InvestNow Added SmartShares ETFs into their Offerings

InvestNow announced they added 7 SmartShares ETFs into their investment platform. They are the following:

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You can access to those ETFs from SmartShares, Superlife, and Sharesies (on some ETF) already. I’ve compared the cost on those ETFs on the previous post and concluded you should get most of the ETF from Superlife except US 500; SmartShares was the better choice for US 500. You can check out the related post below

Related post: Compare ETF Fund Cost between Superlife and Smartshares

Cheapest Option for US 500 ETF

Smartshare was the cheapest option for investing in US 500 ETF because of the low management fee at 0.35% and no annual admin fee. There is a $30 set up fee if you use SmartShares contribution plan and at least $30 exit fee when you sell your ETF.
If you buy or sell the ETF on the share market, there will be $30+ transaction fee on each transaction. Superlife US 500 ETF fund has a higher management fee at 0.49% and charges a $12 annual fee. Sharesies have the same management fee with SmartShare, but they charge $30/year on admin fee. Therefore SmartShares contribution the cheapest option for US500 ETF investing.

Now InvestNow added SmartShares ETF into their offerings, it further lower the cost of US500 ETF. InvestNow offers an investment platform for investors with no annual admin fee. Investors can also bypass the $30 set up fee and the cost of exit the fund on SmartShares ETF. The minimum investment amount lower at $250 and no contribution commitment required. The management fee will be the same with SmartShares at 0.35%. Check out the comparison below.

 

 

Different Way of Contribution

By looking at the number, InvestNow investors can save on $30 set up and the $30+ cost of exit, so it appears to be a better deal to SmartShares. There is a difference on how you contribute to the fund between Smartshares and InvestNow. Take a look at the function difference below.

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The main limitation for InvestNow investors is the lack of small amount direct debit. SmartShares Investor will be committed to at least $50/month contribution (can be stopped at request). InvestNow investors are free to contribute whenever they want. However, the minimum contribution amount will be $250/transaction. If you only have $50/month to invest, you will have to put money in InvestNow once every five months to reach the $250 requirements. So on the one hand, you will save $30 in the beginning, but you will miss five months possible loss/return.

Compare Return Between InvestNow and SmartShares

To work out which one is the better deal on US 500, I ran an analysis to compare the return between InvestNow and SmartShares.

I assume the investor has $500 available to invest and can contribute $50/month. With SmartShares, the fund going to start with $470 due the to $30 setup fee and the investor will contribute $50/month. At InvestNow, investor’s fund will start with $500 and will contribute $250 every five months. The investor will continue for five years (60 months) without any withdrawal. Expected return rate is 10.32% before tax. Here is the breakdown.

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Although SmarShares charge a $30 setup fee up front which lowered the starting amount to $470, they ended up with a higher end balance at $4,640.51. The reason is Smartshares investor contribute $50 every month, and those funds are growing while InvestNow customer’s money is sitting in the bank doing nothing.

Here is the result of different levels of contribution at the end of the fifth year.

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SmartShares investor has a higher return over InvestNow at a lower rate, the gap close as they reach $250 marks. I stopped at $250/month because once you can contribute that amount, you can put money in InvestNow every month. From this point, InvestNow customer will always have better return over SmartShares

It seems SmartShares will be a better deal if your contribution under $200/month. However, there is a flaw in this analysis.

In my assumption, I set the rate of return at 10.32% for all five years. It assumpts the share price of the ETF going up in a straight line and investor will have a positive return every month. However, in real life share price goes up and down every day. By contributing less frequently, InvestNow investor may lose some of the gains during those five months, but they also avoid some drop as well. Afterall, the share price looks like this in real life.

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Applying Real Data

So I collected the share price of US 500 ETF for the past 24 months and plugged that into our analysis. Here is the result. Click here to see the ROI. 

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This time InvestNow ended up with a higher balance over SmartShares. In fact, Investnow beats SmartShares on every contribution level with past data. Check out the result below.

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The Real Deciding Factor

No one knows how the US 500 ETF is going to perform in the future so either service can be cheaper. If you look closely at the amount, the cost difference between InvestNow and SmartShares are insignificant, less than 0.1% of your fund. So investors will need to consider their contribution level and the experience of those two services.

In my opinion, InvestNow functions and its user interface are much better than SmartShare. InvestNow have a modern, clean and easy to understand platform. SmartShares’ holder will be checking their current stock holding on Link Market Service web site. The interface feels like it stuck in 2010.

Related post on InvestNow and SmartShares (Link Market Service)

The main limitation on InvestNow is lack direct debit option, so it’s not a “set and forget” type of investment solution. The investor will have to deposit the money into InvestNow platform and manually invest US 500 ETF on InvestNow website. InvestNow said the direct debit function is on the road map so the situation may improve in the future.

Link Market Service interface for SmartShares is not good, but you can view your holding on other services like ShareSight, Google Finance, and Yahoo Finance to improve that experience.

Conclusion

It’s great to see InvestNow adding more and more fund onto their platform. I prefer InvestNow interface and function over SmartShares. However, I understand everyone circumstances are different so here are some recommendations which service you should consider on US 500 ETF.

  • Use SmartShares if you want a ‘Set and Forget’ solution and you plan to contribution between $50 – $200/month.
  • Use InvestNow if you like their user interface (you can register for free on InvestNow to check out the interface), don’t want to commit to a monthly contribution plan and happy to invest manually at minimum $250.
  • Use SuperLife if you already have a portfolio with SuperLife and want to have all funds under one flexible service with great functions.
  • Use Sharesies if you like their interface. Check out my comparison here.
  • For other ETFs, you should use SuperLife, here is why.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

 

 

How to Check Your Investment Fund and KiwiSaver Fund’s Admin Fee

A reader asked me about their Superlife fund charges. She notices something funny on her transaction list: Instead of charging $1/month on admin fee, she got charged $1/day.

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After checking my transaction, I believe those charges are incorrect and she contacted Superlife. Superlife immediately said the charges were wrong and reversed them straight away.

This is a good reminder for all investors to a take look at their transaction once in a while. I am all for ‘set and forget’ method to invest but we should look at those charges maybe once or twice a year. Not only to Superlife but all of your investments including your KiwiSaver.

I have account with Superlife and KiwiSaver with Simplicity, here is how to check those transactions

Superlife

Go to superlife.co.nz and click on “Log in”

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Click “Transaction history” on the left

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Select ‘last 12 months’ on period, select ‘All’ on Funds, select ‘Administration Fees’ on Transaction types.

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They should charge $1/month. (The $2.75 charges was before the admin fee price drop)

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Simplicity KiwiSaver

Go to Simplicity.kiwi and Log in.

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Click ‘My transaction’ on the menu.

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There will be a list of transactions and Simplicity should charge $2.5/month on member fee.

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If you are with a different fund or service and don’t know how to check transactions, call the service provider and ask them.

If there is anything out of the ordinary, you should contact the fund manager and get them to correct that as soon as possible.

Quickly Work Out How Much You​ (Roughly) Saved

Wealth is not about how much you make, it’s how much you saved.

Most people have a pretty good idea of their income every week/fortnight/month. However, in personal finance, the important number is not the amount you made but how much you managed to save. This figure is calculated by your income minus your expenses. It sounds easy, but you will be surprised as lots of people have no idea what their expenses are. Hence they don’t know how much they saved. They may be doing alright, or they may over spend every month. Without working out those numbers, you simply don’t know.

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No worries, there is a simple way to work it out.

To work out how much you save, you will need to make a profit and loss statement on your finances, just like the financial report for the company. Yes, it may seem time-consuming and lots of hard work, especially for those people who are not good with numbers. So for those lazy Kiwis out there, here is a quick way to roughly work out your saving amount, expense and saving rate in about five minutes.

What Numbers Will You Need?

To do this lazy version of profit and loss statement, you will need three sets of numbers.

Bank Balance this month: Go and gather the balance of ALL bank account, including cheque, saving, serious saver, term deposit and credit card. You can get this number from internet banking or bank statement. For example, today is 28/7, so I need to find out the account balance of 1/7. Make sure you record the credit card balance as negative. Add them all up to get your current cash balance.

Bank Balance 12 months ago: We need another set of account balance (cheque, saving, serious saver, term deposit, and credit card) to compare the numbers. Try to get the balance from 12 months ago, so we cover the income and spending for a full year. You can get that from internet banking (search the balance history) and old bank statement. Add them all up to get your cash balance 12 months ago.

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Check out the example above. In July 2016, we have a $2000 term deposit, and it matured during the year. So in July 2017, the term deposit is $0. On the other hand, we opened up a new serious saver account during the year, so in July 2017 we have a second serious saver account with $2800.

Your income after tax and KiwiSaver: We will need to get the income for your last 12 months.

  • If you are employed, you can get your gross pay on your pay slip.Also, you can log on to MyIR at IRD to check your gross pay.
  • If your income hasn’t changed much during the year, you can use one income to estimate a full year income. You just need to multiply your weekly pay by 52, fortnightly pay by 26 and monthly pay by 12.
  • If you know your annual income before tax, put that number into paye.net.nz, and they will calculate your take home pay.
  • If you have another source of income outside employment, you will need to add those in as well. (Like Investment income, rental property income)
  • If you have uneven income or self-employed, you will need to sit down and review your bank transaction to work out your income.

If you can’t get the bank balance 12 months ago, you will need to adjust your income for the same period. For example, you can only get the balance 6 months ago, then you will need to calculate your income during this 6 months period.

Saving Amount

We can work out your saving amount with those two bank balances. Let’s look at our previous example.

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In July 2016, the total balance was $17,220 and in July 2017 was $20,596. During the year, the balance increased 20596 – 17220 = $3376. So our annual saving amount is $3,376, average is 3376/12 = $281.33/month.

Expenses

To work out the expenses, you will need the annual income amount with those two bank balances. The logic behind the math is very simple. You started with your Bank balance 12 months ago: During that year, you made some money, you spent some money and you ended up with the current bank balance.

To turn that statement into a formula will be :

Bank Balance 12 months ago + Income (after tax) – Expense = Currently Bank Balance

We move around that formula, we will get:

Expenses = Bank Balance 12 months ago + Income – Currently Bank Balance

Using our example with a 55K income ($43,065.5 after tax and KiwiSaver). The expense will be

17200 + 43065.5 – 20596 = $39,669.5/Year, $3,305.79/month

Saving Rate

Saving rate is the percentage of income you managed to save after expenses. The math is:

Saving Amount / Income Amount = Saving Rate

Using our example with a 55K income ($43,065.5 after tax and KiwiSaver). The saving rate will be

$3376 / 43065.5 = 7.84%

Why do it over a 12 months period?

The main reason we try to get the bank balance and income for a 12 months period is that our spendings are uneven through out the year. Most people will spend more toward the end of the year because of Christmas and new year. If you only cover 6 months from March to September, you may under estimate your spending. If you cover November to May, you may over estimate. So it best to cover a full year.

What If you buy or sell something big during the year?

For example, if you purchase a Car during the year for $10,000 and you are not the kind of people buy car every year, you should exclude that in your bank balance.

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On the other hand, If you sold your car for $10,000 during the year and you are not doing that every year, exclude that as well.

Basically, we are trying to work out the saving from your typical day to day income and expenses while ignoring one-time big event.

Should you exclude investment contribution?

Some people may use their savings to do some investing like KiwiSaver contribution, Index fund investing, top-up mortgage payment on rental property or pay extra on your own mortgage. If we calculate the saving with our previous formula, we will treat those transactions as expenses.

Bank Balance 12 months ago + Income (after tax) – Expense – Investment Contribution = Currently Bank Balance,

We turn it around

Expense + Investment Contribution = Bank Balance 12 months ago + Income – Currently Bank Balance

You can see investment contribution inflated the expenses amount. In my opinion, the reason we calculate the saving amount and saving rate is to work out how much money we could invest for our future. Therefore, I will include some investment contribution into all calculation.

I will categorize those investment contributions into two group, Voluntary and Involuntary. Voluntary investment is those you can stop contribution anytime if you choose, like your Superlife/SmartShares contribution, KiwiSaver top-up or you made a lump sum repayment on your home mortgage. Involuntary investment is the one you are obligated to pay, like mortgage top up on your negative cash flow rental property. You have to top up those mortgage payment every month. Otherwise, the mortgage will be in arrears.

Here is an example, during the year, you have the following amount went to investment.

Voluntary:
SmartShares Conrtibution – $1,200
P2P Lending – $500
KiwiSaver Top up – $1,043
Own home mortgage voluntary repayment – $500
Total: $3,234

Involunary:
Rental home mortgage top-up – $3,500

Here is the Saving amount after invesment exclusion on voluntary invesment.

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The adjusted saving amount will be 23839 – 17220 = $6,619/year, $551.58/month

Adjusted Saving rate will be 6619 / 43065.5 = 15.37%

The adjusted expenses will be 17200 + 43065.5 – 20596 – 3243 = $36,426.5/Year, $3,035.54/month

What’s the Limitation with this method

This lazy method will give you a rough idea on much you saved, but it comes with limitation and flaws.

  • Rough figures: The bank balance will be accurate, but your income amount may not be. It depends on how you collect and calculate your income amount. If there is any error in income, the expenses amount will be off.
  • No expenses break down: You will have a rough figure on your expense, but there is no break down on where you spent the money. You simply don’t know where you spent your money without a line by line breakdown.
  • Ignore interest income: This method ignores interest you made on your deposit. If you have $20K in the bank with 2.5% interest, it will generate about $330 after tax interest. It is not that much compared to average income, but if you have $200K in the bank, that will be $3300.
  • Ignore seasonal fluctuation: This method worked out the income and expenses throughout the year and divided by 12 to get the monthly average. However, in reality, our spending fluctuate every month. In winter, we will spend more on power and gas, we shop more during Christmas and new year and, we may travel during the summer. All those factors will affect your month-to-month expenses and saving amount. You may overspend in some months while saving a lot in others.

Without knowing your saving amount is like driving down a country road at night with headlights off, you may be driving into a hole without knowing. Hopes this straightforward and lazy method will provide a rough idea of your saving amount and shed some light on your financial situation.

If you want to get into the details of your finances, you will have to spend time and do a detail report. We will get into that in the future.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

Understand Interest & Principal on Your Mortgage Payment

Do you know how much interest you are paying on your mortgage? No, I am not talking about the interest rate. How much interest in the dollar amount you are paying on your mortgage? Also, what proportion of your mortgage payment goes to interest? Do you know how many years it will take to pay off half of your mortgage? (spoiler: more than 20 years with 5% interest rate)

Most home owners know their mortgage payment like the back of their hand, but not all of them can tell you how much interest is in the payment. Some new house owner is surprised when they read the mortgage statement and found out how little money went to mortgage repayment. Let’s look at the interest and principal on our mortgage payment. I will be focus on the simple interest mortgage with a fixed interest rate and fixed payment amount for 30 years.

Interest and Principal

Every mortgage payment in New Zealand will contain Interest and Principal.

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The principal is the part of your mortgage payment that goes to repay the amount you borrowed. It starts out with a small amount and increases on every payment. Eventually, the total principal paid will be equal to the amount you borrowed.

The lender (usually Bank) took up risk to borrow you money on a house purchase. Interest is the reward for taking that risk. They are profit for the lender and expense for the borrower. Interest rate could be different for each different borrower. Usually, a low-risk borrower will have a lower interest rate compared to a high-risk borrower. At the lender’s point of view, to take a higher risk borrower, they will charge higher interest to compensate that risk. A significant amount of mortgage payment will go to interest payment at the beginning of the mortgage and decrease on every payment.

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Proportion of interest and principal on a 5% interest, 30 years mortgage

How Much Interest you are paying?

We will use the following simple interest mortgage as an example.

Mortgage size: $500,000
Term: 30 years, pay monthly
Interest rate: 5%
Monthly payment: $2,684.11

For your first payment, $2083.33 will go to interest and only $600.77 will go to principal payment. That’s 77.6% of your monthly payment go to interest expenses.

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Breakdown on your mortgage payment during the first year

For the first year, you will pay $32,209.30 in mortgage payment, $24,832.47 will go to interest, and you only reduce your mortgage by $7,376.83.

Why most of your payment went to interest in the beginning?

You may be surprised only 23% of your mortgage went to principal payment and wonder why most of your payment went to interest in the beginning. I was angry and thought it wasn’t fair. So I dug in and worked out how the banks come up with that amount.

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First, under the terms of the mortgage, interest is calculated daily and compounded monthly. What it meant was the bank will charge interest on the mortgage every day and recalculate the mortgage amount and interest every month. The interest rate (5% here) is an annual rate, so one day of a 5% interest will be 5% / 365 = 0.013699%. Bank will apply that one-day interest rate to your current mortgage amount $500k. At your first month, you will be paying $500000 x 0.01369% = $68.49 every day on interest. Here is the daily breakdown on the first month of the mortgage.

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You may notice on 31/7, the interest amount is only $28.54. The reason is that when we calculate the monthly mortgage payment, we are not calculated based on how many days in a month. We just divided the full year (365 days) by 12, so every payment got 30.41667 days. That’s why I have to re-adjust the 31st day of July interest by 0.41667. $68.49 x 0.41667 = $28.54.

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On 31/7, you pay $2684.11 for your mortgage. At this point, the total interest is $2083.33, only $2684.11 – 2083.33 = $600.77 go to reduce the $500K mortgage. At 1/8, your new mortgage amount will be $499,399.89 and you daily interest will be $499,399.89 x 5% / 365 = $68.41. At the end of the month, we will accumulate $2080.83 in interest. By paying the same amount of mortgage payment ($2684.11), you will reduce the mortgage by $2684.11 – 2080.83 = $603.28.

When you compare the numbers on both months, your monthly payment amount is the same. Since you reduce the mortgage amount by a little bit in your first payment, the interest on the mortgage at the 2nd month will be reduced. That explains the interest payment will keep decreasing and principal payment keeps increasing. The reason we why most of your payment went to interest payment is because your mortgage amount is high in the beginning. Lots of interest was charged and most your payment went to pay off those interest.

How does pay extra on your mortgage reduce the interest calculation

In my last post, I said one thing you can do to reduce the interest paid on your mortgage is by paying extra on the mortgage. Let put that in our example and see how $100/month extra can reduce the interest.

The first month will be the same as we haven’t made any payment. We will still have $2083.33 interest needs to pay. However, if we increase the monthly payment to $2183.33, we will reduce the mortgage amount by $2183.33 – 2083.33 = $700.78. On your second month, the new mortgage balance is $499,299.22 and the daily interest will be $499299.22 x 5% / 365 = $68.40. At the end of the month, we will accumulate $2080.41 in interest, $0.42 less.

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You may think that just $0.42, hardly make any difference. However, that is the saving on the second month only. You will save more and more each month. Paying extra on the mortgage will have a knock on effect on the mortgage amount reduced. You will end up pay off your mortgage in 27.6 years and saved $42.6K on interest.

Breakdown interest paid by years

Now we took the $500K mortgage break it down by years. Here is what you will pay over 30 years.

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Some interesting facts here:

  • 77% of your first-year payment went to interest.
  • By the end of the mortgage, you will pay $500K on principal and $466.3K on interest. You almost paid twice on your mortgage.
  • For the first 16 years, over 50% of your payment will go the interest.
  • You will pay almost half of the total interest on the mortgage in your first 10 years. Therefore, lenders make half of their profit in 1/3 of the time.
  • After paying 20 years, you still owe over 50% on your mortgage.
  • You will pay off $253K in the last 10 years of the mortgage.

That’s why Bank love mortgages, and it’s their bread and butter. I personally feel angry reading those facts. I put reducing mortgage as my top financial priority. On the other hand, inflation is another factor helping to reduce the ‘real’ cost of the mortgage, we will get into that in another post.

If you want to find out the breakdown on your mortgage payment, you can check out this mortgage calculator on mortgagerates.co.nz.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

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Understand the Math of Mortgage

I spent a lot of time here talking about investing in New Zealand. However, if I put my money where my mouth is, I spent more money on reducing my mortgage compares to investing. So let’s take a break from investing and talk about the mortgage, which is one the top three investment options in New Zealand.

We are one of the lucky ones who luck into a house before house price went batshit crazy between 2013-2016. However, since we brought Auckland, the mortgage amount is still huge dispute we put down more than 20% deposit. So reducing that mortgage have been my top priority and I spent a lot of time to research and study on mortgages. It turns out the mortgage is just a mathematical formula. If we understand the factor of that formula, how to pay off the mortgage early is not a secret at all.

The Formula of Mortgage

A mortgage is a loan to buy a property. You borrow money from the lender (usually a bank), and you are obliged to pay back with interest. The lender uses the property as security. Here is the formula of Mortage.

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A is the payment on each term.

L is the mortgage amount (or Principal)

r is the interest rate

n is the term

So the mortgage formula based on those four factors and they are interconnected. If you follow the mortgage plan and make the payment each term (usually every fortnight or month), by the end of the term, you will pay off the mortgage and plus interest.

(You don’t need to calculate the mortgage on your own. There are hundreds of mortgage calculator online, I recommend the Mortgage Calculator on Sorted)

Interest and Principle

Each mortgage payment will have interest payment and principal payment. The principal is to repay the amount you borrowed, and interest is profit for the lender. At the beginning the mortgage term, most of the payment went to interest, and only a small part of the payment went to the principal.

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To work out the total interest paid on the mortgage, you will need to:

Payment amount X No. of Terms = Total amount paid

Total amount paid – Mortgage Amount = Total Interest Paid

The Game of Mortgage

 

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The mortgage is a game with four controls.

For me, the mortgage is just a game. It’s a game with 4 controls. The goal of the mortgage game is to minimise Total interest paid by changing payment amount, mortgage amount, interest rate and terms within your abilities. In New Zealand, the size of the mortgage can be range from $100k to $1mil or more. Total interest paid on the mortgage can be 30% – 130% of the size mortgage. This is a high stake game with $30k to $1.3mil of interest to be saved. Yet, the rule of the game is surprisingly simple!

We are going look into each factor and see how they affect our goal to minimise our total interest paid. We will be using the following mortgage as our default example. To keep it simple, I assume interest rate will stay the same during the whole period.

Mortgage size: $500,000

Term: 30 years, pay monthly

Interest rate: 5%

Monthly payment: $2,684.11

Total Interest Paid: $466,278.92 (93% of mortgage size)

Mortgage Amount

The mortgage amount is the main deciding factor in a mortgage. The amount you borrowed is in direct proportion to your monthly payment and total interest paid. More you borrow, more you pay every term and more paid on interest. However, the size of total interest paid compared to mortgage amount reminds the same. In our example, no matter the size of the mortgage, you are still paying 93% more on interest.

In most case, you want to borrow as little as possible.

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5% interest rate and 30 years term, pay monthly

Interest rate

Interest is charged by the lender to the borrower to offset the risk of lending money. It calculated based on interest rate. Interest rate change from time to time due to multiple factors, including official cash rate change by RBNZ,  the cost of borrowing at the lender, the length of the fixed term, demand of mortgage at each lender and more.

Increase interest rate in a mortgage formula will affect mortgage payment and total interest paid. If you took a 5% interest rate and increased that by 0.5% to 5.5%, the mortgage payment will increase by 5.8% but the total interest paid to mortgage ratio jump from 93% to 104%. So you want your interest rate as low as possible.

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$500,000 Mortgage, 30 years term, pay monthly

 

Terms & Payment

The term is how long the mortgage supposes to last and payment is how much you will pay each time. I put them together because they are closely connected in a mortgage. If we increase the mortgage terms, the payment amount will be lower but you will pay more on interest. On the other hand, if we increase the payment amount, we will shorten the mortgage terms.

In the table below, you can see if we shorten the mortgage by increase our payment amount, we will be paying a lot less on interest.

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$500,000 Mortgage, 5% Interest Rate

 

In Reality, What can you Change?

Now we understand those four factors of a mortgage and how they will affect the end game (a.k.a total interest paid). Let’s put them into a real world situation and see how we can change them to our favour. (There are many ways to improve those factors, I only covered the obvious one here)

Reduce Mortgage Amount

Since the mortgage amount decides your term payment and total interest paid, it’s better to have a smaller mortgage. With small mortgage amount, it will come with a small monthly payment amount. You can increase the monthly payment amount without adding pressure to your living budget.

To reduce the mortgage amount for potential house buyer, you will have to put down a larger down payment or choose a cheaper house.

For existing homeowner, you can reduce the mortgage amount when you mortgage terms are up for review by transfer some of your saving to repay that mortgage. (if you have the spare cash)

To be honest, it is difficult for both potential buyer and house owner to reduce their borrowing amount. With those crazy house price these days, most of the potential buyers are stretching to the maximum on what they can borrow and get onto the property ladder. Existing homeowners are already stuck with that mortgage and lender don’t like you pay them back early. So in reality, you don’t have much control on that.

(There are some tricks to reduce that mortgage with right mortgage set up. We will get into that in an upcoming blog post)

Get a Better Interest Rate

Bad news, you don’t have much control on interest rate either. The Interest rate set by the lender and each lender will have the identical interest rate. What you can do is make yourself a better borrower.

Banks love mortgages as this is their bread and butter. If you are a good borrower in their eyes, they will offer you a discounted interest rate to get your mortgage business. What consider a good customer from the Bank:

  • Owner Occupied Property, mean the mortgagor live in that property
  • Work full time with a stable income
  • Employed by established company for a long time
  • Clean credit history
  • No other debt
  • DINK (Double income, no kids)
  • New Customer
  • Willing to change your ‘Main Bank’
  • Have 20% or more equity in the house
  • A good quality house in a good location (not leaky home or potential leaky home)

Bank will consider that as a low-risk lending and happy to offer a small discount on the interest rate.

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However, the free-market is still the primary deciding factor on the interest rate so there is not much we can do about that. Kiwis used to pay 18% interest rate in 1985. Before GFC in 2008, the mortgage rate was around 8.4%. We are experiencing a historic low in interest rate at 2017.

Increase Payment Amount & Shorten the Terms

Payment and terms are the most important factor in the game of mortgage because we have control over it. When the bank says you need to pay $2684.11 for your $500K mortgage, it’s not the absolute amount! It’s just the minimum amount you’ll need to pay. You can always tell the bank you what to pay more. Let’s see how the term and total interest paid change when we pay more on our mortgage.

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$500,000 Mortgage, 5% interest rate. Minimum monthly payment at $2684.11.

By simply put $1/day extra into your mortgage payment ($30/month), you will shorten the mortgage by 9.6 months and save $13.8K on interest. If you can add $10/day extra into your payment, you can pay off your 30 years mortgage in 24 years and saved $106,644 in interest.

It may be hard to do in the first couple of years, but your income will likely to be increased while the mortgage payment stays the same. Combine that with careful budgeting and frugal living; you can put more and more into your mortgage and reduce the interest paid.

The Secret of Paying off Mortgage

Now you understand the four factors of the mortgage and how you can improve them. The secret of paying off mortgage fast and win the game of mortgage is very simple.

Get the smallest amount of mortgage with the best interest rate discount, pay it off with the biggest payment amount you can afford.

That’s the fundamental principle of getting out of debt; it does not only apply to the mortgage but other consumer debt as well. Every single tips and trick that help you pay off mortgage fast will always chase back to this principle. We will cover lots of them in the coming months. Stay tuned.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

Top 3 Investment Options in New Zealand

I spent a lot of time on my blog talking about ETF and index fund investing in New Zealand. I believe they are great options and an import investment vehicle to help me achieve financial freedom.

However, there are three investment options are objectively better than ETF and Index fund with low entry requirement, low risk and high (sometimes guarantee) return. They are the low hanging fruit of personal finance that everyone should do it. Those three investments options are pay off consumer debt, join KiwiSaver and reduce the mortgage. I will go through each one of them and talk about they risk and return.

No.1 Pay off Consumer Debt

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You want to kill those consumer bills ASAP!

Credit card debt, car loan, payday loan, personal loan, hire purchase, P2P loan… All of those are consumer debt. Debts that are owed as a result of purchasing goods or services that are consumable and do not appreciate in value. Those debts usually have high-interest rate and exorbitant admin fee. If you are paying interest on depreciating assets, they are dragging back you financially. You won’t go forward if most of your income goes to those stupid bills. You need to get rid of them ASAP!

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Paying off debt is Investing

This concept may not be obvious to everyone but PAYING OFF DEBT IS INVESTING. For me, debt and investing are just two sides of the same coin. One side (investing) is to increase your wealth (with a given level of risk). Like you buy NZ Top 50 ETF from SmartShares, if the share price increase and they pay out a dividend, your wealth increased. On the other hand, the shares price may drop, and your wealth will decrease. So there is a risk of losing money with investing.

The other side of the coin (debt) will reduce your wealth. If you have $1000 credit card debt with 20% interest, your interest expense for the first month will $16.67. So your wealth reduced by -$16.67. Unlike investing, the debt will guarantee to reduce your wealth and drag you back financially. Therefore, reduce your debt will move you forward financially, guaranteed.

Whats the return and risk?

I will use a simplified sample to present the financial effect of paying off debt.

Assume you have $1000 in cash and $1000 credit card debt with 20% interest.  If you keep the $1000 in cash and don’t pay it off credit card debt, in one year, you will be $1000 x (1 + 20%) =  $1200 in debt. Financially you moved backwards by $200.

Now, you invest the $1000 cash in a 12 months term deposit with 3.25%. You still keep your $1000 credit card debt and not paying that off. In one year, your earn $1000 x 3.25% = $32.5 in interest from your term deposit. Take away $9.75 as tax; you will have $1022.75 in cash. On the other hand, your credit card debt still cost you $200 in interest. So financially, you moved backwards by $177.25.

Instead of invest that $1000 into a term deposit, you use that $1000 to pay off your credit card debt. Since the credit card debt is gone, it won’t occur interest. In one year, you will be in the same financial position.

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Look at all three scenarios, pay off credit card debt resulted in the best financial position. As you putting that $1000 cash to pay off your credit card debt, you are in fact getting 20% return on those $1000. Unlike other investment, those returns are Tax-free and guaranteed. If you need to get 20% after-tax return on investment, the pre-tax return will need to be 27.77%. That is an excellent return on investment. I am not saying you can’t get 27.77% return out there, but I am sure there is no investment (except KiwiSaver) can guarantee a 27.77% with no risk.

If we look that those high-interest-rate consumer debts, paying them off will be a great return for your money. Also, paying off consumer debt will reduce your financial risk and stress. You will be in a much better position when you negotiated mortgage term and resulted in better deals. That why paying off consumer debt is one of the top three investment options.

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What about Student Loan?

The student loan in New Zealand is interest-free as long as you are staying in the country. The payment only occurs when you have income. So you should just pay it off as you’ve got income. I would not be paying them off early unless you plan to leave the country for a long time.

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No. 2 – Join KiwiSaver

KiwiSaver is a voluntary, work-based savings initiative to help you with your long-term saving for retirement. It’s designed to be hassle-free, so it’s easy to maintain a regular savings pattern. Once you join KiwiSaver, at least 3% of your income will invest into a KiwiSaver fund. You can only access those fund until you use it to buy your first home or turn 65. What makes KiwiSaver to be a top investment option is because of employer contribution and member tax credit.

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Employer match

If you’re over 18 and is a member of KiwiSaver, when you make your KiwiSaver contribution, your employer also has to put money in. By law, the employer required to contribute at least 3% of your income. The employee can choose to contribute either 3%, 4% or 8% but employer only requires to match at 3%. Some employer may decide to match 4% or 8%.

It may seem you will be making 100% return on investment on your 3% contribution. However, IRD will take out tax from you employer contribution, so the actual return on your contribution is about 67%-89.5%. (You can find out why here)  It’s still an unbeatable risk-free guaranteed return.

Member Tax Credit

KiwiSaver Member Tax Credit is to help you save on your KiwiSaver. The government will make an annual contribution to your KiwiSaver fund (a.k.a Free money). The amount is $0.5 on every dollar up to $521.43. You will have to be 18 or above to receive the tax credit. This is a way of government help you save for your retirement and encourage you to join the plan. It cap at $521.43 so it will benefit for the most full-time employee but not favour mid to high-income earner.

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Return on Employee

If you are over 18, fully employed, annual income at $55,000 before and contribute at 3%. Your minimum return on your contribution will be like this.

Your annual contribution (3%): $1650

Employer contribution after tax: $1361.25

KiwiSaver Member Tax Credit: $521.43

The return on your investment: (1650 + 1361.25 + 521.43 – 1650) / 1650 = 114%

Return on Self-Employed

If you are self-employed, you won’t get the employer match, but you are still entitled to member tax credit as long as you make a minimum manual contribution for $1042.86

Your manual contribution: $1042.86

KiwiSaver Member Tax Credit: $521.43

The return on your investment: (1042.86+ 521.43 – 1042.86)/ 1042.86 = 50%

Those are only your base return; you are likely to make investment return on your KiwiSaver Fund as well.  Here is a couples data on a KiwiSaver fund with different income level. The KiwiSaver fund cost and return data are based on SuperLife 80.

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No. 3 – Reduce your Mortgage

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Mortgage payment can easily be the biggest expenses on most homeowners’ budget. Average first home buyer will spend $1500/month on the mortgage, and it will cost more if you have a mortgage in a major city. Imagine what you can do with that money if you don’t have a mortgage payment.

Return on Reducing Mortgage

Paying off have the same effect on paying off consumer debt. It will give you a tax-free and guaranteed return. The return is not as high as those consumer debts because the interest rate on the mortgage is lower at 4% – 6%. The equivalent pre-tax return is around 8.3%.

Reduce your Mortgage or Invest elsewhere

Some people may think 7-8% is not a very good return, and you can achieve that with other investment options without taking a lot of risks, like the share market. However, I still think paying off the mortgage on your own home is a better option because you are paying off an asset that will provide you with a place to live, offset the cost of renting in the future and the house will increase in value (in the long term for most cases).

If you can’t decide to reduce mortgage or invest elsewhere, ask yourself a simple question: 

If you fully owned your house today, will you borrow $500k on your mortgage-free house to invest in share market? Or you will use your income to invest in the stock market every month?

If you say you won’t borrow on your mortgage-free home (like me), then you should focus on reducing that mortgage now. I basically asked the same questions but put it in a different perspective. If you have the money to reduce the mortgage, but you put it into the share market, you are basically borrowing on your house to share market.

Saving Big on interest expense

Since the mortgage size is usually over $200K (over $500k in Auckland) and the payment terms are 20-30 years. You end up paying A LOT on interest expenses. Check out the chart below.

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For a 30 years term mortgage at 5% interest rate, you will end up paying 93% extra for interest payment. So what will happen if we increase our payment and shorten the mortgage by ten years?

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When we shorten the mortgage term by ten years (-33%), our monthly payment increased by 23%, total interest paid decreased by 37.3%! Only 36.9% of your payment went to interest.

Reducing mortgage may not give you a high percentage return, but due to the size of the mortgage, the saving you are likely to make is in the hundreds of thousands. I will have a series of blog posts in the coming month to show you how to be smart on your mortgage with different setup and tips.

Conclusion

  • The top 3 investment options in New Zealand are paying off consumer debt, join KiwiSaver and reducing your mortgage.
  • Paying off consumer debt is investing. The returns are in the range of 15% – 35%. You will be in a better financial position once you pay off your debt.
  • A KiwiSaver member can enjoy instant return from minimum 50% – 110% due to member tax credit and employer match. However, that money is locked-in until you purchase your first home or turn 65.
  • Paying off return about 7% – 8% on your dollar, not as high compared to other. However, due to the size of the mortgage and interest paid, you are likely to be saving hundreds of thousand of the dollar

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

Sharesies (Beta) – How does it stack up to SuperLife and SmartShares on ETF Investing

Sharesies is rolling out their trial run (a.k.a beta) investments options couple weeks ago. I’ve got their invitation recently and checked out their offerings. Sharesies is currently offering six SmartShares ETFs for their investor including NZ Top 50, AUS Top 20, US 500, NZ Bond, NZ Property and AUS Resources. You can check out their current offers here.

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What is Sharesies

Sharesies is a New Zealand financial start-up company supported by Kiwibank Fintech Accelerator. They are an investment platform where users can make investments with small amounts of money. One of their mission is to make investment fun, easy and affordable.

The main selling point of Sharesies is by paying a $30 annual fee, an investor can invest into multiple investments with the minimum at just $5. Also, there is a $20 credit for the early Beta investor.

Invest $5 into ETF

In comparison, SmartShares ETF initial investment is $500, set up cost is $30/ETF and monthly contribution minimum is $50. So Sharesies is a great way for beginner investor to invest in a small amount into many low-cost, diversified ETFs. It bypasses the $500 initial investment and $30 set up fee with each ETFs.

On the other hand, SuperLife also offers the same ETF in their investment fund with a different management cost. You can check out the detailed comparison here.

While Superlife also doesn’t require initial investment and the minimum contribution can be just $1. How does Sharesies stack up to SuperLife and SmartShares on ETF investing?

Sharesies vs SuperLife & SmartShares

I’ve picked two popular ETF, NZ Top 50 and US 500, to run an analysis for 60 months (5 years). The analysis will compare the result on different contribution level(low and high contribution) for all three services. The low contribution will be at Sharesies minimum requirement, $30 initial investment (for the annual admin fee), $20/month contribution (about $5/week); The high contribution will be at SmartShares minimum requirement, $500 initial on each ETF, $50/month conditions.

NZ Top 50 ETF at low contribution

Here is the fees structure on the ETF

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This is the amount of low contribution and expected return

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So Sharesies have a higher admin fee ($30) and ETF management cost (0.50%), so its expenses should be higher then Superlife NZ top 50 ETF. Since Sharesies are aiming for beginner investor, I put around $5/week as a low-level contribution. The $30 initial investment cost is to cover Sharesies annual fee. Smartshares will not be included in this analysis as the investment amount is too low.

Here is the investment return each year

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Superlife did better as it has a lower management fee and admin fee resulted in a higher return for the customer. The 5-years different is $135.81, 8.4%.

NZ Top 50 ETF at high contribution

This is the amount of high contribution and expected return

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We increased the contribution to $50/month, put $500 as an initial investment and include SmartShares into the mix.

Here is the investment return each year

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SmartShares came out on top despite the fact that they have a higher management cost. The main reason is that Smartshares don’t have an annual admin fee while Superlife charges $1/month. However, if you wish to cash out those Smartshares at this stage, it will cost you at least $30.

The difference between SmartShares and Sharesies is $163.34, 3.3%. Although both services have the same management cost, Sharesies charge $30/year admin fee which brings down the balance.

US 500 ETF at low contribution

Here is the fees structure on US 500 ETF

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This is the amount of low contribution and expected return

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This is more interesting as Sharesies have a lower management (0.31%) cost compare to Superlife (0.44%).

Here is the investment return each year

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Due to the small amount of holding, the lower management cost (0.35%) did not cover the higher annual fee ($30) with Sharesies. Superlife holding was $122.28 more then Sharesies in year 5, 8.1%.

US 500 ETF at high contribution

This is the amount of high contribution and expected return

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Now we will do the same thing by increasing the investment to Smartshares minimum requirement.

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SmartShares USF came out on top with no annual fee and lower management cost. The different between SmartShares and Sharesies at year 5 is $154.75, 3.3%. The different to Superlife is $41.5, 0.9%.

In both scenario, Investor with low contribution level and better with SuperLife. If you have the $500 and $50/month to invest, SmartShares is the cheaper way. (Although I will suggest going with Superlife on NZ top 50. I’ve already covered that in another post)

How about portfolio building?

Since Sharesies investors can bypass SmartShares setup fee and initial investment requirement. So Sharesies is actually a great tool to build a simple portfolio. I will use US 500 ETF, NZ Top 50 ETF and NZ Bond ETF to build a portfolio.

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Here is a balanced portfolio you can easily build with Sharesies. 25% NZ Bond, 37.5% US 500 and 37.5% NZ Top 50. If we keep the low contribution at $20/month, you can put $5 in NZ Bond, $7.5 in US 500 and $7.5 in NZ Top 50.

If you wish to set up something similar in SmartShares, you will have to spend $30 x 3 =$90 on set up fees, at least $500 x 3 = $1500 initial investment and $50 x 3 = $150/month contribution. Not feasible at all.

SuperLife, on the other hand, as my best pick for portfolio builder in New Zealand can easily build the same portfolio. Let’s check out the cost difference.

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Here are the contribution and return

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Here is the investment return each year

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Superlife still edged out at year 5 with $123.15 more, 8.2%. I didn’t do a high contribution comparison here because SmartShares are really not fir for portfolio building.

Conclusion

Based on the analysis, SuperLife is still the better choice on low contribution and most of the high contribution (except US 500 ETF) regarding cost. However, I still think Sharesies is doing something good here.

Sharesies is promoting to young Kiwis who never invested before by providing a straightforward and easy-to-use app. The sign-up process is simple and painless. The interface is robust and delightful. They’ve done an excellent job on explaining each investment options to beginner investment and make it accessible. Check out the screenshots below.

 

 

I don’t mind about the $30 admin fee if that what’s it take for a newbie to start investing for their future. I’ve been telling readers to spend $12/year on Superlife as they have a better user interface and functions over SmartShares. Sharesies interface and user experience are way better than both of them. They made investing as easy as shopping online, which should bring a lot of people into the world of investing.

Sharesies are still in beta, so there are some functions are missing, like reinvest and auto allocation. I am sure Sharesies will continue to improve on their functions and brign in more investment options. Hope more companies like Sharesies will pop up in New Zealand to bring more people into investing.

More investor, bigger the market size, lower the cost!

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.

How to Start Investing with Smartshares and How Long will it Take

SmartShares is an excellent way to invest in low-cost, diversified ETF in New Zealand. Especially if you wish to invest in the top 500 companies on US stock market. Smartshares S&P 500 ETF (USF) is a great option for all investors as it is simple to understand, the management cost is low at 0.35% and has a long positive track record. I’ve been getting questions on how to start with investing with various investment service I covered and the most of the questions on Smartshares. So here is the guide on Smartshares.

How long will it take?

Let’s set the right expectation here, its gonna take a LONG time to set up a monthly contribution plan with SmartShares. For average Kiwi investor (without any connection to politician or United State), will take about 2-5 days to set up with most investment services. However, with SmartShares, you will have to spend around 27-53 days. Yes, that is not a typo. Just make sure you are prepared for it.

Sign up with SmartShares

We are going to walk through the setup process for an individual investing $500 into S&P 500 ETF with a $50/months contribution. Before we start, you will need to prepare the following items.

  • IRD number
  • NZ Drivers Licence
  • Bank account number for direct debit
  • Read the product disclosure statement

Go to Smartshares Invest Now page and click on “Apply online.”
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Under investment options, select “Individual”, leave it blank on “Common Shareholder Number” if you are a new investor. Put $500 (minimum) on US 500 (USF) investment and $50 (minimum) as regular saving plan.

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Next page is your personal information and email address. That email address will be your main point of contact. You will receive an email during the set process to confirm your email address.

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Next is your ID verification. Put in your NZ Drivers license details.

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Next, confirm your payment details with your bank account no. Please make sure you have enough fund at 20th of each month.

 

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Next part you will have to review your information and confirm your contact email with an authentication code.

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Here is the authentication email with the code. Screen Shot 2017-04-15 at 10.38.27 PM.png

Once you completed this process, you are done with the sign-up. The next part is the long wait….

What you are waiting for?

The SmartShares signup process is straightforward and painless. However, investors need to wait a long time to check up on their holding. An investor cannot log on to SmartShares to check their holding. SmartShares will direct investor to use Link Market Service to do that. To register for Link Market Service, you will need two pieces of information: FIN (Faster Identification Number) & CSN (Common Shareholder Number). FIN will send to you by mail (physical letter), and CSN will be on your holding statement in an email. You will need those two numbers to prove you own those stock. Check out this page from ANZ Securities on what is FIN and CSN.

The long wait

So here is my timeline on signing up with SmartShares.

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4/5 – I submitted my application on SmartShares website.

8/5 – I got a confirmation email on my SmartShares application and my direct debit.

20/5 – $500 initial investment withdraw from my account, and it supposes to make the purchase at the beginning of June.

6/6 – the purchase happened

7/6 – a letter came into my mailbox with the FIN number. I still can’t log onto Link Market Services because I don’t have the CSN number.

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12/6 – got an account statement from Link Market Service with my CSN number.

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I managed to log into Link Market Service and check out my holding. Yeah!

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So it took 39 days for me. To be fair, I can submit my application on 12/5 or 13/5, it will still make the 20th direct debit cut-off date. So you can shorten 7-8 days there. On the other hand, if you submit your application right after the 20th cut-off date, you will have to wait over a month.

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Why it took so long?

Smartshare is NOT an investment service or fund manager. They are an ETF issuer. ETF is not an investment fund; they are tradable shares. Usually, you will have to set up a brokerage account and pay a fee to buy shares in New Zealand Stock Exchange. The minimum is $30/trade.

SmartShares offer a service allow investor buy shares in a small amount monthly without paying a brokerage fee. If I have to do it in the with a stock broker, it will cost me at least $360/year on brokerage fee alone. I am happy to wait a couple of days to save $360.

If you don’t want to wait that long, you can open up a stock brokage account and buy SmartShares directly on the stock market. It will take 2-5 days to set up a brokage account, and it will cost at least $30/trade.

Hope this blog will set an expectation for you when you sign up SmartShares. Don’t be panic when they took your money for 2 weeks without any communication. Your FIN and CSN will arrive…eventually.

SmartShares, SuperLife, Simplicity & InvestNow. ETF & Index Fund Investing in New Zealand

ETF and Index Fund are simple, low-cost and diversified investment option with a positive result in the long term. It plays an important part in my plan to achieve financial freedom by only do a few smart things and nothing much else. To put my money where my mouth is, over 90% of my investment are in ETF and Index Fund. I believe everyone should have at least some investment in those products. SmartShares, SuperLife, Simplicity, and InvestNow are the four investment services in New Zealand that I am currently using. Here is a breakdown of them.

The Breakdown

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Compare four ETF/Index Fund investment in NZ. Best option highlighted in yellow

SmartShares

New Zealand Stock Exchange owns SmartShares. They issue the ETF for local share markets such as NZ Top 50 (FNZ), NZ Top 10 (TNZ), NZ MID CAP (MDZ) and NZ Bond (NZB). They also repackage ETFs and index funds from oversea to sell to New Zealand investor. Those ETFs cover Austraila, Europe, Asia Pacific, US, emerging markets and world markets. You can check out the list of offering here. The most popular oversea ETF is US 500. It tracks the top 500 companies on US stock example, most of them are top international corporations.

Some people mistaken SmartShares as an investment service provider but in fact, SmartShares is an ETF issuer. Their job is to manage and issue ETF for New Zealand stock exchange. That’s why investor can’t log onto SmartShares site for track their holding because they are not managing the holding for you (hence there is no annual admin fee).

If you invested in their ETF, you are basically buying a share on the share market. You can but those ETF directly on share market if you wish.  SmartShares will direct investor to Link Market Service to register and track their ETF holdings. An investor can track their holding on other services like ASB securities, ANZ Securities or Share Sight.

SuperLife

Superlife offer the most ETF and Index Funds investment options in New Zealand. They not only offer SmartShares ETF in fund format but also provide managed fund and sector fund options for the investor. All of those funds invested in a passive index fund or ETF.

The Sector fund cover different country (NZ, AUS, Overseas), industry (Property, Shares) and investment vehicle (Cash, Bond, Shares). Those are great options to build your own balanced and diversified portfolio.

The Managed Fund is is a grouping of financial assets such as stocks, bonds, and cash equivalents. The nature of those financial assets can be classified into two groups, income asset, and growth asset. Income asset includes cash and bond. They tend to carry lower risk levels and, therefore, are more likely to generate lower levels of return over the long term. Growth assets are shares and property. They tend to carry higher levels of risk, yet have the potential to deliver higher returns over longer investment time frames.

Superlife managed fund have different names, like SuperLife 30 or SuperLife 80. The number at the end show the target portion of growth asset in that fund. Superlife 30 will aim to hold around 30% of growth asset and 70% of income asset in the portfolio. So this fund is a low risk (or conservative) fund. On the other hand, Superlife 100 will aim to invest 100% into the growth asset. So the risk is high. Here is a breakdown.

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SuperLife offer the most options, functions in the breakdown. The entry requirement is basically nonexistent, and the cost is relatively low. That’s why I recommend the beginner to start with Superlife.

Simplicity

Simplicity started as a nonprofit KiwiSaver provider. They provide low-cost KiwiSaver options to New Zealander while donating 15% their income to charity. Simplicity recently opened up their investment fund as non-KiwiSaver options as investors can deposit and withdraw their investment anytime they want. Simplicity only offers three managed funds as conservative, balance and growth fund. The majority of Simplicity fund invested in Vanguard’s funds or ETFs. The management fees are the lowest in New Zealand at 0.31% for managed fund. However, the initial investment requirement is $10,000.

InvestNow

InvestNow is a new online investment platform. Investors can directly invest into the selected fund on their platform with as little of $250. InvestNow does not charge any transaction, admin, setup or exit fee at this stage. Investor only needs to pay the management fee on an individual fund.

The biggest advantage of InvestNow is to allow the investor to directly invest into two Vanguard index fund in Australia. They are Vanguard International Shares Select Exclusions Index Fund (currency hedged and non-hedged version) with management fee at 0.20% and 0.26%. Those two funds are not PIE fund, means you will have to do your own tax return. For under 50k holding, you will only have to do tax return on dividend received, which is not that hard. You can check out the detail in this blog post.

Fund Comparison

I picked a couple of index funds and ETFs from each provider and made a comparison. Here is the breakdown.

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As you can see, most of the option’s underlying asset are Vanguard ETFs and Index Fund. That’s basically what I am trying to do on my international exposure, putting money into low-cost Vanguard cost for long term.

 

Me try to invest in NZ 2

Accurate description of my international investment strategy.

Conclusion

  • Superlife have the most function, investment options and easy to start. Also have the lowest cost aggressive managed fund in NZ. It is great for both beginner and experience investor.
  • Simplicity have the lowest cost managed fund in Conservative, balance and growth aera. Great for anyone with $10,000 to start investing.
  • InvestNow user can easily invest in Vangaurd index fund in Australia with 0.20% – 0.26% fee. Great for someone who can handle their tax return on dividend recived (not that hard) or calculate under FIF rule.
  • SmartShares is good if you wish to buy ETF on share market.
  • There are other ways to invest into passive fund and ETF in New Zealand, like ASB Investment Fund, AMP, and Lifestages. However, the cost on those fund are quite high compare to these four services, which defeat the purpose of low-cost passive investing.
  • New Zealand investors can buy Vanguard ETFs on Australian Stock market. The management fee can go as low as 0.04%. I will go into that later once I’ve done it myself.

 

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Compare ETF Fund Cost between Superlife and Smartshares (2017 Update)

Recently SuperLife and SmartShares lower the management fee on four ETFs. So it’s time to update the ETF cost comparison. Also, I am changing my initial recommendation on starting your investment with SmartShares then switch to SuperLife.

Cost update

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Both Superlife and SmartShares lower their cost on Total World, Europe, Asia Pacific and Emerging Markets ETF. The reason was Vanguard reduce their underlying fee, so SuperLife and SmartShares passed on the cost saving to its customer.

Should you start with SmartShare?

In the past, I recommended to start your ETF investment with SmartShares then switch to Superlife when the fund hit a certain amount. The main reason was Superlife charge a $12/year admin fee, it will cost more in term of percentage for beginners with a small amount of investment. However, that calculation ignored the $30 one-off initial fee, the cost of setting up extra funds with SmartShares and the exit cost.

Let’s look the following example for an investor started NZ Top 50 ETF with $500 initial investment and $50/month contribution for 5 years. NZ Top 50 ETF 5 years annualised return is 16.49%. I’ve put it in a simple simulation to compare investment between SuperLife and SmartSharesand for 5 years.

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SmartShaers started with $30 less due to the setup fee. That $30 initial different made Smartshares cost more for that first 3 years, (38 months to be exact). By the end of the 5 years, the different between Superlife and Smartshares is only $24.09. That’s about 2 years of SuperLife admin fees and represent about 0.44% of your holding. That percentage will decrease if we increase the investment amount. So, there are some saving with Smartshare, but the saving is insignificant.

Also, there are some other benefits with SuperLife.

  • Better user interface compare to Link Market Service
  • Easy to switch fund with no cost
  • No setup cost for new fund
  • More fund options included sector fund and passively managed fund
  • No withdrawal cost

Personally, I think those benefit worth that $12/year with Superlife.

My Recommendation

If you wish to invest in S&P500 ETF, NZ Cash ETF and Emerging Market ETF, start with SmartShares because their management fee is still lower than SuperLife.

For any other ETF, just go and join SuperLife. You will be much better off.

If you are currently holding SmartShares ETF and want to switch to SuperLife. There is a way to switch without open a brokage account and pay $30 to sell your Smartshare. However, you will have to email me on that.

Email thesmartandlazy@gmail.com or follow me on Twitter @thesmartandlazy if you have any questions.