The worst financial decision you can make

Date Published: 7 January 2024

Saving is a long, slow process. That’s why so many of us are so bad at it.

You could put $20 aside every week and after a year, you’ll have just over $1,000.  Or you could just buy a few coffees, maybe a smashed avocado on toast, and not be noticeably worse off. After all, what’s $1,000 going to buy you if you live in Auckland? Also, avocados are delicious. 

Where you put your money can have some effect on what that $1,000 looks like after a year. In a savings account, at 2% after tax, it’s likely to be around $1,015. For more risky investments, you might get 10% after tax. You’d now have $1,100. 

This isn’t an article about the magic of Compound Interest. (This is though). This article is about reminding you of the best return you can possibly get for your money if you are an employee. 

It is a requirement (unless your employment contract is specifically noted as a Total Remuneration Package) that your employer matches your KiwiSaver contributions up to a maximum of 3%. This is called a CEC or “Compulsory Employer Contribution”. Some amazing employers go higher but the minimum requirement is 3%. 

So, if you earn $50,000 per year, you will be putting $1,500 (3%) into your KiwiSaver. Your employer must contribute an additional 3% but that will be taxed meaning you’ll end up with an additional $1,050 (approximately). 

Let’s be clear about this. By putting $1,500 aside into your KiwiSaver, you now have a total savings of $2,550. This is before we’ve added on returns from your investment and the Members Tax Credit. The total after all these should be well in excess of $3,100 or well over double the amount you’ve saved. 

What does this mean for your retirement?

I said that this article wasn’t about compound interest. Well, I lied. It’s about to be. 

Because if you’re 30 years old and planning to retire at 65 years old then just putting in the $1,500 from your salary will mean you end up with around $370,000 (assuming 6% per annum return) at retirement.  

Of the $370,000, you have put in $52,500 ($1,500 x 35 years) and the other $317,500 is from your Employer, the government and profit from investing. You’ve literally multiplied your money by 6. 

This is almost impossible in any other investment – let alone any other investment that is comparably low risk. 

The other thing you may have noticed… this doesn’t allow for a single pay rise in the next 35 years!  Now, I don’t want to talk you up too much but you really deserve a pay rise… well, at least one in the next 35 years anyway. 

When wouldn’t you put 3% aside from your salary?

There are exceptions to every rule. Remember, the money that you put into KiwiSaver is locked in; especially once you have bought your first house. So if you are living pay-check to pay-check and can’t afford to lose 3% of your salary, then this may not be possible. There is no point in missing important payments (like your power bill) because you are saving for your retirement. 

But before you say that you can’t afford 3%, ask yourself are you really unable to go without or are there some luxuries you could give up if you started contributing to your KiwiSaver? Because if $52,500 turns into $370,000, that means your $5 triple strength, de-cafe, almond-milk latte is actually costing you $35.23 from your retirement savings. And that is close to the worst financial decision you could make.

Mortgage Lab’s mission is to be the digital town square for financial decision-makers to gain knowledge about their current and future mortgage. Follow us on Facebook and LinkedIn or subscribe to our newsletter to be notified of our latest articles.

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