Personal Finance Basics

Today's topic is Personal Finance Basics where we'll be discussing fundamental concepts around money.

These are the big subjects that you get these right and you'll be 80% of the way to being there with your money and to be quite frank, probably better than the average kiwi.

And we'll be discussing some common misconceptions as well that people have around money to make sure you don't fall prey to some of these incorrectly held myths too.

Before we get into today's discussion though, a bit about myself.

I'm an independent financial advisor.

It's a rare way of operating in this country.

Most advisors are commission or fee based meaning they get paid by outside product providers for making certain recommendations and selling certain products.

So yeah it kind of muddies the water in my opinion.

The fact that I can remain independent means I'm not swayed by any outside incentives.

I'm truly in it for the clients and what is best for them.

So I'm not affiliated with property, I'm not affiliated with certain shares, yeah I can look at a wide range of options for my clients.

I'm the founder, owner and operator of your Money blueprints, financial planning and advice company.

Been in operation for around nine years now.

We specialize in retirement planning and advice, which includes not just preparing for retirement but also for those in retirement as well, helping come up with an optimal way of allocating resources and assets.

We also specialise in investment advice and planning as well as helping with those big life decisions that are pretty common things like slowing down at work, retiring early, working part time, having kids, the decision to relocate, whether or not to buy or sell property or all those kinds of things.

We can help un muddy those waters too.

There's my website there and my email as well if you need to get in touch and finding my phone number.

I'll try and bring those back up at the end if I remember.

So today's order of play will be starting with the importance of tracking spending.

Then we'll get into goal setting and some important things to think about there, as well as emergency funds and sinking funds and the difference between those.

Then we'll get into income tax in New Zealand and a few commonly held misbeliefs there.

And then some very important concepts in personal finance to follow, including savings rates, the difference between saving and investing, and the importance of saving over returns.

I feel like the focus is too often on returns, which is something you can't really control.

But we need to be more focused on our own actions and what we can do, and that includes savings.

we'll discuss a, concept called the rule of 72.

And finally, we'll get into kiwisaver basics, and again, discuss a few things that people may not necessarily fully understand.

Now, tracking spending, that's one of the easiest and most impactful things you can do if you haven't done that already.

It's the first thing I did in my early 30s, that made a huge impact.

You know, I thought I was tracking along fine, living a good life.

And it wasn't until I started tracking my spending that I realized how much was going to places that I didn't want my spend to necessarily go to because it was cutting into how much I could spend on more important things to me.

So it's, a.

It's a really great exercise to go through because you can see, you know, if you look at your bank statements and see that's not the person I am or want to be, you know, you can make some real, real powerful changes here.

So the first step is knowing how much you're spending per year, which is just basically downloading your bank statements for a year, the previous year, and then totaling it all up.

So that's.

That's step one.

I recommend one year.

some recommend less, you know, three months, six months.

But I feel like there's some, irregular expenses that if you do do three or six months, you might not cover everything.

Things like home maintenance or repairs if you're a homeowner, travel or maybe vehicle purchases, just those less regular purchases are more likely to be captured if you're doing it over a year.

So start with that.

And then once you've got your totals, you can put your expenses into categories.

So transportation, food, housing, like rates, insurance, or rent, if you're renting and different categories like that.

And then you can get a really good idea of the percentage of your spend and how much is going into each category.

And there you'll see if that's where you want it to be going.

For example, when I first did this, I saw way too much going into food spend than I was comfortable with and not enough going into, travel and savings.

So, yeah, you know, from there, you can make some good changes and reduce your spend from the categories you think you're spending too much in and spend more in categories that you do want to spend in.

And that's.

It's about setting priorities as well, like, you know, really stepping back and thinking about what's most important in your life.

You know, money is not there just for the sake of earning more money and spending more.

You need to give it a purpose, so that you can live your best life and spend on things that you, you know, bring you the most joy.

That make you the most content.

there's also other areas of the budget that you know, more easier to cut than others.

as I mentioned, start with things that you are, most indifferent about or don't care too much about, those are easy to cut.

You know, if you're spending way more than you want on food, you can make those changes.

Or maybe you've got too much pay tv, you'd much rather allocate your money elsewhere.

so you go, go for the low hanging branches first.

the easiest ones to cut.

phone around electricity providers because regular expenses like electricity, if you can cut a regular expense, that's monthly savings into perpetuity.

Can never get that word right.

yeah, so you're making monthly savings which add up to huge amounts over your lifetime.

So if you can cut, you know, regular bills, that's great.

you know, you can filter by highest amount to lowest amounts and if you can make big changes on the highest amounts, that's also huge impacts.

I cut down on housing by downsizing house houses about a decade ago.

saved a lot of money over 10 years just from that one decision.

I didn't have to cut too much else.

So yeah, what you're looking for is biggest impact, least pain and go from there.

as I briefly touched on earlier as well, when looking at your expenses, you don't want to downplay irregular expenses.

a lot of my clients, they do send me the annual spends and they don't necessarily include things like car purchases and home maintenance or if they do include home maintenance, it's not much.

And you know, just because something doesn't happen in one particular year doesn't mean it doesn't happen.

So you still need to allow for the roof replacement or the window repairs.

If you're a homeowner, flooring, things like that, set aside a certain percent every year for those things.

car purchases as well.

Just because you don't buy a car every year doesn't mean you shouldn't set that money aside.

So let's say you're buying a twenty thousand dollar car every ten years, for example, you want to sit around two thousand a year for that and leave some fat as well in your budget.

You don't want to cut things so tight that it's, you know, you feel restrictive, you can't breathe and all that kind of stuff.

Definitely leave some room for those unexpected items or higher spend than you assumed.

and when you do that, you know, a lot of people feel like they're not optimizing their money when they're not putting any money not used to use.

But I like to think of it as the more conservative you are with this type of money, the more aggressive you can be with the rest of your money.

Like, if you're conservative with your emergency fund, for example, or how much cash you hold, that really gives you confidence to invest aggressively with the rest of your money.

Whereas if you cut things so tight, you've always got that nagging thought in the back of your mind, can I invest the rest of my money aggressively or do I need to set some aside?

Or not invest so aggressively?

So, yeah, there's that aspect of it.

And then finally, such the important concept of save first, spend second, much like you do with your kiwi saver.

You know, you get paid, it gets invested.

You don't even see it in your account, don't even think about it these days.

So if you can set up your savings and investments in a way that, they leave your account pretty much as soon as you're paid, that's great.

just becomes second nature.

If you automate things, you can just get on with those more important things in life.

And with your spending tracking, you don't need to do it forever.

It's.

It's one of those things that, you know, once you've done for a certain amount of time, you kind of know where, where your money goes after a little while, once your life's consistent.

for example, after tracking our spend for three years, that was more than enough for us to know, once we'd made the changes, to know where everything was going.

And we didn't need to track it after that.

It just.

Things were automatic.

Income came in, savings got sent to their locations, investments got sent to their locations, and everything else we spent.

And we just spent as we usually spent because we knew where everything was going.

our lives were stable.

Whereas almost two years ago, we, we moved to a new location in a new house.

Larger house.

yeah, new location.

So a lot changed.

So we had to start tracking spending again.

And we've done so for the last two years.

we'll probably do for maybe one more year.

and then after that, you know, our new lifestyle is more consistent.

we know how we spend in this new location, so we won't need to track anymore.

So, yeah, just, just realize when, when things have become automatic for you in terms of or consistent, how much you're spending per year and where.

And then you step back, you might not need to do it.

So with goal setting, there's some important ways of thinking about goal setting that I've found that have helped me, listed some of them here that hopefully will help you.

starting with saving money is really hard without strong motivation.

You know, if you don't have a strong why you're doing this, then it's going to be hard to keep at it, to keep going after your goals.

saving money for the sake of saving money is less, not motivating.

Why are you saving money?

What's your money going to be used for?

Is it going to be so you can reduce hours and spend more time with family or leisure activities or on your interests?

Maybe you want to start your own business one day or, or it could just be something as simple as retiring financially comfortable, find your motivation and that's what's going to allow you to keep going.

Another important thing is having different types of goals.

I found one without the other is pretty challenging.

So you've got short term goals, you've got medium term goals and long term goals.

You know, medium is not so important in my opinion.

but I feel like short and long term really contrast, complement each other well.

So for example, if you've got a long term goal of going part time at work in 10 years, for example, or maybe starting your own business in the same time frame, if you don't have short term goals, 10 years is a long time and it's a long time to stay motivated.

but with short term goals you can set a bunch of targets along the way, maybe annually if you like.

And you know, ticking off those targets along the way will keep, is much more likely to keep you ticking along.

If you don't have those short term goals, then you're likely to give up.

Whereas if you've just got short term goals, but nothing long term to strive towards, you might not be heading in the direction that you want to head in.

So just try and think about it in the different time frames and set targets for different time frames too.

Another thing I found is that a lot of people, myself included, is guilty.

we overestimate what we can achieve in the short term and we underestimate what we can achieve in the long term.

and that's why a lot of resolutions fail or goals don't last very long because we think in the short term we're going to get to a certain level and then we often fall short, like, okay, this isn't working or I'm a failure and just throw in the Towel.

and at the other end of the scale, we think we'll be able to achieve something in the long term.

But quite often, especially with the impact of compounding, we can achieve much more than we ever thought.

So the combination of those two ways of thinking, overestimating short term and underestimating long term means, you know, we give up too soon, we don't achieve as much as we want to in the short term or we don't realize how much we were going to achieve in the long term.

So yeah, just, just try and think of that and you know, don't be so hard on yourself in the short term.

Try and be more realistic and yeah, you're much more likely to keep going, especially if you truly understand the benefit of long term actions or actions over the long term.

Another important thing is process being more important than outcomes.

a lot of goal setters, you know, you're told to set actionable objectives that you can achieve.

So a certain amount of savings or a certain amount of weight loss, it's a specific number.

And if people don't reach that number again, they might lose motivation, think of themselves as a failure and give up.

But the more important thing is the process.

So you know, why are you trying to achieve something and what are you doing about that on a daily basis?

What actions are you taking?

And that is always going to lead to improvements.

And you know, it doesn't necessarily matter whether or not you meet your targets, as long as you're making daily actions that help you to be better, to get, get you closer to where you need to get to, then just, you know, keep taking those steps and don't be discouraged if you don't meet certain, certain outcomes that you've set.

And again, money is not the goal, it's not motivating.

what is it that money can buy you?

for me, I'm strongly motivated by maintaining the lifestyle that money has provided for us.

Right now we've got two young kids, a five year old and a seven year old.

And my motivation is being flexible with my time, you know, not working necessarily 40, 50 hours a week or at least having a job where I can work nights and evenings when the kids are asleep and different times of the day.

And that allows me to be an active part of their life as well as, you know, my wife.

It's a, it's a hard stage of life.

with young kids, if you've got a full time job, it can be a real grind.

And so yeah, maintaining that flexibility of time so that every day is not so much of a grind is really motivating for me and that's what keeps me going.

So you find your thing.

is it the options that money can buy?

maybe if you're in a job that you don't particularly enjoy, having money saved up, may mean the difference between having to stay at that job or being able to move on to something more enjoyable.

yeah, could be the freedom to make certain other decisions.

So whatever it is for you, just find what it is and that's the stuff that's going to motivate you to keep going.

And also finally, just be wary that goals change over time.

We evolve.

think back 10 years, for example, and look at the person you are today.

And there's a very good chance that who you were 10 years ago did not predict, your be where you are today.

So things change a lot.

Just recognize that.

And if your goals change, just change with, with the times.

You know, don't stick to old goals if they no longer work.

Just be flexible and just be aware of when those changes are happening so that you can make those changes.

And money is really useful in helping us make those changes too.

for example, if your job's not so enjoyable anymore, then having, having that money is what's going to allow you to have a wide range of options in terms of work and income.

You can reduce hours, more easily if you've got money.

you can tell your current employer to, you know, stick his job if they're being uncooperative and all that kind of stuff.

So yeah, money is very powerful in that aspect of goal setting as well.

Emergency funds.

I've got a list of questions here actually, so probably more questions than answers.

But it's these type of questions that are going to help you decide how much maybe you should have in an emergency.

getting thinking about these is important.

the common advice is, you know, three to six months of expenses as an emergency.

for example if you spend 5,000amonth, that's probably a bit low for most.

But just for ease of calculation then if you need to save four months of expenses you're looking at around 20,000 emergency fund.

But that rule isn't necessarily applicable to everyone and hopefully these questions can help you find for your own personal situation.

So the first question is how reliable is your income Now?

Of course not everyone can predict the future, but there are certain industries or certain jobs, where income is a little less reliable or a little more reliable.

for example, maybe a doctor, could feel pretty reliable about their income.

he or she is in a job that can be done most places in the country, it's in demand.

So you could feel fairly safe as a doctor in terms of income in most instances.

Whereas there's other industries where income is much more reliable.

such as contractors and certain industries.

do you have any high interest debt?

By high interest, I'm not necessarily including mortgage here.

more so things like credit card debt.

if you have high interest debts, you shouldn't you know really have a fully padded emergency fund in my opinion.

Maybe a little bit emergency, just in case.

But you really want to get rid of that high interest debt, credit card debt, things like that first.

another important consideration is how are your monthly expenses made up?

So you know, some people keep their expenses quite low and the majority of it is fixed expenses, things like rent or mortgage, rates, insurances, food, electricity, all those kind of expenses that you know we have to spend money on that happen regularly.

if you've, if you're like that then you obviously can't cut much out of your spending.

Whereas others you know, spend a bit more liberally and you know have a high proportion of discretionary expenses.

Things like travel, extra food, entertainment or all that kind of stuff, clothing.

So if you've got a good amount of discretionary expenses, then your emergency fund may not need to be quite so high on a monthly basis.

So for example if someone with high discretionary spend lost their job, they can cut back on a lot of their spend.

so yeah, just keep that in mind.

also what's your family situation?

Are you single?

Are you a couple with no kids?

Do you have kids?

All that's important.

for example, if you're a couple with no kids, then you're in a pretty good situation in terms of emergencies.

you know, you don't have young people to worry about so you can probably be a bit more, a bit more risk, have a bit more risk in your life.

Whereas if you've got kids, you know, you might want to be a bit more risk averse and avoid as much risk.

also if you're a couple you've got two incomes so if one of you lost your income, at least you've got the other person's income to still rely on.

It may not be enough to cover your spend, but at least it would reduce the amount you need in an emergency and just buy you a little bit more time for the other person to find the job.

Whereas if you're single and you lose your job, you don't have that other person to rely on.

So that's an important consideration.

Insurance coverage.

another important consideration when deciding how much of an emergency fund to have.

the more insurance coverage you have, arguably the less insurance fund you need because more unforeseen circumstances are covered through your insurance.

What's your tolerance for risk as well?

Some people just like the safety of having cash, and others, you know, they're more aggressive with their money.

So yeah, that is a consideration as well, in terms of where to put the emergency savings.

offset mortgages is one consideration for those with mortgages.

a very good consideration actually.

It's pretty high interest rate relative to savings accounts.

So yeah, it's always a good option for those with mortgages if managed correctly.

And if you don't have a mortgage then generally it's just an online savings account somewhere that you can access the money quickly and easily.

And no, it hasn't lost value.

A lot of people try and get cute with their emergencies so you know, put it in places like a mortgage fund or maybe a conservative funds, things like that.

there's a few non banks popping up as well, just to squeeze a little bit more interest out of your savings.

But in my opinion the extra amount of risk isn't worth the small amount of extra savings from the likes of those options.

So I'm much more happier and willing to take on a slightly lower interest rate for more security.

but yeah, that's all personal and whatever you like, with the Emergency funds.

Just go through the list of your questions, come up with your answers and see where you land.

for example, if you answer these questions and your income is not very reliable, you don't have many discretionary expenses, you're single with kids and you don't have much insurance, then you know, that's a recipe for a high emergency fund, or especially if you're close to retirement as well.

whereas conversely, if your income is more reliable, you've got, you know, good amount of discretionary expenses, you're part of a household and you've got a bit of insurance cover, then maybe you don't need quite so much of emergency.

So just weigh things up for your situation and being, being conservative with your emergency fund.

As mentioned earlier in the presentation, I think that allows you to be more aggressive with the rest of your money.

If you're trying to be too cute with your emergency savings and save the minimal amount, I feel like that always leaves that nagging thought in your mind so that you're not quite as aggressive with the rest of your money as you probably should be or want to be.

So Or, or you might do something silly when the rest of your money, goes down in value.

For example, you know, if you leave things so tight and then the share market drops and you lose your job, perhaps you might start panicking and sell some shares at a loss.

Whereas if you've got that extra buffer, you know, you can leave your investments untouched, which is great for your long term wealth.

And finally, just touch on the difference between emergency and sinking funds.

A lot of people, dip into the emergency fund for things like irregular expenses.

you know, painting the house, getting a car, extra travel, things like that.

you know, those things, in my opinion aren't emergencies.

You know, they're going to happen.

You just don't necessarily know when you need to set up sinking funds for those irregular expenses.

So as mentioned earlier, if a car is going to be $20,000 in 10 years time, set aside $2,000 a year.

Same thing for roof repairs, painting, of the house, anything else like that that's not regular, just set aside a certain amount and make that separate to your emergency fund.

Because, your emergency fund should be purely for emergencies.

So just understand that distinction because, I do have a lot of clients and I know of a lot of people that do dip into the emergency fund for things like house repairs and it's not really what it's for.

Just wanted to quickly touch on income tax and it's a pretty common misconception really is a, lot of people, that don't understand the tiered tax system that we've got in this country.

the people that do understand it, know how simple it is.

But it's one of those things that, you know, if you don't understand it, you can be severely wrong with your interpretation.

and that can impact on, on your decisions around work.

So just, yeah, make sure that you do understand our tax system and how it works.

on the right there we've got a table of the tax rates and the amounts currently in New Zealand.

Recently, the amounts have recently been increased slightly.

but yeah, basically reading the table, anything you Earn up to $15,600 will be taxed at a rate of 10.5% per dollar.

Anything between 15,650 3,500 will be taxed at 17.5%.

So in this example, if your income is 50,000, your first $15,600 will be taxed At 10 and a half and your next amount of money up to 50, 50 odd thousand will be taxed at 17.5 percent.

So it's not the whole 50,000 that's taxed at 17.5%.

$15,600 taxed at 10 and a half and the rest taxed at 17 and a half.

In this example, if we go further up, any income between 53,500 and 78,100 is taxed at 30%.

Again using an example, if your income is 60,000, then the first 15,600 is taxed at 10.5%.

15,600 to 53,500 is taxed at 17.5%.

And anything above 53,500 to 60,000, your income, that's taxed at 30%.

So only around $6,500 is taxed at 30% in this example.

So yeah, don't want to repeat myself, too much.

But yes, a lot of people get this wrong.

It's not your full income that's taxed at the highest of your tax rate.

it's only a portion.

so using an example of someone on $70,000, looking at the table on the right, the tax rate for that bracket is 30%.

But this particular income earner is not taxed 30% of their income.

They're only taxed 19%.

And that's because their income less than 70,000 is taxed in the lie brackets so there's that and there's secondary income as well.

That's another common misconception, that if you get a second job, that you're taxed more on that second job than you're on your first job.

but yes, you may be taxed more, but it's not because it's a second job.

It's just because it's more, more income.

So if you earn, $53,000, for example, and in your main job and your second, job, you earn $15,000, your total income in that case is $68,000.

Now, whether you earn $68,000 from your main job or $53,000 from your main job and 15,000 from your second job, it makes no difference to the amount of tax you pay.

It only seems like you're paying more tax with the secondary job.

Because with a main income of 53,000 and secondary income of 15,000, the secondary income of 15,000 is all being taxed at 30% in this bracket example.

So it seems like it's your secondary income is being taxed much more because it all fits in that 30% bracket.

But if that 15,000 were extra income from your main job, that would also be taxed in that 30% bracket.

So it doesn't matter about secondary job.

it's just the extra income that's taxed more because you're in, the extra income is in a higher tax bracket.

That's all.

Now one of the most important concepts in personal finance and financial independence, is savings rate.

And that's basically how much you can save each year.

And it's going to tell you around how quickly you'll be financially independent or when you can retire.

And a lot of people think that income is, you know, super important in terms of making progress, but that yes, income is important, don't get me wrong.

And it is easier to save more with a higher income, but only if you're conscious of what you're doing and deliberate.

otherwise you could be on a high income and you know, much worse off than someone on a low income.

for example, if someone earns $80,000 a year and is able to save $20,000 a year, then they have a savings rate of 25%.

Whereas if someone's on $200,000 a year and saving $40,000 a year, so they're saving double $40,000 rather than $20,000, but their savings rate is only 20%.

You might think that the person saving double 40,000 a year is much better position.

But the reality is they're not.

because the flip side of that is their spending as a percentage is much higher than the other or not much higher, but higher than the other person.

They're spending 80% of their money, whereas the lower income earner is spending just 75% of their money.

So how much you save is critical.

Higher income helps, but yeah, it's what you don't spend that's really critical.

So to calculate your savings rate, you get your take home income.

So after all deductions, tax and ACC and so forth, and then you get your annual spending amount.

So you deduct your spend from your income.

So, so in this example we've got an income earner of one, hundred thousand a year.

Their annual spend is 80,000, which means they're saving 20,000 a year.

Once you've got that savings amount, you divide it by your income.

So in this example, 20,000 savings divided by 100,000 income, nice and easy calculation, is 20% savings rate.

Now if we go to the table on the right, someone with a 20% savings rate starting from zero, would be able to retire in around 37 years using the 4% rule of thumb.

you can check out my website for more on that rule.

But it's pretty crude rule to calculate how soon you can retire.

yeah, so with that table on the right, you can see how there's different savings rates and how much of a difference that can make in terms of retiring.

For example, someone with a 5% savings rate might take 66 years to retire, whereas someone with 15% savings rate 10% more will take around 43 years.

So there's a 23 year difference.

You can retire 23 years sooner just by saving 10% more per year.

massive, massive changes, especially with lower savings rates, as you get higher up your savings, you'll notice any increase in your savings rate and the impact, is less and less.

for example you jump from a 5 to 10% savings rate, you're cutting 15 years off your retirement date.

But if you're going from 45 to 50% savings rate, you're just cutting two years.

So the, the trade off for making more savings gets less and less, the higher your savings.

So you've got to find that position you're comfortable with where you're not making so many cuts that you're, you know, hating life.

because the impacts higher up is not so great either.

so where you're getting the best bang for your buck and without sacrificing your lifestyle, that's, that's what you're trying to target there.

But yeah, the main thing here is just to be conscious of the importance of savings and how small changes can make, you know, large impacts over time.

And this is starting from zero as well.

So if you've got some money saved up, most people have kiwi savers these days.

At the very least, it's going to reduce these time frames even further.

For most people, unless they can save an extraordinary amount of money, savings alone is, is not enough.

you know, by saving I mean putting money in this savings account.

So the likes of your online savings or term deposits, that's all savings, right?

So investing is something that's different.

That's where you put your money to things like property or to share funds or bonds.

And it is your money that you invest that is going to make the real difference.

saving money in a bank is not going to get you to where you need to get to.

With table we had on the previous page of how long to retire that was using the 4% rule which assumes that you know you're investing a good proportion of your money around 50%, of your surplus money towards shares.

so if you don't invest in shares or property or other things that are going to provide a good long term return, your years to retirement are going to take that much longer.

Your money's not going to work as hard for you.

And that's just because in savings account your money is barely matching inflation.

It's barely keeping up with the rising costs of goods and services.

So yeah, that's why investing outside of savings is needed.

you've got to understand that the higher risk involved with it, so you don't want to put your short term money in and investments, money you need in the next, you know, few years, you do want in safe havens.

whereas money needed longer term then you can definitely look for, you know, high risk places for that money.

But yeah, if you want to find out more about investing, I do have an investing video up on the website you can check out and there's plenty of investment, blog articles on the website as well as investment calculators for you to play around with as well.

but yeah, just know that when you invest your returns will be much higher over the long run.

The key there is long run, there will be periods of short term where you may do much worse investing than saving.

But over the long run, investing wisely and you know you'll earn much more money than you will with your money sitting in a bank.

So just show you the power of investing relative to saving using an example here.

we've got someone saving $2,000 a month for 30 years.

That's a total of $720,000 saved.

If that money matches inflation, then you'll basically be left with $720,000.

So you won't lose money, but you won't earn money either.

so you've got the same amount as what you put in.

Whereas, if you invest the 2,000amonth rather than save, and you earn returns of 3% more than inflation per year, you'll be left with 1.2 million after 30 years.

So that's an extra 480,000.

So that's, nothing to be laughed at.

And, could make the difference between a comfortable retirement or not.

So just understand that distinction between saving and investing.

And, if you're uncomfortable with investing, I suggest you try and try and get comfortable, because, it's going to be a hard slog without that money.

Working hard for you, means you'll have to save more yourself or work longer.

it's much better to invest in growth assets and have that money working for you, so you don't have to work so hard yourself.

The discourse around Reddit boards, social media and in real life conversations is so much focus is on investment returns.

You know, how can I earn an extra percent?

Or you know, what, what can I do?

I'm going to have to take on more risk than I'm comfortable with.

and you know, people start doing dodgy things to, to earn more high returns, maybe investing their emergency fund or short term savings, perhaps you're about to buy a house and you know, remain invested in shares.

I feel like the emphasis on returns is too high.

I feel like we should focus more inward and what we can do to better our savings.

And yeah, I see it a lot.

So I'd just like to walk through an example here of how much of a difference savings can make rather than chasing returns.

So we've got Kylie and Danny.

They're fresh out of uni and they both started at their first, full time jobs.

They're 25 and they're earning 50,000 a year in the hand.

That's after all tax.

And we'll assume that they both earn 3% annual raises.

It's good for them.

And they both invest in the same investments and they both earn 6% returns in the hand.

So all very much the same so far.

but there's only one key difference between Kylie and Danny.

We're going to assume that Kylie saves 15% of her income and Danny saves 5% of her income.

So over 40 years at age 65, how do things look?

You can see on the graph on the right that Kylie, who's saving 15% of her income, she has around $2 million.

Whereas Danny, who's saving 5% of her income, she's only got around $650,000.

And let's assume that Danny wants to chase higher returns that we've mentioned earlier.

So Instead of getting 6% returns, she gets 7%, which is 1% more than Kylie.

she'd still only have 846,000.

I say only because it's relative.

Eight, hundred forty six thousand is still a pretty, pretty damn decent amount, but still much less than Kylie's $2 million even with 1% higher returns.

if she wanted $2 million the same as Kylie, she'd need 10 and a half percent investment returns, which are nearly 90, nearly double the returns of Kylie's 6%.

So this is just to show you the impact of savings relative to returns.

sometimes, in fact, often it's much more effective to increase your own savings than it is to try and chase higher returns and with much less risk, too.

So now we're on to the rule of 72, which is all about understanding compound interest.

It's basically a division equation.

So you try and estimate how much your investment is going to return.

In this example here, we'll just say 10%, just for ease of calculation.

And then you take your number 72.

It's always 72.

The only thing that might change is your assumed investment percent.

So here we'll go 72 divided by 10%.

And that gives an answer of 7.2.

And that's how long your money will take to double.

So if you're investing $50,000 at, 10% returns, you'd expect to have 100,000 in seven, just over seven years.

7.2.

Now in year 14, your 100,000 will double to 200,000.

Year 21, which is another seven years, your 200,000 will double to 400,000.

And then the next seven years your 400,000 will double to 800,000 and so on and so on.

So as you can see, the longer the time goes on, the doubling has much greater impact.

there's a $50,000 jump in the first seven years in this example, and then there's a $400,000 in later years, maybe even an $800,000 difference if we go another seven years.

So, yeah, time and investing is crucial.

but, it does take time for money to work.

Another example of which illustrates the power of compound interest, you may have heard, is the question of whether you'd rather take $1 million now or you'd rather take $0.01 a day over a 31 day month.

Now the answer is, the $0.01 a day, it turns out to be around $21 million, I believe, which is significantly more than the $1 million taken today.

which intuitively it's hard to grasp how that can be better.

But it's not until you run the calculator that it's quite clear that the 1 cent a day is better.

yeah.

So that's just another illustration of the impact of your money doubling over long, time frames.

On the right here we've got, just another example of compound interest at play.

Someone starting with $0, investing $2,000 a year.

As you can see at the beginning, your contributions are around 93% of the total investment, whereas investment returns make up 7% of the total investment.

So you're doing a lot of the heavy lifting.

Investment returns, not so much.

Whereas come year 10, you can see that you're contributing 67% and your investments are contributing 33%.

So better.

But still you're doing a lot of the heavy lifting here.

It's not until later years where it's totally flipped upside down, where in year 30 your investments are contributing 80% of your total investment and your contributions are 13% of the total.

So total opposite of what it is in year one.

And towards the end you can sit back and see the fruits of your labor and let your investments do all the hard work.

And the main lesson here is at the beginning, it's easy to lose interest when you're seeing that your investments aren't returning a lot, they're not doing much of the work, your contributions are, basically doing everything.

So a lot of people can give up at that stage.

It's just like goal setting, you know, when you expect to do so much so soon, you give up.

But just realistic expectations and understand that it's not until later on that your returns, investments are going to do the hard work.

It takes a long time to get to that stage.

But yeah, just, just keep at it and, and you'll see the, the fruits of that.

Before wrapping things up we'll go over some basics of KiwiSaver and some common misconceptions here.

this first one, the total remuneration that's that got me in my first two jobs.

I had no idea it was a thing.

they got me in hook, line and sinker with that one and I'm sure many others are in the same boat.

Basically it's where the employer can pay KiwiSaver in two ways.

They can either have it on top of your current income.

So in addition to, or they can include it as part of your salary.

If it's included it's called total remuneration.

And that's how I was paid for most of my jobs.

I believe on the rough research out there it's around half of companies do this.

So a lot of doing it it's not necessarily underhanded.

Some companies do use it as an excuse to play their staff less.

for people who are unaware.

But others argue that they would have without Kiwisaver their income would be lower.

So take of that what you will.

but the main thing is just understanding it and knowing it's a thing.

And then when you do get job opportunities or you're comparing jobs, you're comparing like for like because otherwise if you're unaware it can make the difference of several thousands of dollars between jobs.

employees always contribute their pre tax salary whereas employers contribute post tax salary after tax.

a lot of people wonder why the employer's amount that they're seeing in their accounts is less than what they've contributed.

And that's generally the reason why.

Because employees have to pay tax.

the tax that they pay is slightly less than typical income tax rates, but not much less.

and it's called an employer superannuation contribution tax ESCT for short.

The minimum employers have to contribute at the moment is 3% of salary.

from April 2026 that increases to 3 and a half percent and from April 2028 that increases to 4%.

So slowly increasing I still don't think anywhere enough for most people's retirements as you saw on that savings rate table earlier in the slides, saving around 5% a year.

and you takes around 65 years to have enough save for retirement starting from scratch.

So yeah hopefully you're still saving outside of Kiwisaver.

these changes still not enough in my opinion.

other recent changes, the government will contribute to your Kiwisaver now, if you're a 16 or 17 year old, previously it was from the age of 16.

now it's from the age of 16.

So that, that's good.

other changes recently include the removal of government contributions for income earners earning over 180,000 a year.

So it's a slightly negative change.

And another negative news, the government contributions have been halved from a maximum of 521 a year to around $261 a year.

So for the government contributions, basically if your income is less than 180,000, you'll receive 25 cents per dollar you put into KiwiSaver up to a maximum of $261.

So to get that maximum you need to contribute at least $1,043 a year.

in other impending changes, employers will also need to contribute towards 16 and 17 year olds who are in KiwiSaver.

This will take effect from April 2026.

Currently as at December 2025, it's still age 18, but employees from April will have to contribute for 16, 17 year olds, whereas there's no change to the upper limit.

Once you turn 65, employees don't have to contribute towards KiwiSaver and most don't, they stop at that age.

But a few good employers, contributing carry on contributing from the age of 65.

So yeah, not all employers do that, but some of the good ones, finally just on fund selection, it's crucial I see a lot of money left on the table from people who are paying too much in fees or in the wrong type of fund.

so yeah, that's the two main criteria you want to look for.

Low fees and the right fund.

In terms of right fund, I mean asset composition.

So if you're under the age of 50, unless you're buying a house, you pretty much want to be 100% shares.

Anything less than that and you're leaving a lot of money on the table.

and the second thing is low fees.

Again, the difference between a fund charging say 1% or more and another fund charging 0.2% or less can be many, many thousands of dollars, sometimes hundreds of thousands of dollars for higher income earners over the years.

So you get those two things right and you're a long way to making money work well for you.

If you are buying a house in the next, say four years, you pretty much want to be in cash, anything between four and 10 years, probably a mix of shares and bonds and cash.

it's a bit murkier time period, that one.

but yeah, and also, just because you're turning age 65, it doesn't mean you have to be in a lower risk fund.

so some people have money outside of KiwiSaver that they use for retirement.

So I see a lot of people automatically adjusting their KiwiSaver downwards away from shares just because they're 10 years from age 65.

But age is not necessarily the yardstick to use.

you may have money outside of kiwisaver, so just bear that in mind.

Time frame is most important rather than age.

So, yeah, those two changes alone can save many people, multiple thousands of dollars.

So just take great care.

And what KiwiSaver fund you're in there.

So I've reached the end.

Thanks for your time and, and for watching.

I, brought up my details here again.

if you're interested in getting in touch, there's my email address and phone number.

Always happy to have a chat with anyone.

everything's always no obligations and free, just to make sure that our services are a good fit for you or not.

And on the website side of things, I've got several hundred blog articles now that's ranging from retirement planning, investment planning and a lot of the things we've discussed today around personal finances, emergency funds, savings rate and all that kind of stuff.

so, yeah, have a read of anything like there.

There's a real treasure trove of information if I say so myself.

And there's also 127 calculators I think we're up to now.

again they're all free for download and for your personal use.

ranging from comparing investments, retirement planning, kiwi savers, decision to buy property or not, plenty of mortgage calculators and all sorts.

So lots of free resources there.

if you have any questions on any of those, feel free to reach out.

Otherwise, yeah, thanks again for your time and we'll see you next time.