I had a client come to me last week who had come into some money from a relative who had passed away. It was a significant sum of money. So what do you do with it? Spend it on a new Euro car! YES….well maybe not so fast…what about a house?
New Zealand has seen a declining housing market in the past 18 months. However, the 10 year price rise preceding this slight decline has made homeownership an elusive dream for many. According to REINZ, as of 2021, the median house price in New Zealand was a whopping $810,000. So, what if you find yourself with a surprise sum, say from an inheritance, but it’s not enough for that dream house?
1. Clear Outstanding Debts:
Your first consideration should be to tackle any high-interest debt, such as credit card debt. New Zealanders owed over $6.5 billion in consumer debt in 2021. Paying off these debts not only reduces financial stress but also positions you better for any future investments.
2. Emergency Funds:
If you don’t already have one, consider establishing an emergency fund. Financial advisors often recommend keeping three to six months’ worth of living expenses for those unforeseen circumstances. With the uncertainty of global events like the COVID-19 pandemic, having a cushion has never been more crucial.
3. KiwiSaver Top-Up:
KiwiSaver is New Zealand’s voluntary savings initiative, helping residents save for retirement or a first home. If you're under 65, contributing a lump sum to your KiwiSaver can be an excellent way to boost your retirement savings. With annual returns varying but often around 5% to 7% for balanced funds, it can be a relatively safe and lucrative option.
4. Diversify with Investments:
Stock market investments can be a good option. The NZX 50, which comprises the country’s 50 largest listed companies, has returned over 20% annually in some recent years. Platforms like Sharesies or Hatch offer easy access for beginners. However, always remember the stock market can be volatile, so it’s wise to diversify investments and consult a financial advisor.
5. Consider Alternative Real Estate Options:
While a house might be out of reach, other real estate investments can be more accessible. Look into Real Estate Investment Trusts (REITs) or fractional property investment platforms like PropertyShares. These allow multiple investors to pool funds and invest in properties, earning returns proportional to their contribution.
6. Delve into the Bond Market:
NZ government bonds or corporate bonds can be a stable investment option. They may not offer as high a return as stocks but are generally considered safer, providing regular interest payments.
7. Explore Peer-to-Peer Lending:
Platforms like Harmoney and LendingCrowd connect borrowers with individual lenders, bypassing traditional financial institutions. As a lender, you can earn interest on the money you lend, often higher than standard bank savings rates. However, there's also a risk that borrowers might default, so diversification across many loans is recommended.
8. Education and Skill Development:
Consider using a portion of the funds for further education or skill development. Whether it’s a professional course, workshop, or even a degree, upskilling can increase your earning potential in the long run.
9. Support Local Start-ups:
Angel investment in local start-ups can be a way of potentially earning returns while supporting the NZ economy. Organizations like the New Zealand Angel Association can help connect potential investors with budding entrepreneurs.
10. Treat Yourself – Responsibly!
While it’s crucial to think about savings and investments, it’s also essential to enjoy a portion of your windfall. Whether it's a holiday (domestic travel can support local businesses), a special purchase, or an experience, allocate a responsible percentage for personal enjoyment.
Inheriting or receiving a surprise sum can be both a blessing and a daunting responsibility. While the temptation might be there to make quick decisions, it’s essential to approach the situation methodically. Consult with financial advisors, weigh the options based on risk tolerance, and align your choices with long-term goals. New Zealand’s economic landscape offers myriad opportunities to grow your windfall, even if it’s not immediately turning it into a home.
*Lynda Moore is a Money Mentalist coach and New Zealand’s only certified New Money Story® mentor. Lynda helps you understand why you do the things you do with your money, when we all know we should spend less than we earn. You can contact her here.
20 Comments
Why would you put a large lump sum into kiwisaver and leave it at the mercy of government policy when there is not extra pay back for doing that?
Plenty of kiwisaver providers have equivalent investment funds where you can still get hold of the cash if you ever needed it.
With KS you get the Gov top up of $521 should your contributions exceed $1042. Having a non-KS super fund gives you the flexibility to withdraw early as other commentators have noted. If it is a work KS some employers pay the fees. In contrast if it is a private fund you are stuck with paying yourself.
But there are identical vehicles which don't lock your money up until you are 65- 67 and may not have the same high kiwisaver management fees either. Ding that also potentially could prevent someone retiring earlier and using that money. I dont see what advantages kiwisaver has in that situation over other vehicles.
True. But ...
Most mortgages in NZ are table mortgages. In the first years you are paying mainly interest. Whereas in the last years it is mainly principal.
Take Getfeeling's friend Jack who thought about taking a $500k, 30 year mortgage at today's rates of 7.2%
1st year:
Interest paid: $35,841
Capital Repaid: $4,886
Note that if you were investing the capital repaid in the 1st year for 1 year ... wait for it ... You'd need an investment rate of ~700% to make such a return!
30th Year:
Interest paid: $1,545
Capital Repaid: $39,182
(Note: The last year is the only year when interest is so low.)
The point I'm making here is that making lump capital repayments in the early years and keeping the repayments the same results in a far higher return of capital than doing this in the latter years.
The 21st year - 2/3 through - is where interest and principal equalise:
Interest paid: $20,192
Capital Repaid: $20,536
Note that if you were investing the capital repaid in the 21st year for 1 year .... wait for it ... You'd need an investment rate of 100% to make such a return!
Using interest.co.nz's full function calculator you can figure out what effect a lump sum repayment has. Just take the current outstanding balance and remaining term and use those as the starting point. Get the result. Then compare to a reduced outstanding balance ... while making additional payment to bring the repayment up to what you're paying now.
Scary stuff.
You' be amazed at the number of people with table mortgages who compare interest rates on term investments to what what they're paying on their mortgage.
They are not the same.
And sometimes - if you can pay back existing cc debt quickly - then a lump sum capital repayment on your mortgage can be better because the mortgage interest is calculated over the entire remaining term!
Just quietly - were I to be granted the right to be a Dictator for a day - I'd outlaw table mortgages and dictate that only reducing mortgages were allowed. (Where you repay a fixed amount of capital every year and interest on the outstanding balance.) This would mean Kiwi's got an instance lesson on finance and why two interest rates are NOT the same. And would suddenly right our housing market.
The only good thing - and 'good' is sarcasm - about a table mortgage is that it keeps repayments as low as possible ... allowing people to buy as much as possible.
Something's not quite right here.
Note that if you were investing the capital repaid in the 1st year for 1 year ... wait for it ... You'd need an investment rate of ~700% to make such a return!
I think the comparison you want to be making is - what happened if you invested the capital repaid in the first year, for 30 years? Because if you only invested it for 1 year, then you would have your $4886+teeny interest ready to pay on top of the capital in year 2, with compounding effect.
Perhaps look it as follows...
If Jack signs up for a 30 year mortgage, 7.2% of $500k, the table mortgage tells him to pay $40727.28 per year, for 30 years.
Then in year 1, Jack decides to just pay interest-only, makes the mortgage 31 years in total, but just paying the remaining 30 years as planned from year 2-31.
Instead he takes that $4727 he saved by not paying principal (slightly less than 4886 since that entire year of unpaid principal cost him a bit), and invests it at his other bank at 7.2%. For a full 30 years. Compounding annually, avoiding the tax man, he gets $38,056.53 at the end.
Which is just in time for his last year of mortgage payments to come out. He's short about $2700 with these numbers, but that's not significant compared to the $1.2M his mortgage has cost him. Ergo it makes no difference whether a lump sum payment is made in year 1 vs year 30, compared to investing that payment elsewhere.
What I thought. I was one of the original Harmoney lenders. Everything went to seed quite quickly. First 8 months were quite good for the non-institution lenders. After they took the lion's share of loans, I started to wind down. Not bad ROI. Around 9% pa after fees, defaults.
7. Explore Peer-to-Peer Lending:
Nuts IMO. Risk-reward not worth it.
Anyway, at least 1% should be allocated to Bitcoin. Hugely irresponsible for people not have at least 1% allocation, particularly if they already have an established investment portfolio. Bond allocations should be as low as possible.
What to do indeed. Shares and Property are well over priced based on the actual return. So that just leaves the speculative gambling on capital gains waiting for the US money printer to start up again. A safe bet according to our Investor Savant.
Perhaps a focus on eliminating personal living expenses. Set up Solar with battery storage, Tank water collection, and get a great vegetable garden underway to reduce your personal opex as much as possible. Then target transport via an electric bike if you like biking, and or an electric car fed from solar to avoid petrol and road charges (about to change).
Perhaps a focus on eliminating personal living expenses.
A good alternative option which will free up weekly cashflow over time. Garden is going in and making it bigger in the coming months and already cycle or moped to work. Now is a fantastic time to explore other food options and diversify away from meat or as much meat for every dinner as well to save. Plenty of productive hobbies for everyone to explore!
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