This post is directed at New Zealanders and permanent residents of New Zealand. You're bombarded daily with what amounts to rubbish about what you should do with your money. My advice, ignore them and do what you're already doing. Whatever it is it's likely to be better than the advice you're receiving, that's how bad most advice is.
But if wondering how to structure your thinking, then read on. I'm assuming you make all your decisions yourself and make all your investments directly where possible. You do this right? If not then you're likely to come up short of expectations as an entire industry in New Zealand is devoted to fleecing you and everyone else.
So let's get started. Consider the young family, two children of school age with one parent working fulltime on less than $50,000 a year. Can you get ahead and buy a house? The answer is yes and here's how:
1. Live within your income at all times. Do not borrow, never use the credit card. Do not take expensive holidays and if you do go on holiday make it the neighbouring beach town and its cheapest motel (not camping, that's expensive). Only buy real food and only eat just enough. Do not buy so much you throw stuff out. Use water to clean (warm water is the world's best solvent, proven so by Chemists), do not buy cleaning chemicals. If you garden, go to auction rooms and such and buy secondhand tools, secondhand furniture, use Trade Me to buy stuff others are throwing out (it's often quite good).
For clothing visit the thrift stores such as the Salvation Army. They often sell new clothing for $1 or $2 an item. How this works is tourists throw away items that won't fit in their suitcase, the 'Sallies' collect the clothing up and then distribute them around their stores. We're talking name brands here, but you have to be patient and visit the stores regularly. In electronics for that all-important laptop computer, look for ex-lease sales or get the latest cheap deal from Warehouse Stationery online. The latter deliver very promptly and can be much cheaper than in store. Never get carried away with electronics, do not buy Sky TV, better still buy a cheap DVD player and buy cheap DVD's in the bargain bins once a month. This is entertainment, and use Trade Me to buy a cheap TV. Another source of electronics, bicycles and stuff is the local Pawn shop. They're always looking to unload their unredeemed items.
A family which lives like this can exist and even save if they follow my advice. Own only one car and make sure it's a small Toyota or Subaru. They never break down.
Furthermore, live in a small regional town, get out of Auckland.
2. Kiwisaver, that's the compulsory retirement saving taken from your income each week, just pay the minimum. Have it paid into a conservative fund, or possibly a balanced growth fund if you're under 40. For older savers just stay conservative as you will be aware markets do melt down and you want to collect this money when you're 65.
3. Register and collect Working for Families. For a family as described above the sum you receive is about $9,000 each year. This is what you save. Remember you are living within your income - right?
Think about how you will receive this money. You have two choices, either take the money in advance weekly based on an estimate of what you will earn, or in a lump sum based on the year gone past. The second option is prudent as you know how much you'll be getting and it comes as a lump sum. With the weekly in advance approach you can end up owing the Inland Revenue money if you get it wrong.
4. Invest in Bonus Bonds. That's because Bonus Bonds do not impact your Working for Families entitlement. Just about everything else does; for instance any income from bank interest or dividends from companies reduce the amount your receive. Even sizeable gifts from family reduce Working for Families. But not Bonus Bonds. And you may win a large prize, and if you do you still receive Working for Families. Let this pool of money compound, that means have your prizes from Bonus Bonds be reinvested in more bonds, and then let prizes you win win more prizes.
5. Take a proportion of the $9,000 (suggest $5,000 Bonus Bonds, $4,000 shares) and invest in companies through the New Zealand and Australian stock exchanges. In doing this, look for companies that are solid but have been on the receiving end of bad news recently. The market disproportionately penalises bad news and then gets drunk on good news. These companies won't pay too much in dividends and thus you'll still maximise your Working for Families. Hold these investments for a long time and take any capital returns (that's where the company returns money to you over and above regular dividends) and invest that in more shares. Any company that is taken over, take the money and invest in more shares. Over time your investments grow and they can grow a lot.
The capital gain from the above activity is completely tax free in New Zealand. You bought these companies because they were cheap at the time and you bought to realise income from them over time. You did not speculate and trade in buying and selling shares.
[Example: Steel and Tube It is in trouble over mislabelling of its steel but its earnings are always satisfactory.]
Remember to own these shares directly in your own name. Do not invest in managed funds. Why? With funds you have no control over how they operate and they charge fees which soak up your potential returns.
6. Now you have the stake to buy a house. This came about because you lived within your income at all times, you did not spend unnecessarily, and you claimed what you were entitled to. Then when you did invest you did so largely tax free.
When you do buy a house, up and coming areas are always good, or run down areas of large cities that are gentrifying. For instance, Tauranga or Nelson not Wanganui or Blenheim (sorry Blenheim). In Auckland, think West Auckland; in Wellington think Newtown.
Keep doing 1 through 5 above but take any gains you make and pay off the mortgage. To this end a variable rate floating type of mortgage is best. If you do fix the mortgage rate make sure you can make capital repayments up to a certain sum without penalty. Paying off the mortgage quickly is the best thing you can do, it trumps everything else. A home with an income, such as a small flat attached to the house is also good if you can find such a property (your income rises and Working for Families reduces but you take the rent and pay off the mortgage sooner with higher repayments over a shorter time period).
As the equity in your first home increases, you're now in a position to buy a rental property. You can do this by putting both your own house and the rental acquisition together and borrowing against the combined value. Timed right you can borrow the whole price paid for the rental property you're buying.
Now you're on the path to being wealthy. Your income from employment may have risen with inflation but the wealth you've created was from wise investment and not chasing your tail.
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