- for money set aside for tax
- to buy new equipment for your farm or business
- for your house deposit since banks want to see good savings habits
- to pay off a student loan
- emergency reserves
- for nervous nellies
And many other reasons.
A bank is not always a good place for your money
Over the medium to longer term, you will usually lose money after inflation and tax
The IMF recently commented that NZ is exposed to quite a few risks – e.g. a sharp slowdown in China's growth, any global financial market volatility, a sustained decline in dairy & commodity prices, or a drop in house prices – earthquakes too.
Remember the NZ banks lend huge amounts on houses and also to farmers, and so a big adverse event or 2 or 3 events together could bring an NZ bank down
Unless it is a only a little money, or for the very short term, diversify over 2 or 3 or 4 banks. You will need to be patient though, as with new money laundering laws opening another bank account is a painful process, but once done it’s done.
Techniques for investing in term deposits
First and foremost, the highest interest may not be best for you.
Longer term rates tend to be higher, but you are locked in, and will be penalised if you need to break a term deposit.
Emergencies happen to all of us at times – plan accordingly.
Laddering & Interest Rates
It appears as if interest rates will rise, but who can be sure ? The banks are currently awash with money, so deposit rates are not rising much, if at all.
You don’t know, and neither do I, what long term rates will be?
Accordingly use laddering.
Put some money on 3 months, some on 6 months, 1 year, 18 months and 2 years (in accordance with your plans for the money).
When a term deposit matures and rates have risen, you can invest at a higher rate.
Interest rate risk
This is when rates have fallen and your term deposit matures. It can cost you quite a bit in lost interest, but the problem can be partially eliminated by laddering.
If you have laddered your deposits, not all your money will be coming due at the same time - somewhat less pain if interest rates fall.
Tip – you gotta ask
A few days before a term deposit does mature, go into the bank and ask what they are offering – silly, but people sometimes get a tad more just by asking.
Tip - interest quarterly or on maturity ?
You are offered 4% pa. quarterly or 4.1% pa. on maturity, but which is better ? Use your calculator, or ask the bank staff, or your teenager to work it out for you. The answer might surprise you.
Over 2 years
I would be loathe to lock money up for longer, unless there is a really good reward - a lot more interest . Remember you are going to be penalised if you need it sooner.
Over 3 years
If you are investing for more than 3 years, you probably should be investing in bonds and shares on and offshore.
- this is likely to make more money
- is usually liquid, so you can get out anytime
- will usually be well diversified
- will reduce your exposure to unique-to-NZ risks
Does our government support the banks ?
Not officially but they know that a bank collapse would hurt our economy very badly indeed.
If we had 20 banks, the economy could probably withstand a bank failure.
But the “big four” dominate NZ banking and if one of them went down, the pain would be huge.
So to some extent the govt will allow the banks a fair bit of leeway (aka profitable) , hence making them stronger (in theory).
And they are profitable - the big four all made about $1 billion profit pa. each over the last couple of years !!
With that sort of money, and knowing how important they are, they can afford a team of heavyweights to lobby hard to get even more leeway from the govt and the Reserve Bank.
Whether or not the banks are good corporate citizens is another story entirely.
Meanwhile the smarter politicians know how important the banks are, but still try hard to give the impression that they side with the voters. Tui.
Supplied by Alan Clarke, financial & retirement adviser, & author. He also writes regular articles for the media & on line – see www.acfs.co.nz
His second book will be available mid July entitled;
“The Great NZ Work, Money & Retirement Puzzle”.
Alan is an independent authorised financial adviser (AFA) FSP26532 & his disclosure statement is available on request and free of charge