Your Questions: Wage Subsidy, KiwiSaver, Debt
Apr 5, 2020
Thank goodness March is over. I couldn’t wait for the month to end so that I could start the new month and the new financial year afresh. Also, as another week rolled by I’ve perked up a lot, I think I am over the initial shock of it all and I’m actually excited to spend the month dodging COVID-19 and seeing how this “no-spend” month will play out, working to our new budget.
I’d literally no sooner written that when a plumbers bill for $157 turned up in my inbox! Instead of waiting until the 20th of the month to pay that bill, I paid it immediately so I could support a local business to keep its cash flow moving. If you are financially OK, I would encourage you to do the same.
We finished March with our spending down to just $82 a day:
Food - $36
Insurances - $18 (this irks me!)
Rates/Electricity/Fuel/Heating etc - $18
School fees/doctor and odds and sods - $10
This does not include investments that we purchased because I don’t factor them in as ‘spending’, more of a transfer from one account to another. I’ve looked ahead for what’s coming up in April and I feel financially prepared for it, so that brings a level of calmness.
As we settle into this new no-frills budget of ours I am reminded yet again of the walk Jonny and I took along the banks of the Avon River in Christchurch shortly after all of the earthquakes began back in 2010 when our life and jobs were really uncertain. Much like today. At that time I said something I didn’t think I would have to say twice and that was, “I don’t know what the future holds for our family, but I just know that at this time, money is not at the top of the list of things we have to worry about”. Despite my worries, we are more prepared going into this as this pandemic is our second big financial wallop and I already know that one day, there will be a “next time”.
Your Questions:
I asked you last week what I could help you with and I received a lot of emails with questions on various topics. Thank you for sharing these with me. I treat every email I receive in confidence and I’ve answered each one as they have come in. But I thought I would pull a few themes out of them (with all identifying features removed) and share them in a blog post, because my guess is that they are pretty common questions right now.
Wage Subsidy
Q1
I am self-employed, working less than 20 hours a week and work has dried up so I have already received the $4,200 wage subsidy from the government. Should I be putting some of that aside for tax?
A
I am not qualified to answer this at all, given the fact I’m not a tax accountant and I thought about reaching out to our accountant but I know he will be very busy at the moment BUT I can share what Jonny and I have done because both of us will receive this subsidy in different ways. He has already received $4,200 and my own employer has already received it on my behalf.
In regards to Jonny, when he received this payment he treated it as income and he has therefore skimmed the tax off the top (at his normal tax rate) and put it aside in a separate account called “tax”, as he does with any income he receives. Some of the remaining amount will be used to cover his normal business expenses (software costs/phone etc) and the remaining amount has been divided by 12 and he will pay this out to himself (us) each week for the next 12 weeks.
Normally he pays himself (us) monthly and while he could pay it out to us in one lump sum at the moment it just makes it easier for me to BUDGET when I know I can rely on a set amount coming in each week. Because he still has some work coming in, albeit a smaller amount than normal, he will top this amount up at the end of the month but this amount will be variable, as it always is.
For myself, my employer has received the total $4,200 themselves (plus more for other staff) and now they divvy it out to me. To make it easier to see what that looks like for me as an employee, here is my payslip for the week:
My payslip for the week.
So, we are both treating this income as taxable income and to be honest, I’m not 100% sure if this is correct for the two of us, but we figure it’s better to be safe than sorry! Remember how I blogged recently about the fact that we do use an accountant? Well, I figure that he can work it out down the track and if we are due a tax refund because of this well, that’s great! I just figure that people are busy enough at the moment without me questioning this and it will all work out in the end. I just know that I would rather be owed a refund than be faced with a surprise tax bill.
Kiwisaver
Q2
Ruth, I am one of those who switched my KiwiSaver fund from Growth to Conservative during the week of 16th March when things looked pretty dire on the share market. I now realise I have made a mistake, yet having made that mistake, should I change back again?
A
I have to be honest here and say that when I read that question from a few different people, I just wanted to hug them. Because they made the change after a knee jerk reaction and right at exactly the wrong time. But what is done is done. And what they have done is to completely and utterly lock in their losses, which until they sold were just on paper. Once again, I’m at pains to point out that I’m not a financial advisor, so these are just my thoughts on the topic!
To again use myself as an example:
29 February 2020 - my KiwiSaver balance was approximately $80,000
31 March 2020 - my KiwiSaver balance was approximately $70,000
In both instances I held the same number of units, 56860, give or take the units I purchased during the month of March.
Therefore the number of units I owned barely changed, only the PRICE of each of those units changed. Why? Well, just like we have watched our KiwiSaver balance grow and grow over the last ten years as the price per unit increased, well it can drop too, bringing my KiwiSaver balance down with it. This is entirely normal.
My thoughts on this are that as the value of our KiwiSaver fund grows we start to take more notice. But many of us only see a NUMBER and therefore while as it increases we don’t take much notice, but perhaps just smile to ourselves at our own good fortune as it grows far beyond the monthly contribution we make, but when it instead drops, some of us panic.
Don’t panic!
And don’t change funds based on something your brother in law said, or what you heard someone on the radio say about their own fund. Do your research about how KiwiSaver actually works - and given the fact that most of us are currently shut up at home, what a fantastic opportunity we have to research!
You need to teach yourself WHAT your KiwiSaver fund is invested in and to be fair to the providers out there, they have been trying to teach us but because so many are bored by personal finance and just not interested, well, they never took any notice of the literature that was sent out.
For me, I invest in the Simplicity Growth Fund but I’ve taken a look at what I am actually invested in and what is in the fund I buy:
Simplicity Growth Investment Fund (update 31 December 2019) Top 10 investments from their Fund Update document. You can view the full document here.
When I login to see what’s happening I’m looking at more than just the total dollar value, I’m thinking about WHAT I’m actually invested in because now is a good time to remind ourselves that we are investing in companies and businesses and all of them are determined to keep on trading so they can provide products and services to their consumers, so they can provide jobs for their employees and so that they can provide returns to you and I, their shareholders.
The first four investments in this fund are all into huge Vanguard Index Funds which are each made up of a wide and diversified portfolio of international companies and shares. Next, they hold just a little bit of cash. Then they list five different New Zealand companies and when I look at each of them this is what I am thinking about:
Fisher & Paykel Healthcare - I know F&P made my dishwasher, but they also make a lot of medical devices too. Wow, given COVID-19 that’s a good business to be in surely? Why yes it is.
A2 Milk - I’ve never tried it, but I know it’s a huge market and given everyone is binge shopping I wonder if consumers have stocked up on this internationally and nationally?
Auckland Airport - These guys are toast for now. But I certainly plan to fly places in the future, so it might take time, the airlines themselves may operate differently, but they still need airports to fly in and out of, right?
Spark - Thank goodness for the internet and phones in a time like this!
Ryman - This could go either way because they provide housing to elderly. Elderly are very at risk at the moment with COVID-19 and if there are many deaths their rest home occupancy rates will change and their business is all about supply and demand…
The majority of my fund is made up of a mixture of international shares and then local shares, so it’s very well diversified and given time, it will recover, it will. As you can see from my thoughts on those companies above, I still don’t concern myself with the intricacies of each company, I’m just not interested. Instead I just know enough to understand what my fund invests in.
So, you see, my $10,000 drop-in my KiwiSaver balance is just a tiny part of the picture and when I look at what it’s made up of it fills me with hope for the future. Some of the companies in the Vanguard funds will close as a result of this, but some will grow beyond even their expectations and because they are all part of the index funds and the individual companies that are in my KiwiSaver fund, all I can see is an upswing over time. Coupled with the fact that this KiwiSaver provider happens to have some of the lowest fees on the market, I don’t want to change a thing and I am certainly going to continue my investments as per usual. If Jonny and I began to be squeezed financially and I have to make more cuts, cutting the investment into my KiwiSaver will be my absolute last resort, because by doing so I am missing out on the chance to buy cheaper units and that will have long term implications for my KiwiSaver balance. Do everything in your power to not have to pull money out of your KiwiSaver under the hardship application process! In fact, with June approaching it’s actually time for me to make sure that I have contributed at least $1042 to our KiwiSaver funds so that we will receive the government contribution of $521. Now is a good time to top it up while shares are on sale.
Because THIS is how I view my fund, my risk profile makes me entirely comfortable with this more volatile fund, the more shares in a fund, the rougher the ride. Coupled with the fact that I am still 19 years away from accessing any of this money, I am in exactly the right fund for me. I referred to it in my email to my subscribers last week but I’ll mention it again here, Simplicity has suggested time frames to help you choose a fund and they are there for a reason because they give the investor the minimum expected time frames to maximise returns and minimise losses and this is their suggestion:
Simplicity Growth Investment Fund - you need to commit to it for 9+ years
Simplicity Balance Investment Fund - you need to commit to it for 6+ years
Simplicity Conservative Investment Fund - you need to commit to it for 3+ years
They also created a fact sheet about time frames and what goes on behind the scenes when you switch funds: A layperson’s guide to switching funds. This is a useful read no matter who your KiwiSaver provider is.
* I should point out that this is not an ad for Simplicity, I am not being paid by them, they just happen to be my provider!
For the people who have switched from a growth to a conservative fund and ‘realised their losses’ I think the only way around this now is to educate yourself BEFORE making any further moves to change funds and I encourage you to dig down and understand what you are invested in and why and to work out how much volatility you can stomach. And I also think that KiwiSaver providers need to lead the charge in educating their customers in a way they can understand too - and we need to take responsibility too and actually READ the information we are sent!
And I don’t want these people who have changed funds to beat themselves up too much either! Most of us have to learn by doing, heck, I bought five brand new cars before I understood what the term “depreciation meant”! So at a time like this, some of us are going to make mistakes. The key is, just don’t do it again.
KiwiSaver has only been around 13 years, give it another 10 years and our balances are all going to be double what they are today and I really don’t want people to panic and make knee jerk decisions then either. THERE WILL BE another big market drop in the years ahead, just like we are experiencing at the moment, so do your homework now and position yourself now so that you make a considered decision next time around.
I actually referred myself to a blog post I’d previously written “Stock Market Blip - Hold your course!” to see if I had been following my own advice. I have been!
This blog post is already getting too long, so I’ll stop shortly.
Q3 Debt
But before I do, I have also received a number of questions about mortgages. Geez, my least favourite topic for sure. I hate them, hence not having one. And I’m not just saying that to be a smarty pants, I just hated how they chewed up so much of our income and so much of my mental capacity working out how to structure and juggle them and we viewed having one as a temporary measure to be rid of as soon as possible because I detested paying interest. Plus I learned that I felt far more comfortable buying things with my own money and not someone else's. So my thoughts on mortgages are that if you are feeling the squeeze, due to loss of income, talk to your bank immediately to map out a plan.
And then go home (oh hang on, you are already there!), make a cup of coffee and settle in for a long and uninterrupted chat with your significant other (or yourself if you are single) and ask “what could I have done differently to avoid being in the situation I find myself in today”?
So my first thought for those with mortgage debt and consumer debt is that NOW is the time to reassess your life and understand exactly what impact debt is having on it right now and ask yourself how you actually feel about that. So many of us have seen our income drop or stop through no fault of our own and we will each come to realise the hefty toll that debt plays on us.
You can’t fix a situation that you have taken years to work yourself into in a day, but you can learn a lesson and apply it in the years to come. There are a couple of books I would recommend to you to help you think things through:
I’ve had so many additional questions, on all sorts of topics, all of which I’ve responded to and finally, I just want to say, thanks for trusting me in a time like this, it’s nice to be able to help.
