Written by Natascha Mendis
Like many Kiwis, you’re on the road to buying your first home. You’re already opting for an instant over flat-whites and skipping the ski trip to Queenstown, but how do you make sure these new-found savings work for you?
For most people, their first home deposit will be sitting in a bank account – for some people that is the right option, but for others, there are much better places to save, though understanding what those options are and whether they are right for you is a bit trickier. We need to remember saving and investment are very different, and here we are talking to you about your investing options. And remember - the harder your savings work for you - the less saving you need to do.
How much risk should you take?
Higher risk investments may yield stronger long-term results, but they’re not always the best answer for first home buyers. You first need to figure out when you want to buy your home and from there you can determine the amount of risk you’re willing to take on.
To understand risk, look at the aggressive cricketing style of iconic Black Cap, Brendan McCullum. Historically McCullum secured massive victories for the Black Caps with his bold attacking flair, but he was also liable for some huge losses. As a coach you run a higher risk that anyone night McCullum might make a mistake and take an early walk to the locker room, however whatever losses might come in the short term, the virtuoso cricketer would accrue the team far more wins in the long term.
The stock market (AKA growth assets) are the equivalent of Brendan McCullum, they will have spectacular ups and downs, but over the long run will deliver a much better return. Income assets (cash and bonds) are much steadier - they provide dependable investment returns never great, but never too bad either. Find out a little more about risk and different asset types in this blog post here.
The further away from the home purchasing decision, the more risk you can take. Growth assets will go up faster than income assets over time, though can also have some spectacular falls, and you want to make sure that you are not sitting in a portfolio of growth assets if there is a market downturn (Covid-19) at the time you would like to purchase your first home.
The kōura portfolio generator will work out the right investment strategy for your needs, balancing your first home goals with how much risk you’re comfortable taking on between now and then. The KiwiSaver portfolio we arrive at, together, can also educate your investment strategy for other investment options.
What are your options
Once you understand your risk profile, you can think about where to invest your money. The good news is you have lots of options!
The preferred option for many Kiwis. It is easy to set up, the money is deducted from your paycheck so you don’t have to decide between your savings account and your Friday night drinks and most importantly of all, you will benefit from the employer and government contributions (free money!).
With KiwiSaver, it is important to make sure you have the right fund selection – too much risk and it could all go pear-shaped just as you’re looking to dip in.
You can have a look at the investnow and sharesies websites, there are several managed funds for you to choose from and with both, you can set up regular ongoing savings plans.
Your kōura portfolio gives you a template for your risk appetite and asset allocation, which can be easily replicated into other investment schemes. For your growth portfolio, we suggest the Vanguard ACWI hedged to NZD and for your income portfolio you could use the Harbour New Zealand Core Fixed Interest Fund.
Bank term deposits
Term deposits are bank accounts that pay you a little more interest than normal savings or current account in exchange for you agreeing to lock up the money for a period of time. You can get term deposits for anything from 30 days out to three years.
Interest.co.nz has a good summary of term deposit rates for you. Our recommendation is to stick with the banks rather than the credit unions or finance companies as the banks will be a safer investment for you.
In general, there are two different types of bank accounts - current accounts and savings accounts.
Current accounts are meant to be everyday transaction accounts. They have low transaction costs, though do not pay you very much interest (or often no interest at all).
Savings accounts will pay you interest, though will often have higher transaction fees to discourage spending.
You should make sure you are using a saving account rather than a current account to maximise your interest.
After 15 years around trading floors, I am a big believer that individual investors should not be investing in the share market. Research out of the market shows that the average investor underperforms the market by 4-5% per year. You are therefore best placed to put your savings in a managed fund rather than invest directly yourself.
Set it up as a recurring payment
The easiest way to save is to make it a recurring direct debit, preferably directly out of your salary so you are not tempted to skip your saving allocation. One trick is to set up a second account with your bank account and have a part of your salary diverted into that account. This will mean that you don’t have the temptation of an extra night out or a new winter jacket. The money has already been whisked away ready to be invested.
Saving for your first home can be daunting stuff. I get it. But if you set yourself up with the right strategy based on your specific goals, you’ll find that your first home is closer and more achievable than ever before.
At kōura, we recognise how hard it is to save for the things you want (especially your first home). We want to make it easy for you to make the right decisions, using the kōura personal advice tool will allow you to build a personalised portfolio that you can use for your KiwiSaver, or alternatively you can use the asset allocation to invest in non-KiwiSaver managed funds.
We want to make sure that you make the right decisions for you!