One of the most important aspects of managing your finances is where to allocate your money. For individuals in New Zealand, there are three options: you can invest, save or put your funds into KiwiSaver. Understanding the pros and cons will help you make an informed decision about the best-suited options to achieve your financial goals and your tolerance for investment risk.
While there may be a conflict between choosing only one option, you’d be happy to know that each plays an important role in the greater scheme of things and a diversified approach is always recommended.
Understanding the Difference Between Investing, Saving, and KiwiSaver
Investing: Building Wealth Over Time
Investing involves using your money to purchase assets like stocks, bonds, or real estate. You do this with the expectation and hope of generating a return and making more money. The returns or extra funds can come as dividends, interest, or when the value (capital appreciation) increases.
A 2020 report by FMA (Financial Markets Authority) shows that New Zealand’s investment landscape has seen consistent growth, with over 80% of adults aged 18 or older participating in some form of investment. This represents 3.2 million individuals.
Pros:
- Prospect for high returns over the long term.
- It can help you build capital and gain financial freedom.
- Offers flexibility in investment choices.
Cons:
- Involves risk, and you could lose money.
- Requires knowledge and research to make informed decisions.
- It may not be appropriate for those with short-term financial needs.
Saving: A Safe and Secure Option
Saving means putting money away in a bank or another financial institution. The aim is to build up funds for later or when unexpected costs arise. It’s a straightforward way to manage your money for specific goals.
Pros:
- Savings accounts are generally considered safe, secure, and low risk.
- You can withdraw your money at any time.
- Savings accounts offer stability and predictable returns.
Cons:
- Savings accounts typically offer lower interest rates compared to investments.
- The value of your savings may erode over time due to inflation.
When selecting a savings account, factor in how often you want to draw from the account. Banks have various account types; some may have guidelines about how and when you can access your money, possible penalties, and the interest you could make.
KiwiSaver: A Retirement Savings Scheme
KiwiSaver is a voluntary retirement scheme designed to help New Zealanders save for retirement. It emerged as the most common investment choice, although it is often combined with other forms of investment. However, for 30% of New Zealanders, KiwiSaver was their exclusive investment.
Pros:
- The government and employer contribute to your KiwiSaver account, boosting your retirement savings.
- KiwiSaver can be used for a first home deposit, providing a significant financial advantage for those wanting to join the property market.
Cons:
- Funds are primarily intended for retirement and have restrictions on early withdrawals.
- The performance of your KiwiSaver account depends on the investment options you choose.
There are several KiwiSaver scheme providers, and each holds a series of varying investment funds; you can select the one that best suits you. This will also rely on your risk tolerance and when you plan to access these funds.
With KiwiSaver and investment funds, you can make regular and lump sum contributions anytime. However, KiwiSaver offers the added benefit of employer and government contributions. If you’re eligible, the government will also contribute 50 cents for every dollar you contribute to your KiwiSaver account, up to $521.43 a year. If you’re employed and contributing to KiwiSaver from your pay, your employer must generally contribute at least 3% of your before-tax pay.
If employed, you will probably contribute towards your KiwiSaver fund with options ranging from 3%, 4%, 6%, 8%, or 10% of your income allocated to the scheme.
Choosing the Right Option for You
The best option for you depends on your individual circumstances, financial goals, and risk tolerance.
Consider the following…
Time Horizon
Remember, it’s your choice how you envision your financial future and the goals you want to reach. Many individuals are after improving their quality of life, which could mean always ensuring there is money for a ‘rainy day‘, emergency, travel, car, house, or even retiring earlier. These objectives do not need to be specific, and it’s common for them to shift according to your current needs.
Once you’ve identified one or more financial goals, the next crucial step is to determine the timing, or investment horizon. Time is a key factor that will influence how much you need to save or invest, and for how long. Generally, the larger the goal, the longer it will take to achieve, while shorter-term goals can be reached more quickly. Setting a deadline for your goals is also essential, as this will guide what you need to do and how to reach them.
The time and investment horizon will determine your risk tolerance, the returns you wish to make, and how quickly you can access funds.
Risk Tolerance
The most significant difference between investing and saving is risk and the tolerance you have for loss. That is why many individuals prefer saving over investing. The frequency of returns provides comfort in knowing what you’ll receive in terms of the interest payments and when they are paid in the year. It’s these reasons why saving is ideal for reaching short-term goals and giving you access to your funds quickly if needed.
If you are chasing a bigger dream, then the pace at which you receive your returns and the value thereof may not be sufficient – and that is why it is good to consider investing, too.
Investing provides the opportunity to make higher returns than what diligently putting money into a savings account does. A high risk is associated with this; you could lose a portion of your money or all of it. High-risk investments yield high returns and vice versa. It’s all dependent on your risk tolerance. Investing is a long-term financial strategy; you can manage market fluctuations if your goals are for the future. KiwiSaver shares these similarities to investments, and that is why it’s also a sound venture to include in your portfolio.
Access to Funds
The final consideration is how and when you want to access your funds. Money saved in an account is considered the most versatile of the three options; if you’re popping money into a piggy bank or a savings account, your funds remain as cash. So, if you need to replace a car tyre, visit the dentist, or plan a holiday at the end of the year, this form of ‘investing’ is ideal because you can draw it out quickly if needed.
The very opposite of this is KiwiSaver. Designed as a retirement scheme, your funds are stashed away until you reach retirement age (65) or if you need it to purchase your first home. Other expectations may be that you are facing a serious illness, have entered financial hardship, or are emigrating. While the limitations may put a damper on your current goals, see it as supporting your future – therefore, it’s wise to look to other forms of investing and not lean on your KiwiSaver for emergencies.
Investing falls in the middle of this spectrum. Investing means translating your cash into shares or other investments; if you need your money fast, you’ll have to sell these shares. There is no fixed timeline for determining when you will be paid out, and it hinges on the liquidity of the investment, the number of buyers in the market, and more – so it will not happen quickly. Plus, your selling price may not be the original purchase price, and you may incur a loss.
Investing FAQ
Q: Is it better to put money in savings or invest?
It’s often recommended to have a mix of savings and investments to balance risk and reward.
Q: What is the 50-30-20 rule?
The 50-30-20 rule is a personal finance guideline that suggests dividing your after-tax income into three categories:
- 50%: For essential expenses like housing, utilities, transportation, and groceries.
- 30%: For discretionary spending, such as dining out, entertainment, and hobbies.
- 20%: For savings and debt repayment.
Q: How much should you save and invest?
The amount you should save and invest depends on several factors: income, expenses, financial goals, and risk tolerance.
Here are some general guidelines…
- Aim to save at least 3-6 months’ worth of your essential expenses in a high-yield savings account.
- Start saving for retirement as early as possible. A common rule of thumb is contributing 10-15% of your income to your retirement savings.
- Determine the specific amount you need to save for different goals, such as buying a house or a car.
- Consult with a financial advisor for personalised guidance.
Q: Should I put all my savings into my Kiwisaver?
While KiwiSaver is a valuable retirement savings tool, it’s important to diversify your investments and have a comprehensive financial plan.
Q: How to start investing in NZ?
Our guide How to Start Investing in New Zealand is a good place to start. We list investment options that include peer-to-peer lending, shares, bonds, and property. Plus, we touch upon the benefits of investing and how to find your investment sweet spot.
Q. Should I prioritise saving or investing?
Generally, you should prioritise savings until you have a strong ‘rainy day fund’ built up, typically a minimum of 3-6 months’ worth of expenses. Once you have this fund built up, then consider which investments funds are best for your situation based on your risk tolerance.
Q. How can I increase my savings rate so that I can start investing sooner?
- Automate your savings: Set up an automatic transfer from your checking account to your savings account each month.
- Reduce your expenses: Are there areas where you can cut back on expenses? Perhaps make a coffee at home instead of hitting the cafe on the way to work. Do you have monthly subscription services you could cut back on?
- Increase your income: Maybe it’s finally time to start that side hustle, or you could consider asking for a raise.
Q. When is the best time to start saving and investing?
The best time is now. The sooner you get started, the more time your money has to grow. When it comes to investing, even small amounts can make a significant difference over an extended period of time.
Balancing Your Investment Portfolio: A Strategic Approach
Include all three of these investment options in your financial planning. Do not focus on following one method but on when to include another investment type in your financial plan at the right time. An emergency fund is always the best place to start and protects against immediate, unforeseen events. A shared outlook is to save three full months’ worth of pay or three months of expenses before looking to expand your investments. Extra contributions to your savings may help to boost your funds due to higher returns, and the same applies to making additional payments to your KiwiSaver to provide an extra layer of financial security.
If you’re a wholesale investor seeking a reliable investment solution, MoneyShop is here to assist. Our team can provide a personalised consultation to help you explore your investment options and make informed decisions. Contact us today to get started!
