Savings - New Zealand opportunities

Savings This is probably the next most critical thing you have to get your head around after you have mastered the desire to spend more than you earn. Once you have a surplus, what do you do with it, how do you invest it and what do you need to know.

ľ Saving is critical to wealth creation.

Generally I recommend to my clients that they set up two bank accounts: one a savings account with ready access and one a transactional account, with or without a cheque book. All their income goes into the savings account and once a week a transfer is made based on their budget. This is then what they survive on for the week. If you preferred you could take the weekly amount out in cash, to reduce the number of bank accounts needed to only one.

Over time the savings account is likely to grow, as some budgeted expenditure may not eventuate or some unexpected income is received. For example, budgeted car repairs don¡¦t eventuate, you under spend on groceries, or some overtime and bonuses remain in the savings account. This then provides the foundation and source of your investment scheme.

ľ The earlier you start the more you will have saved.

So what are your options?

Simple savings accounts and bank term investments.

This is probably the one your wages will go into and the interest rate is very small - your immediate access has a cost - between 0 and 5 % pa at present. You would probably use this account until the balance rose to over $5,000, as that is usually the minimum figure for placing your money on term deposit. A Term Deposit is one in which you enter a contract with the bank to lend it your money for a fixed term, generally between 1 month and 5 years. The longer the term agreed to, usually the higher the interest rate your deposit will earn. Remember the bank makes decisions on this agreement and will only agree to break (return all or part of the money to you during the term of the deposit) the deposit for exceptional circumstances. A penalty interest rate will also usually be charged for such a break For example, if the interest rate was 5 % pa the bank may reduce the interest rate paid down to 4 % or less. The penalty depends on the length of time the deposit has been in place and what the interest rate was for the term actually completed (comma not required) at the time the investment was made.

It¡¦s probably best to start your investment with the bank you are with and talk to their sales staff to find out what is on offer. If you are interest rate sensitive (require a higher return for your income needs or growth plan), search the Internet for the best rates.

It is commonly accepted the higher the interest rate the greater the risk so take care to satisfy yourself that the company you trust with your money to is financially strong enough to be able to repay you on maturity.

Pros Cons Easy access Boring Guaranteed income Poor return Relatively safe No up side i.e. Capital growth

Shares A share is just that, a share of the company you have invested in. Also known as an equity stake, the share represents part-ownership of a company. When you buy a share in a company, you become a joint owner of the business and share in the future of that business. Shares are generally regarded as providing the potential for the highest return of all the investment options you can have, in the longer term. Shares are generally classed as 'growth' assets, but they come with no guarantee and can fluctuate both up and down or even go belly up and you risk losing the amount invested.

Besides providing potential capital growth as the value of the share price, we hope, rises, shares can provide regular income through the payment of dividends.

Share dividends can also come with a wee bonus by Imputation Credits. Companies pay a flat tax rate of 33 % of their net profit and if the company has paid full tax on the income, and your marginal tax rate is only 19.5 % then you can claim the difference back in you tax return. Of course the reverse is also true, so that if your marginal tax rate is 39 % then you will have to pay the difference. I¡¦d advise that you seek good taxation advice if you have this problem.

Pros Cons Interesting Volatile Potential Capital Growth Ignorance Dangerous Potential Income Earner Semi liquid

Further information can be found at www.nzsx.co.nz

Property 1) For a place to live. We all need to live somewhere and the decision on what property to buy is very much an emotional one and often the heart rules the decision-making.

2) For investment, but this time you have to do the numbers and let your head rule the decision.

Things you need to consider when purchasing an investment property:

1) Strong, consistent population growth - when more people are steadily moving into an area, a certain percentage of these people will need to rent. This builds demand, and keeps occupancy high.

2) Developments that will create permanent new jobs - Act like a magnet, bringing new people into the area, again increasing demand 3) Timing ¡V When should you buy? The property market is cyclical and although the value of property consistently goes up in the long term, it tends to go up and down along the way.

4) Return - The expected income generated from the investment can be measured by dividing the income over the value of the investment. e.g. gross rent is $10,400 pa and the property cost you $115,000, then the yield or return would be 9.04 % pa.

5) Good location ¡V is also of critical importance ¡§where can I buy a property that will give me a great return?¡¨ is a useful question to ask yourself.

Pros Cons It is real (See it, Feel it) Tenancy Laws Inflation adjusted rent Bad tenants Capital growth Not Liquid Tax benefits Large investment

Further information can be found at www.propertynz.co.nz

Fixed interest Fixed interest securities are typically referred to as 'income-producing' investments. There is also the potential for a capital gain.

Bonds, the most common form of fixed interest securities, are agreements to repay a fixed amount of money at a predetermined date in the future, the maturity date. Governments, banks or companies generally use bonds to provide finance for their own use.

When an investor purchases a bond he or she is in fact lending the issuer of the bond agreed time. In return for this money, the issuer agrees to repay the amount in full at the end of the agreed time, and also make regular interest payments known as 'coupons', throughout this time period. Coupons is an old term and comes from the fact that historically a bond certificate came with coupons on the side of the certificate and each one had a date for payment and an amount to be paid. The Coupon would be clipped of and sent to the bond issuer for payment. At one stage in my career with the ANZ bank I had to do just that, clip the coupons and deliver them for payment, then bank the interest into an account. Of course everything is electronic now, but it is interesting to see the name retained.

Bonds can either be held to maturity, or they can be traded on a secondary market. Fund managers will trade bonds on this secondary market because it is possible for them to make a capital gain. This is because while the coupon payment rate and the time to maturity are fixed for a particular bond, its value or the price it can be bought or sold for in the market can change.

A profit occurs if the value of the bond increases (the interest rate decreases) between the time of purchase and the time of sale. Similarly a loss occurs if the value of the bond decreases (the interest rate increases) between the time of purchase and the time of sale.

Bond yields You may hear the term 'yield' used in the financial press in relation to bonds. The yield represents the market interest rate for a bond, and reflects factors such as the risk of investing in the bond and the term to maturity.

While the coupon rate simply shows the rate of return that the issuer will pay each year based on the face value, the yield shows the actual rate of return expressed as a percentage of the market value of the bond under current trading conditions.

Pros Cons Regular income Lower returns Potential capital gain Potential capital loss

Other There are many different other options for you to consider e.g. Precious metals, coins, stamps, art, vintage cars, etc.

A very good rule to follow when investing is ¡§If it sounds too good to be true, it probably is!¡¨

Unfortunately there are dishonest people out there only too willing to play on the greed or vulnerability of individuals and take advantage by stealing their savings. I doubt whether a week would go by with out another scam being reported. Seek professional advice always!

Learn the Rule of 72 Step 1 of 2: How long does it take my money to double?

This step teaches you how to determine the number of years it will take for your investment or debt to double in value. By dividing the number 72 by the percentage rate you are earning on your investment, or paying on your loan, you will find out how many years it will take to double in value.

Here are two examples...

You borrowed $1,000 from your friend, who is charging you 6% interest. 72 divided by 6 is 12. That makes 12 the number of years it would take for your debt to your friend to double to $2,000 if you did not make any payments.

You have a savings account with $500 deposited in it. It earns 4% interest from the bank. 72 divided by 4 is 18. It will take 18 years for your $500 to double to $1,000 if you don't make any deposits.

Remember: 72 divided by the Interest Percentage is the number of years it takes to double.

That is the end of step one. Step two will blow your socks off!

Step 2 of 2: How many times will my money double?

This step teaches you how important it is for your money to double as many times as possible, and for your debts to double as few times as possible.

Determine how many years you will keep your investment before cashing it in. Divide that by the number of years it will take to double each time, the number you figured out in step one.

Now look at what happens to your money each time it doubles...

$1 ... $2 ... $4 ... $8 ... $16 ... $32 ... $64 ... $128 ...

You can see that it makes a big difference how many times your money doubles. If you can make it double only a few more times by making just slightly better investments, you can end up with many times more money at retirement, or whenever you cash in your investment.

Think about how fast your debts can double with high interest rates, such as those charged on most credit card accounts.

You have learned the basics - you need to use the rule of 72 Gain financial success faster when you command the power of compound interest, instead of allowing compound interest to enslave you.

Obtained from the website www.ruleof72.net



Savings - New Zealand opportunities - To learn more about this author, visit David Weusten's Website.

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