm 70 is incredibly challenging!
As I am brand new to the concept of investing, I'm loving learning about all of this and I know the more I learn the clearer the path forward will become.
I have three questions about my situation:1. How clear on my financial goals do I need to become before I invest?
2. How much time should I invest in learning about investing before making my first investment?
3. Are the best investors the people who have gotten clearest on their financial goals?
Thanks so much for your help!
My thoughts on this:
Crikey, it took me a while to get past the fact you were actually excited about buying a car park! I know that owning a car part is a thing, but still, not one I could feel excited about. Each to their own though!
Having a bit of background is useful because it gives me a bit of context, so here goes Dean…
I do think you need to be relatively clear in your goals, but just know that they will change and evolve as you/your income/your relationship does. I think that those who have clear goals in mind feel more confident in their decision making. As you know from having set goals for other things you have achieved, having a goal gives you something to aim for.
Think about a goal this way. If you DID have a car, with a tank full of gas and were about to head out on a long journey, it’s kinda handy to know where you are headed right? Otherwise, you will just drive aimlessly around, burning up fuel/money.
When you have more of a plan it makes your saving and then investing a lot more intentional. You mentioned taking on “a big home loan” someday. So, your goal is clearly to own a home at some stage. But, what if your goal was to own a home with the smallest home loan instead? Suddenly your goal is not to scrape together the minimum deposit but to instead save the maximum amount to make up the biggest deposit, thereby taking on the smallest mortgage. And with that in mind, maybe that Auckland CBD apartment is looking like a more promising option? Do some math Dean, what does a small CBD apartment cost? What does a minimum deposit look like, how long would it take you to save that amount of money up given your current income? Based on that, how much longer do you need to save to double your deposit? Just run some numbers out to start to put a timeline in place because that will start to form into a goal.
As for research, I’m forever learning myself. It never stops. I’m always acquiring the wisdom of others and adding it to my journey, that’s partly why I write this blog, so I can see how other people handle their money and I take from it tips and tricks to apply to my own learning. So, ask around your peers, from young to old. What did they do? What worked and what didn’t? Have an open mind and a bit of scepticism too as people tend to talk louder about wins than losses… Read widely - a post worth sharing with you today is THIS ONE because I know it’s been a turning point for so many: The Shockingly Simple Math Behind Early Retirement
And with that in mind, this is how I’m doing it (I’m 46)):
Jonny and I got the biggest deposit together that we could and bought the cheapest house we could find. We paid it off in five years. We invested in our KiwiSaver from Day 1. We say NO to all debt. We budget each month to cover all of our expenses and we keep our expenses low. We invest in just a couple of ETF’s/Index Funds because the returns are far better than a rental property, with zero hassle. We both work part-time allowing us to do what we find interesting - like writing this blog. Our long term goal is to retire earlier than normal using the 4% rule (The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?”) which we use to work out how much to save to enable us to do this.
Don’t overwhelm yourself with research though Dean, take the key concepts and keep it simple, always referring back to “what does Dean want?” and is this decision I’m about to make going to help me get there? Oh, and just one last thought, just one more goal to add to that list of yours...
What can you do to help your girlfriend become a saver too? Because if your relationship continues on you want to both be on the same team and ensure you are both paddling your waka towards the same goal. If you don’t already discuss money, now is as good a time as any to start.
Abby Asks:
Hi,
I was wondering how much we need for retirement and how to calculate how much we need to be putting away each week? We're 28 and 32 now and planning to pay off the mortgage in 10 years. Then we'll put away $500 per week for 23ish years plus our KiwiSaver and a small Kernel index fund we're depositing into. But I'd say $40,000 per year would be comfortable for us to retire on but I'm thinking there might be an income or asset tested super by then.
Thanks!
Fiona Also Asks:
How do I work out how much I'll actually need to be saved by retirement?
There seem so many variables and unknowns!
Thanks.
My thoughts on this:
Great question Abby and Fiona! And one I think about a lot in my own household. I referred to the 4% Rule in Dean’s question above and again below, so go and check that out as. But another handy calculation is the 25X formula…
Put simply, you take your annual spending, multiply it by 25 and that gives you your retirement number.
For you Abby: $40,000 per year X 25 = $1,000,000
You will need $1 million invested in assets that return you an income (like KiwiSaver, shares, rental property etc). Each year you can pull off 4% and your capital will always remain.
Sounds too simplistic?
Take a deep dive into it here, Mr Money Mustache has done a great job with this blog post: The 4% Rule: The Easy Answer to “How Much Do I Need for Retirement?”
There is also an excellent retirement calculator on the Playing With Fire website: FIRE Retirement Calculator
You can pop your numbers in there and it gives you a pretty good suggestion as to when you can retire as well. I’m like you, hoping that there is superannuation available when I hit 65, but planning for it not to be (although I would be seriously peeved if this turns out to be the case!)
For us, we focussed on becoming debt-free in all areas of our life asap, we invest the minimum into KiwiSaver and invest as heavily as we can outside of KiwiSaver into ETF’s/Index Funds (we do this because we know we will be retiring well before the age of 65 and will need access to this money). I track our investments in Sharesight and this gives me my percentage returns, I can then use that information when I’m plotting how much our investments are increasing in value each year. I track all of our earning and expenses in PocketSmith and that gives me an EXACT figure as to how much we spend each year.
It’s all about keeping our expenses low and our saving/investing rate high, the more of that we can do, the quicker we can retire fully. Using just a couple of these resources takes a lot of the guesswork out of it for me and I get to use real numbers. I’m a huge optimist Abby and Fiona and if you asked me to guess when I would retire I’d say 2021 WOOHOO bring it on! But the reality and what the numbers tell me is that we have a few more years ahead of us BOOHOO! But by tracking our FI date it really focusses us in and makes our earning and spending much more intentional.
Sivaswamy Asks:
Will the dichotomy between the economic reality of COVID slowing down the economy and the rise of the stock prices end soon? What will happen first, the economy will start showing signs of revival or the stock market will start showing signs of retreat?
What should an investor do with his portfolio?
My thoughts on this:
In my considered opinion... I have absolutely no idea Sivaswamy! Nor does anyone else really. Martin Hawes and Shamubeel Eaqub gave it some thought recently, so you might like to listen to their webinar here: Martin Hawes with Shamubeel Eaqub - where will COVID take the economy, our investments and us in the future?
As to what I’m doing with my own portfolio, it’s just business as usual for me and I have not changed a single thing because when I started down this path it was with a long term outlook and I’ve still got a long way to go, so no need to make any changes at all. Although having a global pandemic is ‘unusual’, having a global event is not, something was always going to go wrong in the world and our economies will always adapt in some way shape or form.
Ella Asks Quite A Few Questions...
Hi Ruth,
How do you manage your money in terms of budgeting? We are just starting out on budgeting (very belatedly in life unfortunately) and I'd like to know how to 'ring-fence' money for certain purposes. I've heard that some people have 10-20 accounts with their bank and assign each a purpose, e.g. vehicles, groceries etc. Would you recommend this approach or is there another way?
My thoughts on this:
Put simply I manage my money by budgeting it. I’ve written quite a bit on my blog about budgeting over the years, this is one of the more recent ones that I wrote with Bradie from @Kiwigirlonabudget - Budgeting really does work!
I started out with pen and paper, progressed to my own spreadsheets and then moved to my primary budgeting tool, an online app called PocketSmith. Today, when I want to budget for something specific and I want to ring-fence money for it I do open up another bank account (I currently have 11 accounts and 7 of them are for things I’m saving up for). I created one of these just last week when my mechanic said that I would need new tyres for my car before Christmas.
The tyres are $1,200. Christmas is 18 weeks away. $1,200 / 18 weeks = $66.
Therefore, every Monday morning I have an automatic payment of $66 from my cheque account into my new “Car Tyres” account which will ensure I have the total amount saved by the time I need to buy my tyres. I blogged about these ‘sinking funds’ recently and you can read it here: What is a Sinking Fund?
Next Question From Ella
Also, do you have any resources on how to budget with an irregular income? We have a business and income varies hugely from month to month, even year to year (which has been the poor excuse not to budget until now). The only approach I can think of is the huge job of examining all our transactions for the last two years and figuring out average spends on different areas, then working out a budget from there. Any advice for us?
Thanks so much.
My thoughts on this:
Jonny and I are in the same position as you Ella, we have variable incomes from month to month. Over time I worked out a system of how much cash we need and I did this by, you guessed it, budgeting.
PocketSmith has an Income and Expense Statement, just like a business would and I can see my actual annual income and expenses. Using this information I break it down into how much we spend on average each month and this is what I make sure I have in our bank accounts to cover costs PLUS a buffer for those lean months. So, I may have more cash on hand, but without that buffer, we have the potential to run short, so I would not be without it.
You need to work out what that figure looks like for your own situation Ella but you don’t need to bog yourself down in detail. Do take a look back over the last 12 months and just add up to a rough figure and take it from there. You might not WANT to put the time in but the tone of your questions suggests that you have let this uncertainty roll on for a number of years now and it’s still not working for you, so now might be the time to set aside a few hours and just get it done. Open a bottle of wine if you think it will help make the process more enjoyable!
Next Question From Ella
Hi Ruth,
Just to be greedy on your time I've thought of another question! Are there any tools or templates etc that you use for managing your budget and tracking your net worth etc. I know you have mentioned PocketSmith before? Is there anything else you use?
Thanks,
Ella
My thoughts on this:
No problems at all Ella. I’ve tried my own spreadsheet that I created and it was OK, but it could not give me any analysis - well, the analysis was only as good as my spreadsheeting skills! - so the information was a little too basic for me. I tried the Dave Ramsey budgeting app Every Dollar and that was OK too, but completely manual meaning I had to enter every single transaction. It was a “zero-based budget” meaning I had to allocate my income FOR the coming month, which as you mentioned above is harder for us because our income varies month to month. Then I came upon PocketSmith and have never looked back. It takes a little TIME and patience to learn (probably about three months before you really start to feel comfortable), but it’s worth it in my view. Upkeep is minimal once you have it up and running and I now refer to it almost daily to help me plan my life.
Then Ella had a realisation:
Oh gosh, I've just seen you have a ton of articles on these topics. I listen to your podcast but had not realised you have all these articles here! Duh, sorry.
My thoughts on this:
I had a good laugh when I got this final email from Ella and I hope she had a good time reading my back catalogue of blogs!
So there you have it…
Thanks to those who sent in some fantastic questions as part of Sorted Money Week. These questions are indicative of what people send me by email week in and week out. I always enjoy answering them, they never fail to get me thinking and it’s always interesting to be involved in some of the decisions you are trying to make in your own life. As always I’m first to point out that I’m not a financial advisor and these are just my thoughts and options, so do keep looking for information yourself, keep listening and learning and once you feel comfortable, don’t delay, just make a decision and get on with your life.
