You don’t save when you have debts to pay.
Filed under: Avalon's Money Thread, Economics, General Budgeting, Interest Rates, Credit Cards & Mortgages in NZ, Property & General Investing, Retirement, Pensions and Kiwisaver
It is a fundemental rule of personal finance and budgeting:
Do not save while you have debt to pay off.
So why is it that the supposedly “clever” people in the savings working group want to force people to save because we have too high a level of debt? It makes no sense, in fact its the most stupid and finacially dangerous idea you could come up with. The scary thing is – they have to know this – they really can’t be that thick – so why are they suggesting it?
First of all- why is it a bad idea?
Well, its all to do with interest rates. You get less interest for saving than you pay for borrowing. For example, ASB pay you 3.65% for any savings you have, and charge you a minimum of 6.25% for any borrowings you have. (Up to 19.25% if you have credit card debt with them). So WHY would you put any money in the savings account when it can work at least twice as hard for you paying off the debt?
And because you pay tax on any of the interest that you earn – you are even worse off. The simple fact, to earn enough interest to make it worth “saving” (or “investing” ) instead of paying off debt you need to be able to earn that 6.25% AFTER THE INCOME TAX HAS BEEN PAID. That means you need to earn about 8% interest in savings or investments.
Anyone know where you can get that?
(Actually – First Direct in the UK are currently offering 8% on thier regular savings account – but that aint gonna help most Kiwis, or expats unless you already have an account with them).
So – Forced Kiwisaver then?
Yep – thats the bee-all and end-all of everything. Open a Kiwisaver account and the economy will fix itself. You won’t be able to eat – but hey – who cares about that? We will stop using debt to buy things we can’t afford, and no one will have any money to plow into investment properties because it will all be in the stockmarket. NZ Business needs the investment – and as too many of us are not doing as we are told – we need to be forced to behave.
A classic quote in a second article today shows the attitude of these people really eloquently I think:
“KiwiSaver has considerable potential to further help people select appropriate investment assets,” the working group report said. “At the moment this potential is not being fully realised.”
Ie – “stop thinking you know better than us – we tell you Kiwisaver is the best investment – and if you won’t believe us – we will force you to. You are too stupid to select your own shares and we really are terribly hacked off that you want to buy property – because none of us get a cut of that!”
Of course, buying shares, unless you buy in an Initial Public Offering never actually puts money into a business – it just values the business. Which means that on paper the business is worth more and can borrow more. Um – isn’t that bad and greedy when Property Investors do it? It will of course put money into the pocket of the person you bought the shares from. Much like buying a property off someone who bought it as an investment puts money into the greedy gits pocket!
The first rule of smart finances:
Pay off your debt first.
It’s the best form of “saving” there is, purely because of the cost of borrowing and the effect of compound interest. If you want to try and beat the interest rate you are paying on debts, then you tend to have to save the money in risky investments, or property (and that as we all know is BAD!) And even then – it isn’t easy – and is dependent on a lot of outside forces. Investments can and do lose money – because money always goes in cycles. Theres are booms and busts – in a boom your investment goes up, in a bust it goes down.
But one easy way to get the best return on money is paying down debt. It’s risk free, makes the absolute most of every pound or dollar, and also reduces your personal risk. Can you get a better investment for your money than that?
Does this include mortgages?
Yes and no. In general when people talk about “debt” they mean non-mortgage debt. But clearly when you end up in the middle of a financial crisis like we are right now, mortgage debt is also a huge issue for people, so I personally think you can’t forget about it that easily. And when the boffins in these working grups are whining about our debt levels – they are also talking about mortgage debt. Most of our mortgages are business related, so they are tax deductable – effectively this brings the interest rate down by about 1/3. (which would be exactly the same if we have taken out the loan to buy shares with by the way). But it should never be forgotten that they are still debts, and they cost a lot of money to service. It is in the end money we owe. To be honest – if we didnt have the investment properties then financially we would be laughing all the way to the bank because our spending is way lower than earnings right now. All our spare money is going into paying down debt and keeping our properties.
If we are forced to pay Kiwisaver contributions as well – how the bloody hell am I supposed to pay the mortgages and reduce debt levels???
I may be good with money – but I am not that good!
I will be writing another blog about this, and what the Savings Working Group actually said in full, because from the skim read I have had – there are some really good ideas in there. Just some truly barmy ones as well, and an arrogant insistance that I MUST have a Kiwisaver account.
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How discounting works?
From my new favorite Webcomic Abstruse Goose (with thanks to Peter B).
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Expat Kiwis in Australia are having problems.
It really isn’t just Brits emigrating to New Zealand that struggle to make ends meet sometimes. Kiwi’s crossing the Tasman (which for them is pretty much like Europeans being able to live throughout Europe) are finding that the grass is not always greener. Personally having lived in NZ for a while now, I can’t say I really see the draw of moving to Aussie, but hey.
One of the issues that some are finding is that they can’t get benefits in their country. What shocks me is that they thought they would be allowed to. Especially given the stink the mere thought of immigrants to New Zealand bludging benefits causes here. But it seems having gone in search of better wages and living conditions, and not finding the work needed to get it – some Kiwis are resorting to begging.
[Sallie Army] says they seem to be getting a misleading message about opportunities in Australia.
“They come with this understanding from somewhere that it’s easy to get cheap rental accommodation and employment,” he said.
“When they get here they find that that’s definitely not the case and we’ve had most of that 40 turn up at our centre in really difficult circumstances.”
A spokesman for the Department of Immigration said as long as the New Zealand citizens were not in Australia illegally, the department had no stance on the issue
Very helpful of the Immigration Dept there I think.
I also imagine there is probably a time after which you would be eligible for benefits – much as in New Zealand it depends on the type of visa, and length of time in the country.
I think the lesson here if the is one is that emigrating doesn’t always improve your life, and in these financial times, it doesn’t really pay to emigrate to a new country without a job, income and home in place.
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Why you shouldn’t get a mortgage from WestPac
Filed under: Banks, General Budgeting, Interest Rates, Credit Cards & Mortgages in NZ, Property & General Investing
(Prefaced by saying that they still have the best mortgage calculator I’ve seen – so they ain’t all bad).
Today’s issue comes to you courtesy of Westpac’s draconian break fees – the sledgehammer they whack you on the noggin with for daring to want to pay down some of your mortgage.
Ive asked my banks for break fees before, because i wanted to re-arrange my mortgages when the interest rates started dropping. Westpac at the time were trying to charge way more than our other banks.
Today I have asked if I can use just $600 which is sitting in a Westpac transaction account to pay down one of my investment mortgages. Now the money is only sitting there cos Westpac, like all NZ banks, refuse to take a direct debit from my ASB Business account to pay the mortgage, so I have to set up an automatic payment and pay the funds into a Westpac account that I neither want nor need. But because they refuse to do Direct Debits, and also refuse to work out a standard monthly interest payment, I have to ensure that enough money is transfered to always be able to pay for a 31 day month, which means that over time, the excess paid in a 3o day or 28/29 day month builds up.
Now usually when it gets to about this amount, I transfer the funds back to ASB, where I can actually use it. This month, I decided that rather than doing that, I would like to actually pay these small amounts off the mortgage. It’s my Highest interest rate, it also has the highest Loan to Value Ration (LVR) of any of our mortgages – in fact it’s about 100% of the current value of that property. So for many reasons its actually not a bad idea to pay even a little off that one. So how much are they gonna charge me to pay them $600?
$151.77 
Yep – an eye watering 25% of the amount I actually want to pay off the mortgage. Seems theres not even the option to pay off upto 10% a year from your fixed rate mortgage, which most banks allow.
Now to be fair – I do need to take some responsibility here – I signed the mortgage papers without understanding this – and I didn’t make it clear to my broker (That I remember anyway) that I expect to be able to pay a certain amount off a fixed rate mortgage each year without penalty. On saying that – I do feel mortgage brokers should include this automatically for you anyway. They are supposed to be looking out for our best interests, and I think this is something that should be included as a matter of course.
Now, I’ve looked back at some old blogs Ive written on this topic – and there is supposed to have been an investigation into ridiculous break fees charged by New Zealand banks. And Phil Goff, the leader of the Labour party called for banks to be more flexible. But it seems sod all has happened.
Be warned: Westpac have draconian and inflexible charges if you want to pay even a cent off a Fixed Rate mortgage. The fees are unreasonable, and the bank is known to be inflexible if you start having problems – which is beyond stupid. I happen to know that rather than helping some people by altering the terms or rates on some mortgages, Westpac forced 2 mortgagee sales and lost a staggering $350,000 on the sale of those properties in the block our investment is in. A decision which directly affected the Value of our own apartment, which is what makes our LVR on that so high.
I absolutely recommend you never get a mortgage with Westpac! Ever!
If anything goes wrong – they won’t give an inch, and will lose hundreds of thousands of dollars rather than help you out. As much as I might dislike ASB charging me fees – I will never move banks because they still let me actually manage my mortgages – certainly Westpac don’t. I have asked my new manger (I think I’m on my 6th one in three and a half years – they seem to get through staff like a case of the runs) if someone can try and be flexible over this – we will see if I get anywhere.
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Is Credit Scoring changing?
Filed under: Banks, Interest Rates, Credit Cards & Mortgages in NZ
Credit Scoring is the really blunt instrument that banks use to determine whether you are worthy to borrow money from them. They don’t really look at much, but essentially get a “Credit History” on you off a Credit Reference Agency. (Equifax or Experian in the UK, VEDA in New Zealand).
Now, according to an article I came across in the Herald, that might be changing.
It seems the privacy commissioner here in New Zealand is looking at whether or not lenders could be given access to more information about your financial history – so they get a better picture. Now usually, I’m the last person to believe that people should get more info on you than they have already. In fact I can get quite “testy” with people who insist they have a right to private information that they – in fact – don’t have a sodding right to. (Vodafone for example who claimed I was being “rude” when i refused to give them contact details for a “Friend” so I could get a bloody mobile phone.)
In a case like this though – where I’m asking a bank to lend me money – I actually don’t mind them having as much financial information as they want. I’m still not going to give them my friends details though!
The idea is that credit referencing would move to “Positive Reporting” – that is how good you are at paying your bills, what sort of lending you already have, who its with and for how much. Rather than right now where all they can see is if you have defaulted on a payment. Some people in the industry also think its a good idea to be able to see how much of a loan is used – which is great when looking at any credit cards or revolving credit loans you have: the limit may be $20k, but if you only routinely use $2k of it – why should a lender only look at it as a $20k loan.
In its submission to the Privacy Commissioner, finance company GE Money said the number of people being declared bankrupt or approved for the brankruptcy [sic] alternative, the No Asset Procedure regime had been on the rise.
It calculates the “negative” credit reporting system gives only a 10 per cent picture of a person’s true credit risk. The changes proposed so far would provide an additional 20 per cent, it said. Including current account balances and 24 months’ payment history would boost that to 50 per cent.
That’s a bit scary really. You mean to tell me that decisions on giving credit to people are currently made on the basis of 10% of the information???? No wonder the world got so screwed up with a credit crunch and recession. Even with these changes – it doesn’t look really good.
So all in all – I’m in favour of more info going to the lenders - on the proviso that they can’t ask silly questions that have no relevance – like Vodafone insist on.
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Arghhh – having to pay interest on the credit card!
Filed under: Avalon's Money Thread, Cost of living, Interest Rates, Credit Cards & Mortgages in NZ
Well, for the first time in five and half years – I cannot pay off the whole balance on our credit cards, and we will be paying interest.
This is quite depressing.
I guess I should be happy that its only likely to be a few months where we have to pay, and that we have been able to organise our finances so well for so long that we haven’t had to do this thus far while we have lived in New Zealand. But still – its damned annoying.
Especially since the interest rate is a whopping 19.95%
So – from here on in – hard nosed budgeting and spending restrictions to get us back on track as fast as possible.
Why has this happened?
Some really big bills I’m afraid. Despite the emergency fund, which I still have some left of, we have had some really big expenses come through and no income. The emergency fund is coving our living expenses and top ups on the rentals, but it cant cover:
- Some large medical bills.
- Set up costs for Hubby’s contracting business.
- Legal fees
- Buying furniture for an apartment in the city. (and yes – even though we have 2 houses worth of furniture – it still turns out we need a few things – that was a depressing moment!)
Hubby has income coming in now, but almost all of it is paying the setup costs: new computer, travel, phones, internet bills, city pad – it all adds up.
And at least this time I actually know what I’m doing. I know how to work through the budgets, I know how to cut costs, and I know how to stick to the harder decisions. One thing I am sure of – that debt is not going to be there long. Ill be paying money into it as soon and as often as I can.
I’m just not sure how to cut my coffee budget
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What if economists ran the world?
With all this talk of politicians fiddling their expenses and paying for all sorts of entertainment with taxpayer funded credit cards, there’s some question about whether other people could run the place better.
I was listening to a Freakeconomics radio podcast (From the 24th March, you’ll find it on iTunes) the other day about how great the world would be if we ditched politicians and let economists run the world.
humpfh
Anyway, it went something along these lines;
Economists, mostly ignored.
[A small affectation normally reserved for great things like The Hitch Hikers Guide to the Galaxy.]
Milton Freedman – a great man, with high intellect and amazing theories about how to run the optimum capitalist economy.
Which the then new president of Estonia adopted whole heartedly.
And then discovered that Freedman never had any experience of putting any of these economic ideas into practice.
So undeterred by this lack of practical experience to look at, those young crazy Estonians went ahead with the reforms.
Like privitisation, abolition of import duties/taxes, and a flat tax rate for all sources of income.
Sound familiar? Like NZ’s free trade deal with China, negotiations for similar with India, and the fervent dream of a free trade deal with the USA.
And Nationals’ changes to taxation which are bringing company, trust & personal tax rates into alignment. So perhaps we’re already living in an economists dream society?
Moving on. What would an exhaulted US economist do if he got the keys to the White House?
Abolish the Education department
Abolish the minimum wage
Legalise all drugs
ohhh interesting – now you might think this is a cunning plan to then tax the sale of drugs – just like cigarettes & alcohol. But no, alas it’s only on the theory that the Govt. spends a lot of money trying to control illegal drugs, so lets legalise them and we can stop spending all that money. So scrap the DEA also.
At least we could sell tickets to wrestling matches of Economists vs Teachers.
& legalisation of prostitution
Hmm – taxation here too perhaps?
Nope – apparently it’s all about supply & demand.
Prostitutes cost a lot of money, well apparently the one’s economists visit do anyway, so if you legalise prostitution (removing the barriers to trade!) then more ‘girls’ will enter the industry, there by bringing prices down.
Next.
Change the Federal Reserve, so it only has one thing to look after. Inflation.
No dabbling in Wall St, and all the other stuff they interfere in.
Although really you don’t need the Fed to do anything, just let the free markets run things.
[that'll be the free markets that have screwed the world economy so badly in the last few years then?]
Okay, so what does Milton Freedman’s grandson think?
Well, he is off setting up island nations so that people have a free choice about which nation they want to live in. These nations would be run by business people who would hire economists [really?!], to help them setup societies that are attractive for people to live. Unlike the countries run by our current world Govts.
Hiring economists with big brains and lots of great ideas – is that really a good plan?
Well, the interview continues with this economist who decided to take charge of toilet training their young child. Applying economic theory of effort & reward, every time the child went to the toilet, they got some M&M’s.
It worked. For two days.
This 3 year old child had rapidly figured out how to get the maximum quantity of M&M’s for minimum effort.
hmm – perhaps we need three year olds running the country so they can figure out how to work all the systems we have in place to optimum effect? You sure don’t want a brainy economist in charge who can be outwitted by a three year old.
So what would happen to the world if economists were in charge?
The worlds supply of chocolate would rapidly end up in the hands of children, while the adults sat there befuddled wondering what the heck had happened.
And interest rates went up.
Filed under: Banks, General Budgeting, Interest Rates, Credit Cards & Mortgages in NZ
Mr Bollard did as he was told by almost everyone that he would do and put the base rate in New Zealand up to 2.75%
I wait with baited breath to see what the banks do and how much is going to cost us all. Honestly – I do!
I thought it was worth sharing some gems from the article on stuff though – because its the kind of thing that is said so often, makes no sense, and doesn’t get challenged:
“With the domestic recovery on track, we expect the RBNZ will continue to hike the OCR steadily in 25 basis point moves at each meeting, barring a substantial deterioration in New Zealand funding costs as a result of the European soverign (sic) debt crisis.”
Um Ok, my mortgage has to go up becuase of something of that happened in Greece? I don’t live in Greece – I live in New Zealand! What next – a butterfly flaps its wings in Mexico and Im declared bankrupt???
Cameron Bagrie, chief economist at ANZ New Zealand, also expects the OCR to hit 5 percent over time.
I predict that one day I will die. I wonder if I can find someone to pay me to state the blindingly obvious. Rates go up, rates go down. At some point it will hit any number of numbers. Pick one – you too can be an economist!
“Along with ongoing growth in Australia and recovery in the United States, this has so far offset weak growth in some other export markets. Against this backdrop, New Zealand’s export commodity prices have increased sharply over the past few months, boosting export incomes.”
Sorry – even I cant turn that into plain English!
But basically – the banks will probably increase the amount of money they now want off you – cos NZ money just got more expensive. The reason they didn’t drop the rates when the OCR dropped was because Overseas money was too expensive. Either way – we get screwed.
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Why exactly should interest rates in New Zealand go up?
Filed under: Banks, Cost of living, Economics, Interest Rates, Credit Cards & Mortgages in NZ
The reserve bank meets tomorrow to tell us all whether our interest rates are going up. I’m not really sure why they need to bother because as usual the papers and so called “experts” have already told us they will be going up.
But why?
Well basically Reading through an awful lot of very boring guff, it’s because things are getting better financially for New Zealand. And what better way to celebrate than for some arse to tell us our mortgages have to get more expensive. I mean- it wouldn’t do for us to go out and try and spend some of the extra money we all apparently have burning a hole in our pockets!
I know life isn’t meant to be fair, but come on Mr Bollard. This year we are already getting an increase in GST, and due to the new emissions trading scheme the power companies are going to increase our power bills and petrol is going to have more tax on it, even Air New Zealand is upping the cost of flights to cover it. And it’s not as if the banks are charging fair mortgage rates in line with the the reserve bank anyway. The bank fixed rates are the same as when the OCR was twice what it is now. And yet it almost worth betting real money that an increase on Thursday will be a perfect excuse for the banks to charge even more.
I just don’t get it.
They giveth with one hand and they nick it straight back with the other!
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Will KiwiBank become an AussieBank.
Filed under: Banks, Property & General Investing, Retirement, Pensions and Kiwisaver
There are rumours that the NZ (National) government are thinking of selling some State Assets. Which for many people is the worst thing a government can do and brings out all sorts of diatribes. I’m in two minds about it myself – I think it’s good to have assets – even if you are country, but also you have to be prepared to sell them if they are basically not working for you, or you are in financial trouble. There’s just no point having a boat load of shares looking pretty if you cant afford your mortgage this month.
But when it comes to government assets – a whole load of issues come up. Which as far a my admittedly not-politically-astute mind can grasp comes down to Labour wont sell them – National will. In fact just prior to the financial world crash – the NZ government at the time (Labour) went so far as to buy back KiwiRail which had previously been privatised and was failing, at a massively over inflated price of $690m when it was worth about $369m.
So the first head on the chopping block this time round looks to be KiwiBank.
Now I’m not sure of all the pros and cons of the case – but what I can tell you is I’m pretty bloody disgusted at the sheer amount of bunkum being spouted about the effect this would have on new Zealand if it was sold. It’s a bit like the plonker who said that if we used credit cards we would lose our sovereignty to Australia. The way the opposition is talking it up – a float of KiwiBank and sales of shares to New Zealanders will ensure that KiwiBank is owned by the Aussies. Or even worse – in the hands of greedy “foreigners”.
And thus – ordinary Kiwis will lose out on something that they own.
But here’s the thing:
Firstly – if the Shares in KiwiBank are sold to Kiws – then it will only end up in the hands of “greedy foreigners” if the Kiwis sell the shares to make a fast buck. So who would really be the greedy ones?
Secondly – do Kiwi’s really “own” Kiwibank? If we do – where the hell are the profits we should be sharing in? The government gets a cut – which technically I guess Kiwis get back in the form of government spending – but c’mon! That hardly the same as being a shareholder and having a stake in the company – or getting dividends.
Thirdly, we also “own” most the electricity companies in New Zealand, or rather as with KiwiBank the government owns them. And how are rewarded? With ridiculously high electricity prices which just go up and up and up while the companies we “own” make more and more profit. Its estimated that we have been overcharged by the electricity companies we “own” to the tune of $4.3 Billion in the past 5 years. Hmm – yes – ownership of companies via the government is really working for us.
So all in all – when you hear about the horror of selling national assets – don’t necessarily believe what the papers are telling you. If you disagree with privatisation – fair enough. But just take a moment to wonder if you are being fed a line that is somewhat an exaggeration. That’s not to say that selling KiwiBank (or anything else) is a good idea. Just that it wont cause the destruction of life as we know it.
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