Tired of meagre interest rates on your savings account? It’s time to explore beyond the traditional bank. From peer-to-peer lending to ethical investments and even leveraging loyalty programs, New Zealand offers a diverse range of alternative savings strategies, each with its own risk-reward profile. This article dives deep into these options, providing you with actionable tips and real-world insights to help you grow your KiwiSaver and savings more effectively.
Kiwisaver: More Than Just Retirement
While KiwiSaver is primarily designed for retirement savings, it’s a powerful tool that deserves a closer look for maximizing your returns. The key is understanding your risk tolerance and selecting the appropriate fund. A generally accepted guideline is the younger you are, the more risk you can afford to take, tilting your investment towards growth funds that invest heavily in shares. Conversely, as you approach retirement, shifting towards a conservative fund with a higher allocation to bonds is usually advisable to protect your capital. The Financial Markets Authority (FMA) provides valuable information and resources to help you choose the right fund and understand the fees involved.
Beyond fund selection, actively contributing to your KiwiSaver also plays a crucial role. Even small increases in your contribution rate can have a significant impact over the long term due to the power of compounding and the employer contributions you receive. Don’t forget about the government contribution! To receive the maximum government contribution, of approximately $521.43 per year, you need to contribute at least $1,042.86 to your KiwiSaver account by 30 June each year. This is essentially “free money” and a valuable incentive to prioritize your KiwiSaver savings. If your income is sporadic, consider setting up regular automatic payments to ensure you reach that minimum threshold.
Case Study: Sarah, a 28-year-old marketing professional, initially contributed the default 3% to her KiwiSaver. After reviewing her finances and risk profile, she increased her contribution to 8%. This, combined with her employer’s contribution and the government contribution, significantly boosted her retirement savings projections. She also switched from a conservative fund to a balanced fund, giving her the potential for greater returns over the long term.
Peer-to-Peer Lending: Lending with a Personal Touch
Peer-to-peer (P2P) lending platforms connect borrowers directly with lenders, cutting out the traditional bank intermediary. This can translate to potentially higher interest rates for lenders, but also comes with increased risk. Several P2P lending platforms operate in New Zealand. Before diving in, research the different platforms, understand their lending criteria, and assess the creditworthiness of the borrowers. Diversification is key: don’t put all your eggs in one basket. Spread your investment across multiple borrowers to mitigate the risk of default.
Practical Example: You could lend $100 each to ten different borrowers on a P2P platform. If one borrower defaults, you’ve only lost $100, but if all borrowers repay their loans with interest, you earn a significantly higher return compared to a traditional term deposit. However, remember that P2P lending is not without risk, and you could lose some or all of your invested capital.
Consider the platform’s history of defaults. Statistically, what percentage of loans on their platform default over time. This may be hard to discover, but if you can find it, it can provide some valuable data for your choice. Look thoroughly at their documentation and consider seeking some financial advice.
Investments in Shares: Embrace the Stock Market
Investing in the stock market can offer the potential for significant returns, but it also carries inherent risks. For beginners, investing in managed funds or Exchange Traded Funds (ETFs) that track a broad market index (like the NZX 50) can be a good starting point. These funds offer diversification and are professionally managed, reducing the risk compared to investing in individual stocks. Research different fund managers and compare their performance, fees, and investment strategies. The Smart Investor website on Sorted.org.nz, provides resources for comparing managed funds.
Direct stock investment requires more research and understanding of the market. Start small and invest in companies you understand. Follow market news, analyze company financials, and be prepared to hold your investments for the long term. Market volatility is inevitable, and trying to time the market is generally not a successful strategy for individual investors. If you are not comfortable with the risk, consider seeking advice from a qualified financial advisor.
Actionable Tip: Before investing in shares, create an investment plan. Determine your investment goals, risk tolerance, and investment time horizon. This will help you make informed decisions and avoid emotional trading.
High-Interest Savings Accounts: Squeezing Extra Value
While standard savings accounts offer negligible interest rates, some banks and credit unions offer high-interest savings accounts, often with promotional rates or specific conditions. These accounts can be a good place to park your emergency fund or short-term savings while you explore other investment options. Actively compare interest rates across different institutions and be aware of any fees or restrictions. Remember promotional rates may only last for a limited period, so be prepared to switch accounts when the rate drops. Look for banks and credit societies offering over five percent annual interest rates. They are not common, but they do occur. Read the fine print carefully, and if rates sound too good to be true, they often are!
Feature Spotlight: Some high-interest savings accounts offer tiered interest rates, where the interest rate increases as your balance grows. This can incentivize you to save more. Others may require you to deposit a certain amount each month to qualify for the higher interest rate.
Certificate of Deposit (Term Deposit) Alternatives
Term deposits offer a fixed interest rate for a fixed period, providing certainty and security. While interest rates on term deposits may not be as high as some of the other alternative savings strategies, they are still a relatively safe and predictable option. Explore terms from 6 months through 3 years to discover the best interest options. In times when interest rates may increase, shorter terms may be better. In times when rates are expected to decrease, longer terms may be better. The trick is predicting the economic future!
Consider laddering your term deposits. This involves dividing your savings into multiple term deposits with different maturity dates. As each term deposit matures, you can reinvest it at the prevailing interest rate. This strategy provides you with regular access to your funds and allows you to take advantage of rising interest rates.
Ethical and Impact Investing: Saving with a Conscience
Ethical and impact investing allows you to align your savings with your values. This involves investing in companies or funds that promote social or environmental good, such as renewable energy, sustainable agriculture, or affordable housing. Several fund managers in New Zealand offer ethical and impact investment options. Research these funds carefully to ensure they align with your values and investment goals. Be aware of “greenwashing,” where companies or funds exaggerate their environmental or social impact.
Look for funds that have a clear and transparent investment policy and that are independently certified. Some ethical investment funds may have lower returns compared to traditional funds, but this is not always the case. Many ethical companies are also well-managed and profitable, offering both financial and social benefits.
Leveraging Loyalty Programs: Everyday Spending, Extra Savings
Many retailers and service providers in New Zealand offer loyalty programs that reward you for your spending. These programs can offer discounts, cashback, or rewards points that can be redeemed for goods or services. While the savings from loyalty programs may seem small individually, they can add up over time. Actively participate in loyalty programs of businesses you frequent and maximize your rewards. Consider using a credit card that offers rewards points or cashback on your purchases, but only if you can pay off your balance in full each month to avoid interest charges.
Practical Example: Using a rewards credit card for your grocery shopping and paying it off in full each month allows you to earn rewards points that can be redeemed for fuel vouchers or travel miles. This effectively reduces your everyday expenses and frees up cash for other savings goals.
Micro-Investing Apps: Savings on the Go
Micro-investing apps allow you to invest small amounts of money, often by rounding up your purchases to the nearest dollar and investing the spare change. These apps can be a convenient way to start investing, especially if you’re on a tight budget. Several micro-investing apps are available in New Zealand. Research the different apps and compare their fees, investment options, and user interface. Be aware of the fees charged by these apps, as they can eat into your returns, especially if you’re investing small amounts. Even a dollar a month can make a difference over the long term!
Feature Advantage: Many micro-investing apps offer automated investment options, such as pre-built portfolios based on your risk tolerance. This can make investing simple and easy, even for beginners. The barrier to entry is extremely low here, allowing experimentation for many. Be sure to fully understand how the app may be accessing your financial data. Some may request direct access to your bank accounts!
Investing in Yourself: A Lifelong Return
One of the best investments you can make is in yourself. Investing in your education, skills, and health can lead to higher earning potential and a better quality of life. Take courses, attend workshops, or read books to expand your knowledge and skills. Prioritize your physical and mental health by exercising regularly, eating a healthy diet, and managing stress. These types of investments can yield the highest returns over the long term, providing financial security and personal fulfillment.
Case Study: Michael invested in a professional development course that enhanced his skills in his industry. This led to a promotion and a significant increase in his salary. The cost of the course was quickly recouped through his higher earnings.
Side Hustles: Powering Your Savings
Explore creating additional income through side hustle. New Zealand has a strong gig economy, so there are many options available. From delivery work to web development gigs, there are plenty of options available to boost your income and in turn, boost your savings. The best thing is to find something that will not only pay well, but also something that you will enjoy doing. Consider using already existing skills. Remember to declare all income in your annual tax returns!
Reduce Outgoings and Focus on the Difference
Take a close look at your current monthly outgoings. Ask yourself what you can change, reduce or just eliminate. If you are not doing a budget, then this is the first place to start. Review insurance payments, power bills, entertainment and services such as streaming subscriptions. Identify where you can reduce costs and make the money saved part of your savings strategy, or to invest in one of the alternative savings options detailed above! This might be painful in the short term, it can improve your cash flow and savings long term.
The Tax Implications of Different Savings Options
Understanding the tax implications of each savings strategy is crucial for maximizing your returns. Different investment options are taxed differently. KiwiSaver contributions are taxed at your Prescribed Investor Rate (PIR), while interest earned on savings accounts is generally taxed at your marginal tax rate. Capital gains on the sale of shares may also be taxable, depending on your investment activities. While New Zealand does not have a capital gains tax in the traditional sense, the “bright-line test” taxes profits from selling residential property (excluding your main home) if the property was bought and sold within a certain timeframe. Consult with a tax advisor to understand the tax implications of your specific investment strategies and to ensure you are complying with all tax regulations. The Inland Revenue Department (IRD) provides comprehensive information on tax obligations for investors.
Financial Advice and Resources
Seeking professional financial advice can be invaluable in developing a savings and investment strategy that is tailored to your individual circumstances. A qualified financial advisor can help you assess your risk tolerance, set financial goals, and choose the right investment options. They can also provide guidance on tax planning and retirement planning. The Financial Advice New Zealand website provides a directory of qualified financial advisors in New Zealand. You can also access free financial guidance and resources from organizations like the Commission for Financial Capability (Sorted.org.nz).
FAQ Section
What is the best alternative savings strategy for beginners?
For beginners, high-interest savings accounts, micro-investing apps, and ethical investments through managed funds offer relatively low risk and easy accessibility. Start small, diversify your investments, and gradually increase your exposure to riskier assets as you gain more experience and knowledge.
How much money should I allocate to alternative savings strategies?
The amount you allocate to alternative savings strategies will depend on your financial goals, risk tolerance, and investment time horizon. As a general rule, don’t invest money you can’t afford to lose. Start with a small amount and gradually increase your allocation as you become more comfortable with the risks involved. Financial experts often recommend the 50/30/20 rule. 50% essential expenditure, 30% on discretionary spending and the remaining 20% is allocated to savings!
What are the risks involved in peer-to-peer lending?
The main risk in peer-to-peer lending is borrower default. If a borrower fails to repay their loan, you could lose some or all of your invested capital. Other risks include platform risk (the risk that the P2P platform could go out of business) and liquidity risk (the difficulty of selling your loans quickly if you need access to your funds). Mitigate these risks by diversifying your investments across multiple borrowers and choosing reputable P2P platforms.
Should I consult a financial advisor before investing in alternative savings strategies?
Consulting a financial advisor can be beneficial, especially if you’re new to investing or have complex financial circumstances. A financial advisor can help you assess your risk tolerance, set financial goals, and choose the right investment options. They can also provide guidance on tax planning and retirement planning. However, be sure to check a financial advisor’s qualifications and fee structure before engaging their services.
How can I stay informed about changes in the financial markets and investment opportunities?
Stay updated via reading financial news sources, subscribing to newsletters from reputable financial institutions, and following financial experts on social media. Attend financial literacy workshops and seminars to enhance your knowledge. Be aware of potential scams and always verify information from multiple sources before making any investment decisions.
References
Financial Markets Authority (FMA). KiwiSaver.
Sorted.org.nz. Smart Investor.
Financial Advice New Zealand. Find an Advisor.
Inland Revenue Department (IRD).
It’s time to take control of your financial future and explore the exciting world of alternative savings strategies. Don’t let your money languish in low-interest bank accounts. By carefully researching and diversifying your investments, you can potentially achieve higher returns and build a more secure financial future. Start today, even with small steps, and watch your savings grow!
