Take Five for Monday

Personal Finance

The KiwiSaver savings debate; Affluenza?; Family budgets; Live without borrowing; Minimum repayment calculator

19th Dec 11, 11:48am by Amanda Morrall

By Amanda Morrall (email)

1) What's the difference anyway?

Is it just me or does Treasury have it in for KiwiSaver? One of their latest working papers suggests the retirement savings programme (with close to 1.8 million members and more than NZ$8 billion invested) may have missed its mark with the audience that needs to save the most and at the end of the day will potentially cut the national savings rate.

James Weir from the Dominion Post reports why here.

The Treasury report said as many as 93 per cent of those in KiwiSaver were outside the target group, so the vast majority of the public cost of the savings scheme leaked away from those who may be poor in retirement.

The report stressed that it was an initial assessment of the scheme, based on figures from early last year, before various changes to KiwiSaver were announced in the Budget this year, such as lifting the minimum contributions from 2 per cent to 3 per cent.

Ongoing costs of the scheme for salary and wage earners were expected to total about $823 million for the 2011-12 year.

Through direct subsidies and foregone tax, the government puts in more than $1b a year to individual KiwiSaver accounts, equal to about 40 per cent of contributions in 2010.

Those contributions are now being funded through rising public debt, so it was "prudent" to look at the scheme, the report says.

While there may be some short-run increase in national savings, it says, it appears that, given the extent of public contributions through tax breaks and direct grants, the net contribution to overall savings "would be marginal at best in the longer term, and may in fact reduce national savings".

2) Affluenza

Affluenza; it's the plague of our times. Someone has a nicer, bigger, newer house, car, bach, boat, (fill in the blank) and all of a sudden we need one too. Economist Robert Frank called it expenditure cascade. Status emulation is another term.

Globe and Mail columnist Margaret Wente, writing about how acute the disease is in Canada, talks to Wealthy Barber author David Chilton about just how insidious the problem is and why.

Why can't we content ourselves with laminate countertops? Just stay away from the friends with granite top and you'll be grand. Either that or avoid the kitchen party. And don't look at this Gourmet Kitchen either priced out by Bloomberg.

3) Family budgets

I enjoy the frankness of the personal finance blogosphere. I get roasted on occasion for my own honesty but I regard even the negative feedback as positive. Sometimes it forces me to reflect a little deeper, or else review my financial circumstances.

I admire the bravery of couplemoney.com for revealing, in detail, their 2012 monthly family budget. I have to admit to a bit of envy after reading their numbers: US$350 a month for groceries and mortgage payments of $850. I will reveal this much, that my rent blows their mortgage out of the water. And food? Is there anyone who can feed a family in NZ for $350 a month?

See also their family budgeting tools blog here. One of the methods referred to is the envelope system whereby you determine how much you need for monthly expenditures, categorise and carve out the dollars accordingly and basically suck it up when the envelopes run dry. I know some friends who use this system and it has worked beautifully for them.

I'm still hanging out for the NZ banks to kick open the doors to allow mint.com and the like to marry up so we can get some decent integrated options for money tracking electronically. In the meanwhile, I have been using sorted.org.nz's budgeting programming, which also now enables you to export from your account monthly data. It requires a bit of classifying and time but useful for establishing the flow and to spot the leaks.

4) Live without borrowing

One day I would like to buy a house in NZ but I'll have to get over myself, or rather my dread of borrowing. I'm phobic to the point of not even getting a credit card here.

Helium.com offers this four-step guide to living without borrowing money.

Always good to be reminded of the basics: 1. set goals 2. budget 3.have discipline 4.sacrifice

5) Minimum repayment calculator

I would add to the above getting out of debt as fast as humanely possible and also avoiding credit cards like the plague unless you're one of the rare few that can milk them for the points without incurring unnecessary spending.

To see just how financially deadly it can be drip feed the debt, check out our minimum repayment calculator here.

To read other Take Fives by Amanda Morrall click here. You can also follow Amanda on Twitter @amandamorrall

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38 Comments

by JungleBoy | 19th Dec 11, 12:18pm 1324250284

New Zealand Home Loans Debt Nav system is an awesome budgeting tool and their system reduced our mortgage from 25 years to 14 years saving us thousands. Having the will power to keep on track is the secret to success. The support structures put in place to assist with this are very helpful.

by Amanda Morrall | 19th Dec 11, 1:31pm 1324254719

Thanks for that Jungleboy. These are the kind of user tested recommendations we like to hear about. Cheers,

by Andrew S | 20th Dec 11, 12:05am 1324292741

There's a basic calculator online at http://www.nzhomeloans.co.nz/debtnav-lite/ that gives a rough idea of what you get. The full thing lets you plug in all of your income and expenses in detail so you can see where you're at, and calculates it all forward so that you can see what's going to happen in future months and years. It auto-updates from your bank balances as time goes on so you can see if you're over- or under- budget.

Disclaimer: I wrote the debtnav software :)

by Ms de Meanour | 19th Dec 11, 12:36pm 1324251386

So what exactly is your problem with the Treasury report on KiwiSaver? It's their job to check and report on whether the expenditure of taxpayers' money is achieving the results that are intended. In fact I wish they'd do a lot more of it.

by Gummy Bear Hero | 19th Dec 11, 12:54pm 1324252440

Some of us , according to our nearest & dearest , suffer from unffluenza ........ wishing to get budget priced , better quality , more durable chattels & goods than our friends and neighbours ...

.. . and also , aiming for stuff that we can have a cack-handed DIY attempt at painting or repairing , without fear of wrecking an overpriced art-house piece of filigree .......

Gummy eschews the ponsey shops of Merivale , in favour of the council's own Super Shed on Pages Road . All sturdy stuff , recycled ...... and dirt cheap !

..... saving a few hundred each year in the house , no need for contents insurance !

by Amanda Morrall | 19th Dec 11, 1:35pm 1324254954

Gummy, a patron of the Red Shed?! are you kidd'n me. I had you pegged as a buyer of E-bay cast offs from the rich and famous. Anyway, you get awesome hand-crafted goods in the Philippines for dirt cheap don't you?

by Gummy Bear Hero | 19th Dec 11, 2:14pm 1324257272

Red Shed ! .. Wash yer potty mouth out , .. GBH wouldn't be seen dead in that place ....

. Super Shed , hon !!! .... a cornucopia of recycled goods , cast offs . Run by the CCC .

..... also excellent for the unffluenza set ( aside from Ebay ) are farmer's clearance sales , auctions of industrial & commercial goods , and job lots from diseased estates .....

Being a mean miserable old Scrooge can be alotta fun ......

by skudiv | 19th Dec 11, 5:25pm 1324268736

diseased estates ..... ?

by Gummy Bear Hero | 19th Dec 11, 6:21pm 1324272110

Deceased Estates ! ........ silly Gummster , a wee Freudian slip .

.... There's something about the oldies ...... blackspots , blotches , and slow weeping sores which makes me think we should fumigate them all against fungal diseases .......

[ Granny Gummy appears to have developed swine flu , leaf curl , and a touch of brown rot (a.k.a. leprosy ! ) ... ]

by skudiv | 19th Dec 11, 1:23pm 1324254189

I see affluenza everytime I go into town. The way most people live, I couldn't afford to live like that, and I seriously question how they justify it. I'm in the unflenza camp, my standard of living may be low, but my quality of life is still high. No contents insurance either.

The first time I used borrowed money was also my largest purchase at the time. 55k I had a guts ache the whole way home, and couldn't even talk about it for 2 days. I'd never been keen on debt, or parting with money. Now it's not such a big deal, my perspective has changed.

by Amanda Morrall | 19th Dec 11, 1:43pm 1324255421

I admit to the odd attack of affluenza usually on trips back to North America where keeping up with the Jones' is a national pastime. Also, I have a few wealthy Kiwi friends who really challenge me too when I visit their mansions...feeling doesn't last too long. I consider myself truly blessed with what I have...on this front gratitude works miracles for putting out the fires of material desire and other cravings for other holes we perceive in our lives that will never ever be filled....desire is a bottomless pit.

by skudiv | 19th Dec 11, 5:55pm 1324270525

I'll always remember a story my Grandfather told me about the time he met Lord Rothschild. He mistook him for the gardner, because he was out weeding the garden in some old clothes.

Regardless of my personal opinions of the worlds oldest most powerful and richest banking family. Even they could see the wisdom of un-fluenza.

by MortgageBelt | 19th Dec 11, 1:52pm 1324255929

A bit difficult to live without borrowing once you have kids: e.g. keeping Kid1 financially afloat in last year of Uni = $$$$. Flying Kid2 working in Aussie home for Xmas = $$$, Kid3 = school fees etc. This sort of spending is not exactly mindless consumerism, to avoid it would require removing significant support to one's family.

Hence the importance of purchasing a house early, get a few years working as a couple saving, then at least you can use your house as an ATM during the expensive years (those are 16-23 now - not 5-13!).

Hopefully, once they all leave - then you can catchup with debt reduction & investment. Mind you, I hear stories of people then stumping up house deposits, & bailouts for adult kids. Not going there.

by MiniMe | 19th Dec 11, 3:09pm 1324260570

Not judging but wondering why you'd be spending any money on kids 1 and 2? Independence?

by skudiv | 19th Dec 11, 5:19pm 1324268374

HAHaha classic

by skudiv | 19th Dec 11, 5:24pm 1324268647

My first job was on a fishing boat, and I had to be there at 4am. I needed $20 for a taxi, (because my parents wouldn't drop me off) and they wouldn't even LOAN me $20. That was probably a bit extreme IMO but it taught me the importance of saving.

Taught me nothing about investing, or how to really make money, but nothing was free when I was a kid.

by MortgageBelt | 19th Dec 11, 7:26pm 1324275996

Hmm... 'throwning' my money away? Maybe, but I'd rather my kids had the opportunity of a first degree before cutting all $$ support.

It does raise an equity issue - Kid2 (18) serving an apprenticeship in Australia, I think, is as deserving of semi-support as the Uni student. Both good training options, but often the early worker gets the cord cut quicker.

I see the $$$ as an investment - both as a parent, and on a macro level as a contributor to the NZ (& Aus) economy & society.

Skudiv - yes, same re on your own financially at 18 - but is that a good reason to repeat? I spent a lot of my working life playing catchup then postgrad studies later etc - could have done all that quicker at 20/22.

by Elley | 20th Dec 11, 8:59am 1324324747

And I thought nappies were expensive... It probably wasn't a bad idea to start a savings account for a 3-month-old baby a couple of weeks ago then!

by the_dc | 19th Dec 11, 2:01pm 1324256494

Did the geniuses at the Treasury ever consider that the govt contributions won't last indefinitely but are a means of incentivizing people to join. Also the "soft compulsion" will definitely increase numbers. But if "93% of those in Kiwisaver are outside the target group" then the "target group" is badly defined. This sort of "analysis" helps no one. What a bunch of clowns.

btw ... your Globe and Mail link is broken.

by Ms de Meanour | 19th Dec 11, 2:24pm 1324257866

"The govt contributions won't last indefinitely" - says who? There's nothing in the legislation, or in Government policy statements, to indicate that Government contributions are going to be reduced or stopped. On what basis should Treasury be assuming that they will?

The whole point of this kind of analysis is to demonstrate the value for money (or not) that Government contributions are delivering, so that informed decisions can be made as to whether Government contributions should be maintained. You're making a circular argument.

by the_dc | 19th Dec 11, 2:53pm 1324259622

Says who? Says common sense. The reality is NZ doesn't have a savings culture (except through gradually and painstakingly building equity in residential property). KiwiSaver is a good start towards creating that culture. It would help if Treasury didn't try to undermine it at every possible opportunity.

by Hamish | 19th Dec 11, 3:06pm 1324260377

What's common sense got to do with government policy?

by Ms de Meanour | 19th Dec 11, 3:22pm 1324261365

"KiwiSaver is a good start towards creating that culture".

What is your evidence for that? What do you know that the Treasury doesn't, about the extent to which KiwiSaver members are saving more of their own money than they would have done otherwise?

If you think it's such a great and successful scheme, why do you think it is common sense to assume that Government contributions are going to be reduced?

by the_dc | 19th Dec 11, 3:58pm 1324263527

What is my evidence that Kiwisaver is a good start to creating a savings culture in New Zealand? ... Well, my evidence is that it is a savings scheme in New Zealand.

The reason govt contributions would be expected to tail off over time is because (as I suspect you would agree) it is not the govt's role to be perenially topping up people's personal savings. However, it is the govt's role to encourage people to start saving, which is what the govt contribution seeks to do.

Why doesn't Treasury go and do research into how to boost NZ's capital markets? Why bother with a report undermining Kiwisaver, when by their own admission, it is probably too early to judge anyway?

by Ms de Meanour | 19th Dec 11, 4:26pm 1324265187

It's a policy intended to achieve a certain effect, and therefore by definition it must be having that effect? What touching faith in the skill and judgement of our political masters.

No. Agreeing that the Government contribution is intended to encourage people to start saving, is not the same thing as saying that it actually has that effect in practice. The evidence suggests that it does not.

When you say, why bother with a report undermining KiwiSaver - do you mean that:

the Treasury should not be examining the impact of a policy which costs the Government a billion dollars a year; or
that they should only have published the report if the results of their analysis turned out to be favourable to the policy (ie, conceal results which are unfavourable); or
that they should have conducted the analysis in such a way as to make sure that the results were favourable?

by MiniMe | 19th Dec 11, 3:12pm 1324260723

Amanda, link for Canadian Affluenza doesn't go anywhere.

Also in NZ Kiwi Bach = holiday home, batch = amount of muffins

by Gareth Vaughan | 19th Dec 11, 3:32pm 1324261924

Fixed those two, thanks MiniMe.

by Black Celebration | 19th Dec 11, 4:09pm 1324264174

I met a bloke a couple of weeks ago who was convinced that he had no savings at all. He was thrilled to see that he did in fact have about $8,000 in his KiwiSaver account. He literally rubbed his eyes and shook his head in disbelief when he saw it. He let KS membership happen to him in 2008 when he changed jobs and hadn't really paid much attention since then. He wouldn't have saved a darned thing without KiwiSaver.

So how come Treasury thinks that without KiwiSaver he would have somehow saved this money somewhere else? Enlighten me. Please.

by Wolly | 19th Dec 11, 4:22pm 1324264934

Savings is just capital BC...even a bloke with not a dollar to his name can be rich in capital...knowledge BC...that's where it's at....knowing stuff...pays off big time when you spot that rough diamond or gold nugget...that rare book or old master....the rare coin or watch...

Most people wouldn't know a Diamond in the rough if it bit them on the bum. Many have tossed away such 'pebbles' over the years...at one time the 'experts' said Diamonds didn't exist in Australia....

Same is true for rare books paintings and pots of all kind.

Kiwisaver is a rort....it feeds the fund industry fat fees forever...fabulous rort...propped up with taxpayer subsidy...

by Black Celebration | 19th Dec 11, 7:14pm 1324275292

Wolly..my future wealth is assured, not through KiwiSaver, but through big corporations paying big money to virally spread their message *very* subtly via my pithy and influential blog posts.

If you're gonna get a shed, you can't go wrong with a Fair Dinkum shed.

by Ms de Meanour | 19th Dec 11, 5:00pm 1324267258

Well, for a start the Treasury looked at a larger sample than an anecdote about one bloke.

Of course there are some people who now have more in savings than they would have had without KiwiSaver, even subtracting the Government's contribution (which you have to do if you are assessing the impact on national saving).

And there are also others who don't. I don't. I put some money into KiwiSaver and other money into other forms of saving, but the total amount of my money that I save is not different from what it would be if I weren't in KiwiSaver.

Your bloke may well have been delighted to find that he had $8,000 in savings. But if in the past three years he had run up damaging debts, or had had to pass up an opportunity to invest in something worthwhile, or forgo the purchase of something that he would have liked, , he might well have been less pleased to discover that money that he could have used for that, had been going into his KiwiSaver account instead of being put at his own disposal.

He does, however, serve to illustrate that KiwiSaver does not necessarily change people's attitudes to saving. He's been a member of KiwiSaver for three years, but hasn't consciously saved anything in that time. Not much evidence of a culture change there, then.

by Black Celebration | 19th Dec 11, 5:31pm 1324269078

Au contraire, Ms de Meanour. My bloke has now seen the power of saving money. He now knows it's a good thing and he'll tell other people. And the money he has personally foregone to get $8,000, is about $3,000.

Once balances build up, the more people will like it. KiwiSaver can't change the nation's savings habits just like that.

I am suspicious of this release because, as Amanda alludes to, it seems someone somewhere wants to trash KiwiSaver. Releases like this don't appear to be passive, business-like releases of the latest data.

by the_dc | 19th Dec 11, 5:40pm 1324269633

Ms ... I assume by your own actions that you do think saving for retirement is a good idea.

If some people are not as motivated, intelligent, or disciplined as you are, to have a savings plan of their own, then wouldn't it be a good idea to use their inertia (read: laziness) in a postitive way? (i.e. have them automatically enrolled in a savings program, so at least they are saving something, even if not consciously). I mean if some "bloke" is so clueless that he doesn't have any idea what savings he has, then is he really likely to have chosen a better investment vehicle himself?

Now I know there are those who say (and perhaps you are one) "well he should be free to choose what he does with his money and if he choosely poorly, then that's his problem" ... which is fine except that it is not just his problem. When he reaches retirement and can't afford to house himself or pay his medical bills, then it becomes all of our problem. Unless we want to be a society that casts people into the cold dark night. And I don't think we are that sort of society. At least not yet.

Kiwisaver should be reviewed and if necessary tweaked from time to time (and in time the Govt contribution should go), but to suggest the whole thing is a waste of time less than 5 years into its life, seems premature and unhelpful.

(btw: Black Celebration, I don't mean to say your "bloke" is clueless ... this is a generic bloke!)

by Black Celebration | 19th Dec 11, 6:59pm 1324274374

No worries, the_dc - I know what you meant, and I agree with your points.

by Ms de Meanour | 20th Dec 11, 9:34am 1324326899

Evidently I've not been that clear. I'm not saying the whole thing is a waste of time and I don;t think the Treasury report is either. I don't have a problem with automatic enrolment and passive saving at all. That will raise both personal and national savings and mean that many people are better off at retirement than they would have been otherwise.

I do however have a problem with the Government subsidies. They are not delivering public value for money.

In the case of BC's bloke, he has collected more, but he has not personally saved more than he would have done in an unsubsidised KiwiSaver. His personal savings would have increased by $3000 without the Government or his employer having to contribute anything at all. Is the additional personal enrichment of one bloke really the best use of the additional money that his employer and the Government have put into his KS account?

by Black Celebration | 20th Dec 11, 12:18pm 1324336696

I think the Government subsidies are crucial to the wider take-up of KiwiSaver (beyond employees), particularly the self-employed, but as time goes by I would expect the member tax credits to stop.

The kickstart will probably stay because it does get people into KiwiSaver early on. By the time they start work, they will have the KiwiSaver mechanism already in place and they will start to save money when they get paid.

After soft compulsion, every employee that was going to join will have joined - and every employee that doesn't want to join will have opted out voluntarily. This will mean at least 1.5m (perhaps more) employees will have regular savings coming from their pay on a regular basis, matched by their employer.

Those who aren't employees may stop contributing because there is nothing "in it" for them, after collecting the $1,000 kickstart. This is why the member tax credits have been so important - without it, KiwiSaver doesn't help those people, who aren't on a payroll, establish a regular savings habit.

My opinion is that KiwiSaver will eventually settle into what it was originally intended to be - a workplace scheme. Having the vast majority (80%+) of employees having 6% of their pay regularly going towards retirement savings paints a healthier picture than pre-KiwiSaver days, when only 5% of employers offered savings through the workplace (and most of them weren't really superannuation schemes.

In short, I think the subsidies have worked and they have played a crucial role in raising savings levels in New Zealand.

by Justice | 19th Dec 11, 5:44pm 1324269896

Kiwisaver is a con, end of story. 1.8 million mugs will find that out eventually

by the_dc | 19th Dec 11, 5:54pm 1324270496

Wow. Great story. You should do children's books.