Quickly Work Out How Much You (Roughly) Saved

by Alpha

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.

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.

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.

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.

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.

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.

July 6, 2017 Debt, Investing, KiwiSaver, Mortgage, Personal Finance Basic New Zealand, Personal Ffinance 6 Comments

Top 3 Investment Options in New Zealand

by Alpha

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

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!

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.

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.

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.

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.

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.

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.

No. 3 – Reduce your Mortgage

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.

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?

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.

June 28, 2017 ETF, Investing, Personal Finance Basic ETF, Investing, New Zealand, Sharesies, SmartShares, Superlife 20 Comments

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

by Alpha

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.

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

This is the amount of low contribution and expected return

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

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

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

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

This is the amount of low contribution and expected return

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

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

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

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.

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.

Here are the contribution and return

Here is the investment return each year

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.

May 31, 2017 Index Fund, Investing, Personal Finance Basic ETF, Index Fund, Investing, Personal Ffinance, Superlife, Vanguard 8 Comments

The Best Way to Start Your Investment as Beginner in New Zealand

by Alpha

You may already know you need to start investing for your future, but you have no idea where to start. There are so many options out there like the sharemarket, investment property, P2P lending, the bond market, active and passive fund, etc. You have no idea which one is the best for you.

Well, I don’t know what is best for you because everyone’s situation is different. However, I think it’s better to start somewhere rather than sit here and do nothing. People say, “you need time in the market, not timing the market” or “The earlier you start the better”. I believe both of them are true. So, here is my suggestion on where to start your investment.

What you need to do before you start investing

Before you jump into the world of investing, you need to have a solid financial foundation. Here is what you should do.

Pay off your consumer debt like credit card balances, personal loans, store credit, overdrafts and hire purchases. It doesn’t make sense to chase for 6-7% return on investment while paying 19-22% interest on your credit card debt.
Join KiwiSaver. KiwiSaver is one of the best investments available in New Zealand because of the employer contribution and member tax credit. You will have an instant risk-free return on your investment.
Set up an emergency fund for 3-6 months of living expenses. This fund will help you to deal with any unexpected situations, so you’re not forced to cash out your investment, especially during a market downturn
Live on less than you make. Naturally, no one can become successful with their money without first learning how to live on less than they make. Where will you get the money to invest if you live paycheck to paycheck?

Better to start with a plan, however…

You should have a plan for your money before you start investing. Failing to plan is planning to fail, right? That why in my previous post I said the first thing you’ll need to work out is how long can you leave the money in the investment? Or how long before you will need to use that money?

On the other hand, I know how hard it is to come up with a plan when you don’t understand most of the investment terms. It’s hard to learn something from the outside when you don’t have personal experience. You may be afraid you will make a mistake and lose your hard-earned money.

I also understand how busy life is and how lazy we are (Well, at least how lazy I am). It took me six months to finally put down some cash into an investment. I kept making ‘plans’ and doing ‘research’ for my investments (actually I’ve been putting it off because I am lazy).

I started looking into investment strategies on the Internet in April, but I looked around without making any decisions for 4 months. I remember I found out about Smartshares and SuperLife and decided an index fund is the way to go in August, but it still took me two more months to pick which fund or ETF to invest in. Who knows if that is analysis paralysis or just laziness paralysis?

It may be just me, but I know lots of people are in the same boat, especially the beginners. You know you need it start investing, but you don’t have a complete plan yet. So you wait. To those people, hear me out!

If you don’t have a plan, just start without one.

Start small and start early

I am not talking about putting in your life saving without a plan. I suggest you dip your toe in the water. Just put under $500 into an investment and get it started. TODAY!

That small amount of cash should not affect your financial situation (if that is a problem, you should make sure you have a solid financial foundation). You should be able to move it quickly to start a small investment. You may not even care if you lost it, so you don’t need a plan for that small initial investment. You can put it in almost any fund as the start of your investment.

The most important thing is to get you started on something. Once you dip your toe in the water, you’ll have a personal stake in the investment. Looking at the value go up or down will motivate you to know more about investment. It will help you put together a plan for your investment.

Best way to start – SuperLife

SuperLife provides 40+ different passive investment fund to New Zealander. They also offer superannuation, KiwiSaver, and insurance solutions. They are great for beginner to start because:

No minimum investment requirement – You can invest by making regular or lump sum payments to the scheme at any time. There is no minimum contribution amount.
Passive Index Fund – All investment fund with SuperLife are passive index funds. They either invest in a fund designed to track an index or in a number of assets for the long term. It is a cost-effective and diversified investment opinion with a proven result.
Low cost – The annual admin fee is $12/year (or $30/year if you want paper documents) which covers all fund in SuperLife. The management cost on each fund is around 0.39% – 0.94%, fees for the most popular funds is around 0.49%. SuperLife’s fees are relatively low in New Zealand standard(2nd lowest in the country), and some aggressive funds and sector funds have the lowest cost in New Zealand. There is no joining fee, exit fee, and no cost for you add/close/or switch funds.
Flexible – SuperLife provides 40 different investment products on managed fund, sector fund and ETF. An investor can invest in a single fund or multiple funds with their own asset allocation. You can switch fund allocation on SuperLife website.
Web Site and App – Investors can log onto SuperLife website to check the performance and value of their holding. They’ve also got an iOS and Android App for that.
Simple Tax – SuperLife’s investment fund is a portfolio investment entity (PIE). The amount of tax you pay is based on your prescribed investor rate (PIR). SuperLife will pay the tax from your holding, and you don’t need to manage your tax return.
Lots of functions – Investors can make lump sum investments or regular contributions with direct debit from their bank account. You can organise your portfolio and allocation your contribution into different funds based on your preferred percentage. SuperLife can auto rebalance your portfolio, which is a great tool for the investor who wants to build a portfolio with their own asset allocation. It can also reinvest your dividends.
Owned by New Zealand Stock Exchange – NZX is New Zealand stock market operator. They 100% own SuperLife. In my opinion, this makes SuperLife a very safe company.

Start with Index Fund

For those who don’t have a plan and want to start small and test it out, here are a couple Funds/ETF in Superlife I think are ideal for beginners.

SuperLife Age Step: This is a managed portfolio invested in multiple Vanguard ETF in both income and growth assets. The ratio between income and growth assets depends on your age. When you are young, over 90% of that portfolio is invested in growth assets (shares and property). It will increase the ratio of income assets (Bond and fixed income assets) as you age. If you join at 28 years old, 80% will be in growth assets, and 20% will be in income assets. On the other hand, if you join at 58, 60.5% will be in growth assets, 30% in income assets and 9.5% in cash. This is a great fund to start especially if you aim for retirement. You can basically set it up and forget about it for decades. The management fees are 0.45%-0.52%.

NZ Top 50 ETF: This growth asset ETF is the same as FNZ from SmartShares. They invest in financial products listed on the NZX Main Board and is designed to track the return on the S&P/NZX 50 Portfolio Index. You are basically investing in the 50 biggest companies on New Zealand Stock Market. The concept is simple and easy to understand, so this is a great starting point for beginners. One disadvantage is this ETF is not as diversified as others because it is only invested in 50 companies in one country while other funds invest in between 100 to 7000+ companies all over the world. On the other hand, investors can take the tax advantage on local investing. You only need to pay tax on dividends and no tax on capital gain. The management fee is 0.49%.

Overseas Shares (Currency Hedged) Fund: This growth asset fund invests in shares in major stock markets all over the world via the Vanguard ETF. The number of companies included is over 7000. This fund is currency hedged, which reduces the currency fluctuations and exchange rate risk on the fund. The management fee is 0.48%.

Conclusion

Make sure you have a good financial foundation before you start investing. Clear your consumer debt, Join KiwiSaver, have an Emergency Fund and live on less than you make.
Best to start with a plan
If you don’t have a plan, start small while you make your plan.
The hardest part is getting started. By starting small, you make the first step so much easier.
SuperLife is the best place to start your investment in my opinion because there is no initial requirement, and it is diversified, low-cost, flexible and straightforward.
If you have no idea what fund to invest in, consider SuperLife Age Step, NZ top 50 ETF and Overseas Shares (Currency Hedged) Fund
Start small and START NOW!

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

May 3, 2017 ETF, Investing, Personal Finance Basic ETF, Financial, Investing, New Zealand, Personal Ffinance, Shares, SmartShares, Stock market 4 Comments

How Easy to Get Your Money out from SmartShares ETF

by Alpha

SmartShares offer 23 exchange-traded fund (ETF) in New Zealand. They tracked different stock and industry index in New Zealand, Australia, United States and international market. It is an excellent opinion for Kiwis investor due to the low-cost and diversified portfolio. So, how easy to get your money out? (Spoiler alert: Very easy)

ETF is tradable share

ETF is similar to an index fund that tracks an index, a commodity, bonds, a sector or a basket of assets. However, ETF can be traded on the stock market like any other stock. ETF shareholders are entitled to a proportion of the profits, such as earned interest and dividends paid.

Liquidity of shares

Since ETF is a share, i. In order to get the money out, you will have to sell your ETF in the stock market, just like any other stocks. This brings us to Liquidity of a share.

Liquidity means how easy for you to sell your share into cash on the stock market. If lots of people wanting to buy that share and lots of willing seller on the market, the liquidity is good.

We use trade me as an example here. If you are selling a brand new iPhone on trade me at a price closed to everyone else is selling, you will be able to sell that iPhone quickly. Also, you can use similar amount cash to buy an iPhone on trade me without any problem. So the liquidity of an iPhone is good on trade me.

However, if you want to sell an expensive and rare antique phone on trade me, it may take months and multiple listing to sell that phone. You may have to lower your price to get it sold. It also hard to find another expensive and rare antique phone on trade. So, the liquidity of an expensive and rare antique phone is bad.

Let’s take a look at Auckland International Airport’s stock info.

You can see there is lots of buying (Bids) and selling (Asks) order. Lots of trade happened in 13 mins. The different between buy and sell price (a.k.a. Bid-Ask Spread) is only $0.5c.

Now compare that to Delegat Group Limited’s Share.

There are some buy and sell order, but there was no trade at all. The different between buy and sell price is $10c. There is a seller want to sell 2000 units of share at $6.25, but there is no one taking that offer. If the owner of that 2000 share intends to liquidate the stock quickly, they will have to lower their selling price by $10c to $6.15 to meet the closest bid. That is $200 less on 2000 share.

If you are an owner of Auckland International Airport share, It will be very easy to liquidate your stock in a short time. On the other hand, if you hold shares in Delegat Group Limited, you will have to wait or lower your price for someone to buy your share.

Here is the info on two popular SmartShare ETF, NZ Top 50 and US S&P 500.

Both of them have a good amount of bid/ask and the spread is small. Therefore, the liquidity is good.

Also, there is a market maker for all Smartshare ETF.

Market Maker

A market maker is an investment firm that guarantees liquidity of stock by putting out buy and sells order on the stock market. They make sure investor can always buy or sell the shares.

The Bid and Ask below are the market maker order.

Screen Shot 2017-05-03 at 2.15.07 PM copy

Screen Shot 2017-05-03 at 2.15.19 PM copy

At December 2014, SmartShares appoints Craigs Investment Partners as the market maker. Craigs will offer two-way quotes of agreed minimum volume and maximum spread for an agreed minimum period of the full trading day. This will cover all current Smartshares ETFs, plus future ETFs launched by Smartshares.

You can read the full press release here.

Always ready to sell

With a market maker on all Smartshare product, its very easy to liquidate your Smartshares holding. However, you will need a stock broker to sell your shares. Especially for those who purchase Smartshares via monthly contribution plan since you don’t need a broker account to do that. Smartshare is not an investment fund, they will not cash out the ETF for you. Lots of people don’t know that.

In order to sell your Smartshare ETF, you will need a broker to put your holding on the stock market. You can google “Stock Broker NZ” to contact any broker firm and set up an account. The cheapest way for most people is to use ASB and ANZ securities to trade online. ANZ cheapest rate is $29.90/trade under $15000. However, you have to be an Online Multi-Currency Account (OMCA) holders with sufficient cleared funds available to fully cover the purchase of securities prior to submission of the order. Otherwise, ANZ charge $29.90 + 0.40% on trade. If you are not an OMCA holder with ANZ, go with ASB Securities, they charge $30 or 0.30% per transactions, whichever higher.

If you currently hold SmartShares ETF and don’t have a brokerage account, do it ASAP. You never know when you need to sell you share in a short period. It will take 2-10 days to set up account with ASB and ANZ. If you starting a monthly contribution plan with SmartShares, make sure you open a brokerage account as well.

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

April 21, 2017 Investing, Personal Finance Basic Financial, Investing, Investment Mentality, New Zealand, Personal Ffinance Leave a comment

Investing: it’s only getting easier

by Alpha

I think the hardest part of investing is the beginning. When you are starting out, the return on investment seems minimal (unless you start out with 50k+ lump sum). I started my investment with $500 each in Smartshare and Superlife. I remember the first couple months, returns are under $10 and I lose money in some months as well. However, as I slowly build up my investment by monthly contribution and reinvest my returns, the returns are getting better over time. My portfolio passes its milestone with less and less time. Investing is getting easier

Here is a simulation for someone who investing into a growth asset with $500 a month. The average annual return is 7% and the goal is to reach $100,000. It took 11 years and 2 months to reach 100K

If you break down the investment by $10,000 block and measure the months it took to reach each one of them, it took less and less time.

The first $10,000 took you 20 months and the last $10,000 only took you 9 months. It’s just getting easier.

Also, around the 10th year mark, the monthly return on investment actually is more than your $500 monthly contribution.

Overall, you’ve only contributed $66,500. The rest came from the return of your investment.

You may think you only got a tiny amount right now, it won’t make a difference. From our example, the first $500 contribution turns into $1,226 at the end. That small $500 contribution is only 0.75% of your total contribution. However, with the power of reinvesting, continues contribution and compounding interest, the return on that first $500 represent 1.23% on the $100,000. So if you haven’t started your investment, start now! That small initial investment could be your biggest return. If you already started, the hardest part is already over, just enjoy the downhill ride.

Also, don’t be afraid to aim for a big number. The path to get there is a lot shorter than you think. Currently, I am only 5% on my investment goal, but I know the hardest 5% is over. Investing, it’s only getting easier.

April 11, 2017 ETF, Index Fund, Investing, Personal Finance Basic ANZ, ASB, Cheapest, Comparison, ETF, FNZ, Investing, New Zealand, Personal Ffinance, SmartShares, Superlife Leave a comment

Cheapest Way to buy and hold NZ Top 50 ETF

by Alpha

I always encourage people to start a small investment with NZ Top 50 ETF and US 500 ETF when they are starting out. Those two ETFs are easy to understand, diversified, low-cost and have low minimum investment requirement ($500). They are ideal for long term (7 years+) investment. So here is the cheapest way to buy and hold NZ Top 50 ETF.

I will be discussing average investment here. I do not include KiwiSaver opinion here because you can’t get the money out before 65. (Anyway, ETF still an excellence option for KiwiSaver, especially for anyone aged under 50)

What is NZ Top 50 ETF?

Quote from Smart Shares Web Site:

The NZ Top 50 Fund invests in financial products listed on the NZX Main Board and is designed to track the return on the S&P/NZX 50 Portfolio Index. The S&P/NZX 50 Portfolio Index is made up of 50 of the largest financial products listed on the NZX Main Board. The S&P/NZX 50 Portfolio Index is made up of the same financial products as the S&P/NZX 50 Index, but with a 5% cap on the weight of each product.

So basically when you invest in NZ Top 50, you will have a share in the top 50 companies in NZ stock market.

Stock code for NZ Top 50 ETF is FNZ.NZ

Where and how to buy?

There are three ways to purchase NZ Top 50 ETF, on the stock market, with investment fund or monthly contribution.

Trade on the stock exchange – NZ Top 50 ETF can be traded as share on stock market via any stock broker. I will be using ANZ Securities online and ASB securities online here as they are amongst the cheapest brokers in New Zealand.

Purchase with Fund – Superlife (Smartshare’s sister company) offer NZ Top 50 ETF fund that holds shares in NZ Top 50 ETF. You can set up an account and purchase those fund with Superlife.

Purchase via monthly contribution – This is the most accessible and fixable way to buy into ETF, both Superlife and Smartshare offer that service. You need set up an account with at least $500 initial investment, and contribution $50 monthly to purchase that ETF or fund.

What’re the fees?

Basically, you should look for the lowest fee when you consider investing into the same product.

ANZ & ASB Securities online: You can purchase FNZ directly on the stock market with ANZ Securities. ANZ cheapest rate is $29.90/trade under $15000. However, you have to be an Online Multi-Currency Account (OMCA) holders with sufficient cleared funds available to fully cover the purchase of securities prior to submission of the order. Otherwise, ANZ charge $29.90 + 0.40% on trade. If you are not an OMCA holder with ANZ, go with ASB Securities, they charge $30 or 0.30% per transactions, whichever higher. On top of that, NZ 50 ETF charge 0.50% p.a. on management fee base on your total holding before they pay out. If you did the calculation, in order to pay the least amount of fees, you should only make one trade a year with over $10000, which will bring the fee% to 0.80%.

Smartshares: You can make lump sum investment and monthly contribution with smartshare. They will charge a one-time $30 account setup fee and charge 0.50% p.a. management fee base on your total holding. Check out the SmartShares disclosure statement here.

Superlife: Same as Smartshare, you can do lump sum investment and monthly contribution. They charge a $12 p.a. administration fee and 0.49% management for NZ 50 Top ETF. Check out Superlife disclosure statement here.

Cheapest Way?

Smartshares is the cheapest way to buy and hold FNZ. Superlife’s fee will become cheaper once the holding passed 120K.

I personally used both Smartshares and Superlife, and I think Superlife have a much better user interface and app. The $12 admin fee can be shared with other Superlife funds.

So if you just want to buy FNZ, Smartshare is the best deal out there. If you already have other funds with Superlife, there is not much difference in cost between Superlife and SmartShares.

Although ASB and ANZ Securities’ cost are higher, you should open an account with them if you got ETF from SmartShares. Since you are buying actually share of ETF via Smartshare, you will need a stock broker when you need to sell your share.

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

March 31, 2017 Bond, ETF, Index Fund, Investing, Personal Finance Basic Bond, ETF, Financial, Investing, New Zealand, Personal Ffinance, property, term deposit 1 Comment

Where to invest your money in New Zealand (Part 2)

by Alpha

At the last post, I made a simple graph to explain where to invest your money. Now let’s break it down in more detail

Mobile-friendly version

Within 1 year – Cash in Savings

For such a short terms, your best bet will be keeping your money in a savings account. Most banks offer serious saver or notice saver accounts with interest around 2.25 – 2.75%. I know it’s not a good return but its better than nothing. You may also consider a 6 months to 1-year term deposit for higher interest (3 – 3.5%). However, if you need to get your money out early, you may lose the interest and pay a break fee.

2 to 3 years – Cash in Term Deposit

You still want to play it safe so you should keep the money in cash. In this time frame, you can use a term deposit as they have a higher return of interest, around 3.5 – 4%. As mentioned previously, watch out of the penalties for early termination.

Recommended products: Term Deposit for all major bank.

3 to 5 years – Income Asset (Bond and Dividend Stocks)

If your money can stay in the market for 3-5 years, income assets become a feasible opinion. BBonds are not as stable as term deposit return, but they do offer the potential to earn a higher yield. I would suggest investing in a Bond ETF or a Bond Fund over buying individual bonds via a stock broker for small investors due to the cost of trade. Bond ETFs and Funds invested in multiple corporate and government bonds, which should reduce the risk

If you are willing to dip your toes in the share market, you can buy some dividend shares at this stage. Dividend shares are usually associated with established and mature companies on the board that pays out dividends constantly. Don’t expect those companies to have rapid growth but they usually pay out dividends every quarter. The volatility of those shares is smaller compared to other shares on the market. Spark, Auckland Airport, and power companies are considered dividend stock in New Zealand.

5 to 7 years – Shares, Property, and Bond

At this stage, growth assets will play an important part in your investments. Growth assets are shares, properties, and managed funds. The reason we shouldn’t touch growth assets until this stage is because of the volatility of the return. Year-to-year return can be ranged from -80% to +80% , but over longer periods it usually goes up. Take a look at the graph below. It shows the NZ stock market’s return in 2 years from April 2007 to April 2009.

If you invested in the stock market in April 2007 and planned to exit the market in April 2009, you would have lost about 35% of your investment.

On the other hand, if you had stayed in the market for 7 years, you would have gained 24% on your investment.

The same principle applies to property investment. The House Price index from 2000 to 2016 shows New Zealand property prices are trending up in the long term. You can see there was a dip during the 2008 GFC and the price recovered within a few years.

Therefore, in this timeframe, you should invest more and more into growth assets and the ratio of Bond and Dividend stocks should decrease.

7 years+ Mostly Growth Asset

At this point, I recommend invest 90% of your investments in growth assets and expect a long-term positive return on share and property. You may wonder why the income asset portion goes down to 10%. Although income assets are considered a safer investment, but they cannot match the high return of growth assets. Having a small amount of income assets in your investment will help offset potential downturns in your growth assets. Income assets don’t crash like growth asset, it will act as a cushion to soften any drops in the market.

Some people think if you are young and you can handle a market crash, you should have 100% growth assets as your investment. Whilst I agree with this point of view, it basically comes down to risk tolerance and personal preference.

What’s Next?

So this is the guide that I used to decide where to invest my money based on how long I was going to invest. In the next post, I will talk about risk tolerance adjustment and how KiwiSaver funds fit into this graph.

The timeline and investment ratio used in the graph are based on my own studies and conventional wisdom. Investment suggestions are based on neutral risk tolerance. Investment products listed are based on popularity, ease of access in New Zealand and a bit of personal preference.

Just a reminder, this graph is for GENERAL ADVICE ONLY. Your own situation may be different. Please thoroughly research everything you read here and seek professional advice if you need to.

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

March 27, 2017 Mortgage, Personal Finance Basic Banking, First home, First home buyer, Insurance, Mortgage, Mortgage broker, New Zealand 5 Comments

10 Mistakes I made as First Home Buyer

by Alpha

In this blog post I listed 10 mistakes that I made as a First home buyer. Now, here are more details about what I’ve done wrong.

I walked into my bank and get the personal banker to do my mortgage.
You can get a better deal and service from a mobile mortgage manager for that bank or a mortgage broker. A good mortgage broker will not only get you a deal on interest and cash back, they can also help you to structure a home loan so you pay it off faster. Moreover – if you are getting a quote from the bank, don’t ask just one bank. Make sure you get at least 3 quotes and be prepared to switch banks to get the best deal for you.
I took the advertised rate.
Bank’s advertised rates are for SUCKERS! You should ALWAYS ask for a lower rate. If you can’t get a better rate, ask another bank. There is 95% of the time you will get a lower rate unless you are a ‘high risk’ lender. Do not settle for the advertised rate. And remember – both fixed and floating rates are negotiable.
I 100% fixed my mortgage.
100% fixed mortgage gives certainty on your payment so lots of people are taking that. However, you will end up with extra cash sitting in a saving account and earning low interest. It would be better to set up a small revolving credit or offset mortgage for that cash to offset the home loan interest. You will be paying less interest while having the flexibility of cash in your account.
I paid my mortgage based on what the bank said.
If you have a 600K, 30 years term mortgage at 4.79%, the bank will ask you to pay $3144.37 monthly. Keep in mind that amount is NOT the absolute amount, it’s just the MINIMUM amount you should pay. You can (and should) always ask to increase the payment amount. Even a $50 increase or rounding up to the nearest $100 can save a lot of interest and time (I am talking about years) on your mortgage. For instance, If you up the 600k payment to $3250/month ($106 extra/month, just$3.5/day), we will reduce the loan by 2 years and save $42611 on interest.
I pay monthly.
You will save more on interest if you pay fortnightly. Using a 600K loan as an example, the monthly payment will be $3144.37. If you pay fortnightly, the payment amount will be $725.12. The annual amount when paid monthly is 3144.37 x 12 = $37732.44, compared to a fortnightly payment of $725.12 x 52 = $37706.24, a $26.20 different. Although the amount is small, a saving is saving.
I accepted the $1000 cash back.
This is the same principal as point no.2; you should always ask for a better deal. Although it may not be that easy to get more cash back at the moment.
I did not get a friend to do a referral despite heaps of my friends are with that Bank.
My bank, at that time, offered $500 cash if you got your friends and family to start a mortgage with them. I could’ve got friends to do a referral and split the $500.
I buy insurance from the bank.
Insurance from the bank is more expensive compared to insurance companies while offering a similar service. In my case, it was about 20% different. It is very easy to get an online quote for home, content and life insurance now.
I did not ask for fee-free credit card
Again, this is the same principal as no.2, you may not get it but at least you asked.
About 18 months into that fixed term, some news headline saying interest rate is going up. I considered to break the contract and refinance.
I didn’t in the end. However, I shouldn’t have been affected by a couple of news headlines or what the radio says.

So, those were my rookie mistakes when I first started my mortgage. Hope you guys won’t make the same mistakes that I made. Now, my mortgage set up is optimal for my situation and I will write about it in a coming blog post.

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

March 21, 2017 Investing, Personal Finance Basic Banking, Bond, ETF, Financial, Investing, New Zealand, Personal Ffinance, property, Shares, term deposit 4 Comments

A Simple Graph that explains… where to invest your money

by Alpha

The No. 1 personal finance question being asked online is “I have $XXX in saving, where should I put it?” or “What should I do with my term deposit?”. People who are unfamiliar with personal finance usually have no idea where to investment their money except term deposit and property (Oh, the old Kiwi dream). While property seems out of reach and interest rate on term deposit are hitting all time low, Kiwis are looking for another way to invest for their future.

Before you jumping into the world of investing…

You should put your money to invest after you pay off your consumer/personal debt, join KiwiSaver, and have an emergency fund. I believe you are not in the position of investing if you still haven’t got your financial basic sorted out.

The most important question

The first thing you’ll need to work out is How long can you leave the money in the investment? or how long before you will need to use that money?

If you are saving for a new car in 3 years, then 3 years is your answer. If you are saving for retirement and you are 30, 10+ years will be your answer.

Make sure you have money set aside for emergency before you invest. You don’t want to be in a situation where you plan to invest in the stock market for 8 years, some emergency happen in year 2 and you are forced to sell your investment at a loss.

Once you’ve worked out the time, apply that to the graph below.

Mobile-friendly version

Example

Let’s say if you plan to invest for 6 years, according to the graph, you may want to consider invest 60% of that money into growth assets such as stock, property, ETF, and index fund, while the other 40% investment into Bond or Dividend stocks.

If you invest for your retirement in 20 years, you may want to have a portfolio with 5-10% bond and the rest with stock.

On the other hand, if you wish to use the money to buy a car in 2 years. It’s best to put it in a term deposit.

Break down your plan

You may have multiple plans for your money, such as $3000 for travel next year, $12000 for a new car in 30 months, and $20000 for the first home in 8 years.

You need to apply those plan individually to the graph.

$3000 travel fund in saving account

$12000 car fund in term deposit

$20000 in a 10:90 mix portfolio while you keep adding more into the investment every month.

What’s next?

I will explain the basic idea of this graph, the mix of investment in this post and how to apply risk tolerance in the next post.

The timeline and investment ratio on the graph are based on my own study and conventional wisdom. Investment suggestion is based on neutral risk tolerance. Investment product listed on the graph are based on popularity, ease of access in New Zealand and a bit of personal preference.

Just a reminder, this graph is for GENERAL ADVISE ONLY. Your own situation may be different. Please thoroughly research everything you read here and seek professional advice if you need to.

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