Budgeting Archives - Mortgage Advisers - Mortgage Lab

Could parents use KiwiSaver as a method for rewarding children in the form of pocket money?  Read on to see how one of our clients is not only successfully doing it but also teaching their children about the magic of compound interest.

Compound Interest

Whether Albert Einstein ever actually said that compounding interest is the eighth wonder of the world is debatable.  Regardless, the sentiment grows increasingly more and more true every day (see what I did there).

Compound interest is the effect of invested money receiving regular interest payments that are reinvested and allowed to grow.

For a simple example of this, let’s look at $100 invested at 10% per annum (a high interest rate but easy to calculate).

Day 1 – $100
1 year – $110
2 years – $121
5 years – $161
20 years – $739

So an investment of $100 has increased to over $700 in 20 years and will increase by another $73 the next year.  We are almost at the point where we are doubling our initial investment every year, all thanks to compound interest.  If you had simply left in the $100 and taken out the interest, you would have received $200 of interest and still only have your original $100.

Saving for young children

It shouldn’t come as a surprise that putting money aside for young children is therefore going to result in huge returns for their retirement.  Let’s look at an example of $1,000 of savings put into an investment fund for a newborn.

Let’s assume the savings will average 10% return on this fund but let’s take off 2% to allow for tax.  So an 8% return over 65 years would mean a total savings of $178,000 upon retirement.  While this isn’t enough to retire on, it shows how $1,000 can change into a much larger amount given enough time.

There are 2 thing to really acknowledge here.

Don’t put it off

Leaving it until later in your child’s life significantly reduces the amount saved.  $1,000 given to a 20 year old – as opposed to a newborn – will mean ~$36,00 in the fund at retirement instead of $178,000.

Regular small deposits can massively increase the end result

If you can afford it, even a small regular deposit will grow your child’s retirement savings.  This is all thanks, again, to compound interest.  Remember the initial deposit of $1,000 which became $178,000 at retirement.  Well, if we add another $20 per week onto that for 65 years you have deposited a total of $63,400 into the fund however that fund has grown to $2,318,000 (based on the same 8% average growth).  At this stage, we’re talking serious money to retire on.

Pocket money and KiwiSaver

So, if pocket money is one of the methods you use to facilitate family-based child-slavery, then consider putting some of that money into KiwiSaver.  Notice I say some of it.  Children don’t wash dishes on the promise of an easy retirement in 50 years time.  You’ll probably need to give your child some actual money too.

But it’s a great opportunity to teach your children about interest.  For this article, I have been using this compound interest calculator.  Feel free to play with it. Here’s an example that might encourage the savings bug.

Let’s say your 10 year old child has $5,000 in their savings.  You’re putting $20 into that fund per week (in the calculator, I put $80 per month).  The calculator is showing a total of $1,358,934 at retirement in 55 years.  What does it show if they deposit one $20 note into that fund?  Not multiple, just one note.  The answer is $1,360,540.  A difference of $1,606.  $20 put into their fund today gives them $1,606 at retirement!

Summary

I know that pocket money put into a savings account or KiwiSaver will not thrill most children.  I can hear parents screaming at the screen right now.  But I do suggest taking the opportunity to show them what a little savings means for their retirement.  The calculations haven’t taken into account purchasing houses in their early adult life and all other sorts of life events that will affect their savings.  The bottom line is, however, the sooner you can start putting money aside for your child’s retirement, the easier it will be for them.  All thanks to the magic of compound interest.

Join The Mortgage Lab, Share NZ and Kendons Accounting for an hour  of industry learning.  We’ll also have beer tasting from Boneface Brewery Co and catering by the award winning Island Bay Butchery.

Best of all, you’ll earn LBP points for attending.

Where: Mitre 10 MEGA, Upper Hutt
(in the Trade Drive Thru)
When: Wednesday 14th March 2018
Time: 4:30pm
RSVP: terri.maguire@sharenz.com, 0275 0275 19

Click here to download the brochure

Purchasing your first home can be confusing.  The key to being ready to buy is to be organised.  Here are 3 things that first home buyers can do today to get ready to apply for a mortgage.

Order their Credit Report

Ordering your own credit report is free.  You can a nice and simple indication from Credit Simple or you can get the whole report (I recommend this) from Equifax. This second option can take a couple of weeks (my latest one turned up in 4 days though).  This will allow you to see exactly what the bank is going to see about your history.  If anything isn’t correct, now is the time to address that.

Tidy up your spending

Look through your last 3 months of bank statements.  Are you spending more than you earn or going beyond the limit of your bank account?  This is called going into “unarranged overdraft”.  To a bank, these 2 words send up a big red flag.  Once is usually ok, but more than that and getting a mortgage is going to be difficult.

You can limit how often this happens by setting up a spending account with automatic payments going out.  You’ll know exactly how much is going to be spent and how much is in the account.

Key point: don’t have an eftpos account attached to this expenses account.  You’ll end up over spending and going into overdraft again.

You can download a copy of The Mortgage Lab’s Excel Budgeting Spreadsheet here.

Get proof of your income

The bank is going to want to see your income and it won’t usually be enough to show them the money going into your bank account.  Banks like to see payslips because they show how your income is made up (ie; is it a base salary or commission).  The bank will usually want to see the most recent 3 payslips so if your HR department is a little relaxed in this area, get them working on it now.

If you are self-employed, you will need to have this year’s most recent Financial Statements (between October and March).  You can see our blog on when you need to update your Accounts.  Since Accountants are often busy, these can sometimes take a while to source so talk to your Accountant early.

Bonus Tip

If you’re ready to apply for a mortgage, it’s also time to look at your Life and Health insurance.  You’re going to be signing a contract for a large amount of money and need to make sure you can pay for it.  Find an insurance adviser who you like and feel is looking after your best interests.  We believe the best advisers only advise on insurance which is why we don’t offer it in our company.  They should be comparing several different products and choosing the one that suits you the most.

Summary

You can start getting ready to buy today by:

 

We all enjoy saving a bit of money, especially if you’re looking to buy your first home or if you’ve just got your first mortgage.

There are all sorts of convoluted ways to save money.  Some of them are easy (eg; ditch the expensive TV subscription and get yourself Netflix, Lightbox or Neon) and some of them are disproportionately hard (eg; setting up a grey water system to water your plants to save on Water Rates).

My initial budgeting suggestion for new “budgeters” is, pick the low-hanging fruit first.  And the easiest of all is to find what you’re paying too much for and find a place that sells it for less.  Groceries are a good example of this.  The price between supermarkets is astronomical for essentially the same product.  Petrol is another.

The Great Gaspy

This is where Gaspy comes in.  Whenever you open Gaspy, it will find you the cheapest fuel nearby.  And the range in prices is amazing!  For Diesel, my local price ranged from $0.99 – $1.17 per litre.  That’s an 18% difference.  Or to put it another way, if I normally spent $100 per week on fuel, I could save $936 per year by knowing the cheaper petrol stations around.

Now it’s not worth driving 30 minutes to save yourself $18 (or maybe it is!) but if you get in the habit of opening up the app when you’re below half a tank, then you are sure to pass a cheap spot sooner or later.

And as an added extra, the app summaries where the cheapest and most expensive areas are in NZ and it’s not where I would have expected!  You can find the link to the pdf here or you can generate the list yourself on the app.

If you haven’t tried Gaspy yet, give it a go and let us know how you find it.