The Beauty of Compound Interest

As always, the content below is meant as general information to give you a better understanding of this topic, and is subject to our terms and conditions. You should seek appropriate personalised financial advice from a qualified professional to suit your individual circumstances.

---

So, compound Interest. Never heard of it? Fair enough. The purpose of this blog is to:

1. Explain what compound interest is

2. Help you understand why it is so valuable, so that hopefully you can take advantage of its key benefits, and make it a part of your long-term financial future

First, let’s cover off “interest” - this is the ‘fee’ you either pay (when you borrow money) or receive (when you loan money). It’s almost always calculated as a % of the amount borrowed, per year. So if you borrowed $100,000 at a rate of 4% - you would pay $4,000 of interest per year.

Many people don’t realise that when leaving money in their bank account, they are effectively ‘loaning’ that money to the bank. In return, they receive interest. Sometimes it’s not that much, which is why it pays to check the level of interest paid on your savings and everyday accounts.

There are other ways to earn interest, for example term deposits.

Compound interest is pretty simple. Each time you are paid interest, just leave it in the account. Don’t withdraw it, don’t spend it, just leave it. Then, the next time you are paid interest, you’ll be earning interest on your interest. 

Albert Einstein called compound interest “the eighth wonder of the world.” - Okay, so that’s quite extreme, but it is pretty amazing.
Let’s say you have $1,000 in the bank earning 4% interest per year. By the end of the year, you will have received $40 of interest, and will then have $1,040 sitting in your account. The following year (as long as you haven’t withdrawn the money), the 4% of interest will be calculated on the new amount (the $1,040) - not the $1,000.

So, at the end of year 2, you will have $1,081.60 in the account - you received $41.60 of interest, instead of the $40. You earned interest on your interest.
This might not sound like much. It’s not even enough for a flat white. But let’s fast forward 10, 20, 30 and even 40 years. Compound interest shines the longer you leave it.

Example 1: Compound interest (4% per year) with a $1,000 initial deposit and no regular deposits.

Source: Money Smart Compound Interest Calculator

Example 2: Compound interest (4% per year) with $1,000 initial deposit and $20 regular deposits each week.

Source - Money Smart Compound Interest Calculator

How to make the most of compound interest

1. Start early, save regularly – Save small amounts often. As shown above, saving as little as $20 a week can create a very nice nest egg thanks to compounding interest. A lot of the time, saving small amounts earlier in life will have a greater impact than saving larger amounts later on.

2. Check the interest rates on your bank accounts –  A survey* shows that around 62% of Kiwis use their savings account as their primary investment strategy. That’s okay, but it means we should be paying extra attention to the details - e.g. the interest rate and how often it’s compounding (generally speaking, the more frequent compounding, the better).

 A cheque or ‘everyday’ account linked to your Eftpos card typically earns no interest. If you’re keen to start saving, have a look at your bank's website to see what kinds of savings accounts are available, and at what interest rate. You can check out what you bank is offering and compare to others in the market here: https://www.interest.co.nz/saving/call-account 

3. Get excited about the numbers!
So maybe numbers aren’t the most exciting thing. But the rule of 72 is an easy tool you can use to figure out how your savings or investments can grow with compound interest. Simply divide the number 72 by the interest rate. The answer shows how many years it will take for your money to double.

o   E.g. if you have $5,000 earning 4% (after tax). 72 divided by 4 = 18 years.

o   Every 18 years, your money will double.

There’s a handy tool you can use to see what your money may look like in the years to come: Compound Interest Calculator

Compound interest on our debt

Unfortunately, compounding interest can work against us as well, making it more difficult to pay off debt. The longer it takes us to repay debt that charges interest, the more we ultimately end up paying.

If you do have debt such as credit cards or pay day loans, compound interest can work against you. To work out how much you will pay over the lifetime of the loan, check out this debt calculator.

So, there you have it. A bit of an explanation about compound interest and you can use it in your long-term financial planning. 

If you have any questions, please get in touch with us - We would love to hear from you. 

I have no assets, so why would I need a Will?

The short answer:

You probably do have assets, and just don’t realise it. If you die without a Will, you’re leaving a legal mess behind for your family to deal with. It doesn’t take very long to sort out and could save your loved ones added hardship in the event of your death.

The slightly longer answer:

A Will is basically a piece of paper detailing what you want to happen to everything you own in the event of your death.

Many people think they don’t have assets, but your car, your KiwiSaver money, cash savings, and anything else of value, all need to be dealt with.

If you die without a Will, it is called dying ‘intestate’. In this case, the court can freeze all your assets for 6 months or more. This can be a major hassle (and cost) for your family during an already difficult time.

In this scenario, the court decides how your stuff is divided up - using a standard formula. A lot of people are under the impression that if they died today, their family or spouse would be able to sort everything out easily. Unfortunately, that just isn’t the case.

People don’t like to talk about death, and we totally understand. But, getting it sorted now could mean a lot less complication for your loved ones in the future.
 

If I get a serious illness, will the government fund my medication?

Medications, particularly the ones that can save people’s lives, cost money. A lot of money. Years of research, clinical trials, and approvals put a hefty price tag on these drugs - and place them out of reach for most kiwis. 

Fortunately, our public health system has something called Pharmac. This is a government organisation that subsidises certain medicines and equipment, to make them affordable and available to all New Zealanders. 

Around 3.5 million Kiwis use pharmac-funded medications every single year.*

What does Pharmac cover?

• Community Medicines

• Vaccines

• Hospital Cancer Medicines 

• Medical Devices

The problem is limited resources. The government allocates Pharmac a budget each year, but obviously they can’t afford to subsidise every single medication available. Decisions are made to prioritise funding for the medications that will positively impact the most people.

This means a big list of medically approved, cutting edge medications aren’t subsidised. To get hold of them, we have two options:

1. Fork out the full amount ourselves (which can be very expensive); or 

2. Use private medical insurance

Most good insurance companies will cover the cost of non-Pharmac drugs, which can literally be the difference between life and death. However, the amount they cover can differ from $10,000 to $400,000, and $10k isn’t going to get you very far in the event of serious illness. For example – A non-pharmac melanoma drug can cost up to $150,000 per year.*

If you have medical insurance, that’s great. But do you know exactly what you’re covered for? And for how much?

If not, we can check the policy wordings for you, free of charge, so you know exactly what you’re covered for. Or, if you would like to learn a bit more about medical insurance, you can chat to one of our financial advisers. Remember, their help is free. And it’s important you sort out this stuff now, before you need it.

"I earn more than I used to, but it feels like I have less money."

If this sounds like you, don't feel bad. It's a really common situation that most of us have experienced, and usually we aren't even aware of what we're doing to cause it.

First things first, we know life happens. Unexpected bills and greater responsibilities can mean more spending. What we've written below refers more to the extras, the things we don't need to spend money on.

So, there's this thing called Parkinson's law. Without getting too far into it, the law says that "Work expands so as to fill the time available for its completion." This basically means it doesn't matter how long you give yourself to complete a task, 1 day, 1 week, a month - whatever time limit you set, that's how long it will take.

This law seems to apply to other things, too. The bigger our house, the more stuff we'll accumulate to fill it up. The bigger our plate, the more food we'll pack it with, and subsequently eat.

In a financial context, the more money we have, the more we seem to find things to spend it on. Living our entire lives like this means we'll probably never get ahead financially, and will live our lives paycheque to paycheque.

So why do we spend more when we earn more?

Essentially it comes down to our relationship with money, and our lack of transparency over where it goes.

Us and money.

Let's say you get a new job and go from receiving $650 cash into your bank account each week to $900. Fantastic. Now, there are a couple of legitimate expenses that might come with that. Maybe the job is further away, so transport costs a bit more - or you might need to upgrade your wardrobe. But fundamentally, there is no reason you shouldn't be able to save at least $200 extra per week than you were before. It's just... you probably won't.

Now don't get us wrong, we're guilty of this too. See, the issue is in our thinking. As soon as we hear the words "pay rise" many of us start making a mental list of all the great things we can now afford. This might seem okay to get us to a certain "level" of comfort - but the problem is, it never stops. There will always be something to upgrade, something better than what we currently have. Unless we change our thinking, it doesn't matter how much more we earn, we'll continue to spend all that extra money - and never reach our financial goals.

The transparency thing.

"You really should have a budget" - we hear this often. But it's so important that we're aware of where our money is going each week, each month - instead of pay-waving our way through life without a care in the world.

A budget is essential, and we have a great tool for you a little later in this blog.

 

There are a few other things that trap us in to overspending

- Online lay-buy services

- Hire Purchases

- Apple bringing out a shiny new iPhone that no one actually needs

- Qualifying for higher levels of debt, such as a credit card or big mortgage. A bank or financial institution being willing to loan you money, doesn't necessarily mean you should take it.

How do we stop it?

1. Look at all your spending from the last 2-3 months. That is, take a good hard look at your spending. What is essential, what isn't? Do you remember when you used to live of $300 a week? What are you doing differently now? We're not saying live off bread and water, but be practical about what you need vs. what you want.

And one thing, don't discount something from your analysis as a "one-off" big purchase, like a holiday. Because chances are, you'll have more of these coming up. You're better off accounting for ALL your spending, and then making a "holiday fund" bank account where you put a set amount aside each week.

2. The best way to break that annoying Parkinson's law? Limit your spending. The only way: Make a budget, and stick to it. We know, you hear it all the time. But there's a reason for that. It makes you cut the crap, and become accountable for where your money is going. Sorted.org has a really good budgeting tool you can find here. Go make one, and set yourself a goal of sticking to it for 8 weeks. See how you go.

3. Talk to a financial adviser. We say this a lot too, but their help is free, and they often have some really good ideas. For example, if you have a mortgage and a decent amount of credit card debt, they might suggest you move the credit card debt (on which you're probably paying interest of over 18%) and turn it into mortgage debt (which is probably somewhere around the 4.5-6% mark).

There it is. A brief explanation of why we often find ourselves with less, when we're earning more - and a few practical steps to help you get past it. If you have any more questions, please just get in touch.

Why every Kiwi needs a Will.

Passing away without a Will places a lot of added stress and pressure on your family during an emotional time. Your Will should be sorted as soon as possible, for the sake of your family and loved ones.

What happens if you die without a Will? 

1. Everything in your name, including your bank accounts, is frozen by the court.

2. Even if there is no disagreements between who gets what, all your assets will remain frozen for at least six months. 

3. Your family will need to pay legal and court fees to get it all sorted out. 

Many people are under the misconception that they don’t have any assets to put into a will.

Even if you don’t mind where your assets will go, having a Will means your family won’t be stuck with the expensive burden of sorting it all out after you have passed away.

*Wills can be complex, and it's something you can chat to an adviser about helping map out your wishes with a lawyer.

I’m in my early twenties, and I’ve decided to pay attention to my financial future.

Let me start off by saying this doesn’t mean I’m working 7 days a week, staying in on the weekends, or living off noodles and toast and whatever my parents will give me. Really it just means I’ve decided to pay a bit more attention to my finances, and educate myself on a few of the basic things about money that I now realise we really should have been taught at school, but weren’t.

It’s a bit frustrating, because we learned about trigonometry, but not how to make a budget, or get a mortgage.

Call it financial knowledge, responsibility, planning, whatever. This is the stuff that I’m glad I now know about.

I’ve been fortunate enough to find myself in an environment with access to a massive amount of financial knowledge. I realised that not everyone is that lucky, and a lot of this information isn’t easily available to people. Or, if it is, the way it’s written makes it seem so complicated, that after 5 minutes of reading most of us want to throw it all in the too-hard basket, and just hope for the best.

So here we are. Ducks in a Row. This is my attempt at helping people learn more about their money :)

___

Whatever your age, you might be thinking there’s time to figure this all out later. But one of the first things I found out - the sooner this gets sorted, the better.

Timing is one of the most important factors in this whole equation. And the earlier you roll up your sleeves, and get your head around it all, the better.

I’ve broken it down into four key elements. These are the most important “ducks” that I think everyone needs to get in a row.

____

My Spending Behaviour

People (like my parents) used to tell me I needed a budget. My response would consist of a small eye roll and a quick subject change. I’ve always had a job, and been relatively careful with spending - so I thought it didn’t apply to me.

Then my bank released an app that tracked my spending. When I actually started looking at where my money was going, it was a wake-up call to say the least.

Food, coffee, and new clothes was the bulk of it. And some small tweaks meant some big savings.

Budgeting is pretty straightforward, and sorted.org has a really good tool.

The more important thing I learned however, was about my long term behaviour. Have you ever felt like no matter how much more money you make, say when you shift jobs or move from part time to full time, you never actually have any more money?

I found out it’s because of something called Parkinson’s law. Basically, unless we pay attention and really question our spending, it will increase with our salary. Meaning we never save anything, and just incrementally spend more and more throughout life.

I wrote a whole blog about it here. Have a read later on.

____

My KiwiSaver

This one is really important. After all, it’s my nest egg. Almost everyone I know is in a KiwiSaver scheme. But when we’re asked about what provider we’re with, or how much our KiwiSaver is being taxed, we don’t really have an answer. I was even fuzzy about exactly when I could withdraw my KiwiSaver money.

When we start working, we get set up with KiwiSaver. Most of us are enrolled in a default scheme, and put in a fund that doesn’t necessarily match our financial goals.

For most of us, our KiwiSaver account is one of our biggest assets. We should pay at least some attention to it.

After some research, I learned about a few key factors that every one of us should sort out. Not doing so could easily mean $300,000 less in our KiwiSaver account by the time we’re 65.

The major ones are your provider, the type of fund you’re in, your employer’s contributions, and your tax rate.

If you want to know more, and potentially end up with way more money for your first home and your retirement, then read my other blog on this here.

____

My Insurance

Insurance. What a boring, morbid topic. What happens if something goes wrong? Ugh.

Like maybe some of you reading this, I used to have that “it won’t happen to me” attitude. Problem is, shit does happen.

I’ve learned that insurance isn’t just for things like your car or your house. There are other, really important types of insurance, that relate to everyone’s most important asset - their ability to earn money in the future. It’s so important that I’m not even going to send you off to a separate blog post. I’m going to tell you about them now. Right here.

1. Medical/Health Insurance - People do tend to know about this one. It that covers medical bills if you get sick, it gets you immediate treatment instead of waiting, and it gives you access to non-Pharmac funded drugs (of which there are heaps).

Kiwis use their medical insurance an average of 4 times before they turn 65.

2. Income Protection - An important, and more unknown type of insurance. If something happens and you can no longer work, this type of insurance will pay a % of your salary, ongoing. As long as you can’t work, you’re still getting paid.

People get tripped up here because they think ACC has their back. But ACC only covers accidents, no diseases, mental illnesses, or a host of other issues that stop people from working.

1 in 5 Kiwis will claim on their income protection policy.

3. Trauma - A big old lump sum payment of money, if you get diagnosed with a serious illness.

The biggest claim here in New Zealand is for cancer. 1 in 3 Kiwis claim their lump sum trauma payout.

The beauty of this one is a lump sum of money into your bank account, with no strings attached. You can use it for alternative medical treatment, mortgage payments to release financial pressure - anything you want.

4. Life - Another more familiar type of insurance for a lot of people. If you’re diagnosed as terminally ill, or you pass away, your family gets a big lump sum payment. This can help them pay off debt, and relieve some financial pressure in a very tough time. It’s important to have a Will that details who this money should go to, otherwise a court will decide. This is a perfect segue into my fourth and final topic. Wills.

If you would like to know some more on the insurance side of things, I’ve broken it down further in, you guessed it, another one of my blogs.

____

My Will

Okay so if you thought insurance was morbid, you’re going to hate this one. But you just have to get it sorted. At the end of the day, we’re all going to the same place, and we all need a will.

Thinking about this topic can make people sad or uncomfortable (it did to me) and that’s totally normal. But in the interest of your family and friends, try to treat this as a practical task, grit your teeth, and get it done.

My first thought was something along the lines of “I have no assets, so I’ll worry about this later when I’ve got kids and stuff.”

The problem with that? Almost all of us have assets, we just don’t realise it. My KiwiSaver account, my car, my laptop and inherited jewellery all count as assets. Without a Will, no one knows where those things should go in the event of my death.

If we die without a Will (called “dying intestate”), it’s a huge hassle for everyone we leave behind. And when you think about it, they’re already going through a tough time, so why make it harder on them?

Essentially the court can freeze the assets, and no one can access them, not even your parents. They have to go to court, pay legal fees and wait 6 months or longer to get it all sorted. If you have business assets, a whole extra layer of complication is added.

The easiest way around it? Leave a straightforward Will, stating exactly where you would like your assets to go in the unfortunate event of your death. Then update it for big life events i.e. marriage, new kids, just won Lotto etc.

Getting a Will is so important, we have teamed up with a company that specialises in this area. Their name is Perpetual Guardian, and they’re great. If you go through Ducks in a Row, you’ll get a significant discount - so you can have your Will created for as little as $50.

____

So, what’s the best way to get this stuff sorted?

Ask for help. There are quite a few moving parts, and considerations to be made.

I have set up Ducks in a Row in a way that gives us access to a few of New Zealand’s top Financial Advisers. The best part, their help is 100% free.

They can sit down and look at your financial situation, and essentially get your Ducks in a Row for you. By law, everything is kept totally confidential, and the advice they give you must be entirely independent.

The reason their help is free? They’re paid by the insurance companies, only if you decide to take out an insurance policy, but there’s absolutely no pressure to do so.

If you’re thinking it’s time to get your Ducks in a Row, great. Just click below, and tell us a bit about yourself. We’ll do the rest.

- Jess

Co-Founder

The limitations of ACC - and how Kiwis get caught out.

What actually is ACC?

ACC is a scheme that Kiwis put money in to, so that if and when we get injured, ACC covers the bills.

It’s a “no-fault” scheme, so it doesn’t matter how you were injured - (even if you were doing something silly), they’ll cover it.

What does ACC cover? Any accidental injury.

For example; if you break your arm, ACC will cover:

• Surgery and treatment costs

• Rehabilitation costs

• Up to 80% of your income, if you can’t work because of your broken arm. e.g. if you’re a builder, working with one arm is pretty difficult.

Learn more about what ACC covers

When you think about it, ACC is just a huge government-run insurance company. They sometimes get a bad wrap, and the scheme does need to be kept on its toes, but in general, we’re better off to have ACC in place. A lot of the time, people’s negative opinions about ACC arise because they don’t completely understand how it works, and the limitations in place.

 

ACC’s limitations

Over 81% of people in the hospital across New Zealand are there due to illness, not injury. And ACC doesn’t cover illness.*

That basically says it all. The majority of the time people need help with medical bills and replacement income, it isn’t because of an injury.

Yes, the public health system kicks in here, but this can take a long time. For example, you could be diagnosed with a heart condition, and be put on a waiting list. It could be a number of months before you receive treatment, depending on how bad your condition is compared to other New Zealanders (many wait longer than a year).

 

What can you do?

Insurance companies are willing to step in here, and there are two key types of insurance that can fill in the gaps left by ACC.

Medical Insurance

Covers you for both accidents and illnesses, providing access to treatment straight away, and the good ones offer non-pharmac drugs - e.g. medicine not subsidised by the government (and there are a lot of them).

The benefits:

• You have a choice - about when you have treatment, who does it, and where. You don’t get this in the public health system.

• You get treatment straight away, and your condition isn’t prioritised against other New Zealanders (i.e there’s no waitlist).

• You get access to a range of things which aren’t available through the public health system.

 

Income protection

This one is simple. If you are unable to work due to your illness, this type of insurance will pay up to 75% of your income, each month, until you can go back to work. Remember, your ability to earn an income is your most important asset. You and your family will likely struggle if you aren’t able to earn money.

As always with insurance, you can’t afford to get it wrong, so it’s best to chat to an expert who knows what they’re talking about. Our independent financial advisers can lay out what kind of insurance is on the table for your situation, and what level you should take out, depending on your needs. Best of all, their help is free of charge.

And if you want any other help or advice around ACC, such as how to reduce your levies (if you’re self-employed), just click below and we’ll sort the rest.

References

• HFANZ/NZPSHA Major Medical Research Rate, June 2015, 2017.

What is Ducks in a Row?

That's simple. So many of us are lacking in basic financial knowledge. Ducks in a Row is an online resource that exists to fill in the gaps.

Why are we here? Because they should have taught us this stuff at school. It's so important, because getting the basics wrong now can have serious consequences down the line. Not only can it negatively impact us as individuals, but our families too.

---

We start with the fundamentals. Three pillars (or ducks, if you will) that are crucial for everyone to understand, and have set up correctly for their own unique situation.

1. Your Will

What happens to everything you own after you pass on?

2. Your KiwiSaver

Is your money with the best KiwiSaver provider and the best fund for your goals? Are you making the most of Government contributions? These questions can be worth hundreds of thousands of dollars by the time you retire.

3. Your Insurance

Do you have the best and most relevant insurance in place? Are you covered if something stops you from being able to earn? We're not just talking house and car cover, we're talking about the important stuff.

---

Our online resources explain these three concepts in a simple, but informative way. Further, we have a small team of experts that can take a look at your situation, and make recommendations on how best to get your Ducks in a Row.

The best part: their help is free.*

Keen to learn a bit more? Good, that's what we like to hear.

---