saving
Saving
A little becomes a lot over time.
Inside . . .
Set your savings goals Save or pay off debt? The power of compound interest
brought to you by the retirement commission
Set your savings goals
Learning to be a regular saver is a giant leap towards getting your finances sorted. Whether you’re saving for a specific goal, like a home or a holiday, or for your retirement. It takes real discipline over a long period, but if you’re serious about saving, just keep it simple, set realistic goals and watch your money grow.
A little becomes a lot over time
If you save regularly, even the smallest amount can turn into serious money. Adjust the amount you save each year for inflation. That way your savings hold their value.
Be realistic
Your biggest enemy when you are saving is temptation (all those things whispering ‘buy me, buy me’). You can avoid this trap with realistic savings goals. Think hard about what you are really willing to give up for your savings.
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What is inflation?
Inflation is the rate at which the prices of goods and services increase over time. The effect of this is to reduce the purchasing power of money. Example: If you buy something with $1000 now, in one year’s time you would need $1020 to buy the same thing (at an inflation rate of 2%).
Try these online calculators
Ready to save? Check out the Saving calculators – you can work out what you want and how you’re going to get there with a few clicks! Want to set a goal? Try the Goal Machine calculator. Just enter how much you want to save and by when, and it does all the calculating for you.
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saving
Start early
Saving for your own retirement is one of the easiest decisions to put off. But talk to those retired people who are now enjoying the benefits of their own savings. Generally they’ll say that starting regular saving early was one of the best decisions they ever made.
Keep it simple, set realistic goals and watch your money grow!
Write your goals and how you are going to achieve them on one piece of paper for quick reference. Make your goals easy to remember. They should be simple enough to carry around in your head.
Save for emergencies
It’s a good idea to save some money (two to three months’ pay) to have put aside for emergencies. You never know when you may need it, but you’ll be pleased you have it to call on if you do.
Don’t put your plan in the bottom drawer
If you’re serious about reaching your savings goals, your plan will be something you keep close at hand. Don’t put it in the bottom drawer. Look at it often – that way, you’ll keep focused on what it is you want to achieve.
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Get your saving
Save or pay off debt?
As a rule, it makes sense to try to pay back your loans as fast as possible before you start saving – particularly if you have high interest debt like hire purchase or credit cards. However, there are some cases when it’s good to do both – pay off debt fast and save at the same time.
Get into the savings habit Some people feel more comfortable starting a small savings scheme while they are still paying off a loan (such as a mortgage).
You’ll get into the habit of saving, and start to build a small nest egg. You’ll also start to build your knowledge of savings and investment options, so that you’re better prepared when you want to start serious saving. Get into the saving habit and you’ll see the benefits before you know it. Set up an automatic payment from your pay – that way, you won’t even notice the money you ‘don’t have’.
Joining KiwiSaver Even if you have debt, you may be better off financially joining the government’s new KiwiSaver retirement savings scheme because of the incentives – including a $1,000 ‘kick start’ to your savings and $1040 annual ‘tax credits’. Workplace saving Some employers offer their own subsidised retirement savings schemes. This means that for every amount you save, your employer also contributes some money. You may be better off paying into a scheme like this, as well as repaying your mortgage or other loan faster.
Employer contributions to KiwiSaver will be compulsory from April 2008 – starting off at 1% and rising to 4% by April 2011.
Saving for an emergency fund It’s common sense to have an amount of money (say two or three months’ income) you can call on if the unexpected happens. It means you won’t have to borrow money or be left financially vulnerable. Saving for an emergency fund may not be such a good option if you’ve got high interest debt.
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Kiwi story
The Aotearoa/French connection
While attending a family reunion last year, Eru (34 years) discovered that apart from being Ngai Tahu, he also has ancestry which links him to the Bordeaux region of France. He hasn’t had a chance to do his big OE yet, as he’s been focusing on his career in the police force. Eru decides to visit France next year to find out more about this side of his family, and also have a good look around other parts of Europe. On an annual salary of $40,000, Eru works out that he can afford to save $200 every fortnight out of his pay packet. Using the Regular Savings calculator on www.sorted.org.nz, he works out that in one year’s time he will have saved $5,262 (including interest) – not quite enough to cover all the things he hopes to do while he is over there, nor to survive the entire six weeks comfortably. However, if he continues to save for a further three months, he will have accumulated $6,598 – a more realistic amount to survive on. Now, he’s off to his bank to find a high interest savings account. And Eru knows he is well on his way to achieving his saving goal and discovering the rest of his whakapapa.
Eru knows he is well on his way to achieving his saving goal.
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Get your saving
The power of compound interest
If there’s any magic in saving, this is it – the power of compound interest. When you’re saving, interest is added to your savings at regular intervals (such as every month). If you don’t touch the interest, but leave it so it adds to your lump sum, you start to earn interest on the interest, as well as on the original amount you saved. The longer you leave your money, the more powerful the compound interest effect. So the earlier you start saving, the more you make.
Think you can’t save? Save $10 a week from age 20 and thanks to compound interest, here’s how it will grow!
Age
25 30 35 40 45 50 55 60
Capital
$2,600 $5,200 $7,800 $10,400 $13,000 $15,600 $18,200 $20,800
Interest*
$170 $700 $1,640 $3,050 $4,980 $7,510 $10,710 $14,680
Total*
$2,770 $5,900 $9,440 $13,450 $17,980 $23,110 $28,910 $35,480
*Rounded to the nearest $10
You’ll have $35,480 by the time you’re 60.
Based on net real rate of return of 2.5% p.a.
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Kiwi story
A tale of two sisters
Jenny and Margaret are sisters, aged 28 and 30, both married with young children of similar ages. Their financial circumstances were similar when their mother died and left them each $50,000. Jenny and her husband decided to treat their family to a six week holiday in Europe. It was a great time. The trip cost all of the $50,000, taking into account their lost earnings over the six weeks they were on holiday. Margaret and her husband took a different approach. They decided this ‘windfall’ could make their future much better. They spent $10,000 on a New Zealand holiday and a new car. Then they invested the $40,000 left over. They worked out that when they plan to retire in 35 years time, their $40,000 would, with compound interest, have grown to at least $95,000. With the other savings they were already making they’re confident about their retirement plans.
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Get your saving
Where to now?
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Written down your savings goals? Saving for an emergency fund (2-3 months pay)? Saving for the long term?
Next step:
e.g. think about investing to make your money work for you.