Kiwis work hard for their savings. Whether it be working longer tireless hours, or cutting down on expenses to find that extra bit of dough to put away. Saving takes dedication and discipline, so it isn't fair that a lot of people actually lose money while trying to do so.
There are some secrets about your average savings account that banks don’t really want you to know. Yes, it is common knowledge that you are charged service fees, withdrawal fees, admin fees and many other little deductions off of your deposits but that isn’t the real killer when it comes to the loss of value in your standard savings account. The real culprit is inflation.
Put simply, inflation is the rate at which the price of a standard good or service increases over time. For example, the average price of your shopping basket 10 years ago may have been $60. But that exact same basket of goods may cost you $70 today. This is due to the effects of inflation. The constant increase in the price of goods and services over time may seem like a problem, but the gradual increase in income over time (though not keeping up with the rate of inflation) helps to counter this and keeps everything balanced. The real problem lies in your savings account. According to the reserve bank of New Zealand, the inflation rate in NZ is about 1.5%, meaning every year the price of your average good goes up by this much. So last year that $100 you had sitting in your savings account could buy you a nice full tank of fuel from the petrol station. But this year (due to inflation of 1.5%) that tank of gas now costs $101.50 but you still only have $100 in your account, so effectively your money can’t buy you as much fuel as it could last year, and in 30 years time, that same tank of fuel would be 50% more expensive again.
That is a lot. But relatively speaking, New Zealand's inflation rate is actually very low and steady compared to some other countries. Some countries suffer from hyperinflation, where governments have failed to control the impact of inflation resulting in goods and services price increases spiralling out of control. Here are some stats from 10 of the most hyperinflated countries to help make you feel a little better about the 1.5% rate in NZ.
Inflation is a drawback when it comes to saving and yes it is true, banks pay interest on most savings accounts. But those rates average at around .8% (and that's for a term deposit). This is substantially less than the rate of increase on goods and services. So the longer your money sits in a savings account at the bank, the more value or ‘purchasing power’ it loses over time. So how can you put away your hard-earned savings without it diminishing in value over time?
There are a few options when it comes to saving your money without sacrificing your value. One of them being KiwiSaver. Many New Zealanders believe that your KiwiSaver is just another savings account where you can push aside some of your paychecks in the hope you can buy a house or retire one day. But there are so many benefits that put it so far above your average savings account. Firstly, your KiwiSaver is not a stagnant savings account that just collects dust and loses value over time. It’s actually an investment opportunity. When putting money into your KiwiSaver, those funds are pooled together with many other KiwiSaver participants to be invested into all different types of markets in an effort to make you a return on your investment. The average return of a “Growth Fund” KiwiSaver account is approximately 8%. So instead of losing 1.5% value per year, your savings could potentially be gaining 6.5% value per year.
In addition to that, unlike your standard savings account you aren't the only person making deposits into your KiwiSaver account. Employers must match your KiwiSaver contributions up to 3%. So if you are earning $60K per year and are contributing 3% to your KiwiSaver ($1,800) then your employer also contributes $1,800 per year as well! On top of this, The government will match 50 cents to every dollar you contribute (maximum of $521.43). In total, that’s $4,451.14 from contributions and expected return in your Kiwisaver account after year 1, with you only contributing $1,800 of your own money. The increase rate gets even larger in years to come due to compounding interest.
Though KiwiSaver is a great option when trying to gain value on savings as opposed to losing it, there are some aspects that you need to take into consideration. Firstly, KiwiSaver is an investment. So that means there will always be a certain element of risk involved. That being said, KiwiSaver is one of the safest investments that you could make. Even with the Covid 19 economic disruptions, KiwiSaver funds showed only small blips of drawbacks before returning and exceeding their previous values. The level of volatility that comes with any investment is also something to be wary of. There are many different funds available to choose from with all different returns and levels of volatility. If you're a keen investor with a long investment horizon ahead then maybe a growth fund is right for you. But if you were a little more comfortable investing in a fund that can just keep you a little ahead of inflation then perhaps a conservative fund is better for you. Nevertheless, choosing the right provider and fund can be a very daunting process. Fortunately, at National Capital, we excel in helping match you with the fund that is going to best meet your needs and goals. So if you would like to find the best fund for your unique situation then have a look at our KiwiSaver HealthCheck.
Another consideration to be made when looking into KiwiSaver is what you are saving for. Due to the Nature of the Kiwisaver scheme, you can only withdraw your KiwiSaver for a small handful of reasons.
To buy your first home
When you retire
If you aren't trying to withdraw for one of those reasons then it is likely that your request will be rejected.
Understandably, KiwiSaver does not fit the needs of every individual. Maybe you aren't often in the country, you would like to access your savings at a specific point in time or for a number of other reasons it just isn't right for you. But don’t stress, there are a few other ways to save without sacrificing the value of your hard-earned money.
Bonds are a great way to keep your savings safe, without losing out to inflation. A bond is essentially a small loan made by you (the investor) to a borrower. The borrower can range from Businesses, Large corporations or even the Government. When purchasing a bond, you agree on the date of maturity, (when you get your money back) and the coupon rate (the fixed rate of return to reward you for lending out your money). This means that you can decide how long you want to save before withdrawing savings. It’s all-around a good investment option as it is very safe and often offers a return higher than inflation, so your savings aren't losing value. The downside is that often the return isn't very high and it’s a fixed-term contract so you are not able to access your funds before the maturity date.
An Exchange-traded fund is a great financial tool to add some return to your savings. Exchange-traded funds or ETFs are essentially made up of tiny fragments from many different types of investments including securities, bonds and commodities. It’s safer than investing in your average stock on the share market as it is very diversified. It’s also a very liquid asset meaning it’s very easy to access your funds quickly.
Property can be a great investment option to avoid the loss of value on your savings, but it isn’t a viable option for everyone. Though historically the property market has seen some very desirable returns, it takes an awful lot of capital to acquire. Property is also an illiquid asset, meaning that it can take months or in some cases even years to turn your asset back into cash savings should you need it.
Why Choose one?
The great thing is when deciding on the best way to secure value in your savings is that you don't have to pick one way to do it. It’s actually advantageous and safer to pick a few different options to really diversify your savings.
At the end of the day, KiwiSaver is a great way to safely invest your money, where you can earn a return on your investment, gain extra contributions and be rest assured that it will increase in value over time. The tricky part is figuring out which provider and fund are going to serve your goals best. For Advice on your KiwiSaver and how to get the most out of your savings, have a chat with one of the advisors at National Capital.
But remember, don't put all of your eggs in one basket. Try a mix of some of the savings options that were discussed above, and perhaps leave a bit left in your bank account as well.