Mary’s Q&A column appears in the Business section of the Weekend Herald. Mary was a finalist for the "Best Columnist – General" award for this column in the 2014 Canon Media Awards.
NZ Herald March 4 2006
Q&As: Eftpos v credit cards. And bank fees.
The investment outlook is gloomy, so save!
Wealth doesn't make you happy.
Question: I know you get lots of comments and questions, so I was wondering why you chose to answer the question on the use of Visa cards rather than eftpos last week.
Maybe this person was assuming that everyone that uses an eftpos card must pay 5 or 10 cents per usage. On the other hand, using an eftpos card from HSBC bank, my wife and I pay zero fees on eftpos usage (which is standard where we come from in the US) and use the eftpos nearly 100 times a month.
At a 10c-per-usage rate we would (at say BNZ) pay $120 per year - a lot more than $25 for using a credit card. So with such an assumption maybe it is a good point, maybe.
The advantage in using an eftpos is that you can see at any time during the month EXACTLY how much you have in your bank.
If you fastidiously keep track of your expenses, then the eftpos is great, especially as compared to paying with cash. I've tried this before and you end up with a mountain of receipts that you must try to make sense of at the end of the month. With your bank's records of expenses from eftpos charges, keeping track of your expenses is now a breeze.
The real question that should be addressed here is why so many kiwis are willing to pay so many ridiculous bank fees. I'm still having a hard time swallowing this issue after having grown up in the US where no-fee credit cards are standard, and few other banking fees exist. It feels like such a sham banking here in NZ.
Anyway, I appreciate your post each week, but I must say, you could have picked a better question, and crafted a better response to the eftpos question.
Answer: I published that letter because many readers could save several hundred dollars a year by picking up on the idea.
It's true that people who pay no bank fees - including you, many people under 18 or over 65, students or recent graduates and others with high balances in bank accounts - wouldn't benefit.
But there are many others, some of whom pay eftpos fees as high as 60c per transaction. At your usage rate, they are paying $720 a year. For them, last week's Q&A might be the most helpful one of the year.
Eftpos does, of course, have some advantages over credit cards. As you say, using eftpos helps you know where you stand financially. And those who aren't disciplined with credit cards might not be advised to increase their use of them. It's a classic horses-for-courses situation.
But eftpos is no better than a credit card for keeping track of expenses. In my case, at least, I get more detail on my Visa statement than my bank statement.
Turning to your "real question", yes, some people do pay higher bank fees than they need to. In the calculator section on www.consumer.org.nz, the Consumers Institute helps you work out how to reduce those fees, given your personal banking habits. You have to pay to use that feature on the website, but in many cases bank fee savings would more than cover the cost.
More broadly, though, the comparison with the US is probably not fair. If banks charge little or no fees there, they must cover their expenses some other way, presumably by paying less interest on savings than they otherwise would, and charging more on loans.
The user pays tendency in New Zealand banking is probably fairer. Those who use bank services more extensively pay higher fees - except the lucky young, old and high-balance types.
Question: I read your response to me last week (about whether compounding interest is significant). You are still a bit like financial advisors talking up compounding interest.
Yes, interest and inflation has now been stable for almost 20 years. However, no one can predict what the next 20 years will bring, based on the previous 20 (as you repeat in your columns).
A possible spike in oil prices to $100 a barrel (in the next year or two) could send inflation spiralling upwards and, after a few years, wipe out the meagre 2 per cent real interest (after tax and inflation) you have earned in the last 20 years. That happened to our parents' and grandparents' funds (remember the 1,000 pound whole-of-life policy, which was considered a fortune back then?).
You could put your money into other options like shares and property, but these have higher risks. For example, the Baby Boomers' wanting to sell down to recoup some equity for retirement over the next 20 years will depress property prices, or the "bird flu" decimating world populations and reducing demand and depressing share prices.
You could buy residential property, but with rents falling or going to fall (witness the proliferation of "For Rent" signs now on the streets), and cheaper options like apartments being built, this is not a good option either (as you also say in your columns).
I am in a quandary, as I am saving over half my income per month by not spending, but there is no real safe place to accumulate, other than interest-bearing bank accounts.
However, you also missed my point at the end of my first letter. I said saving is like deferred spending and interest is simply no more than a bonus (and a not-guaranteed one, given inflationary risks stated above).
Therefore not spending is more important to me than saving, even though "not spending" is a form of saving. An old saying has relevance here: earn $1 spend $1.01, you are poor; earn $1 spend 99c, you are rich. Therefore if I earn $1 and spend 50c, I am very rich indeed. Interest or no interest.
Answer: Phew! I was getting a bit depressed reading your letter, but you end on a high note.
However, the vast majority of us, who are not saving half what we earn, might still feel rather concerned about the bleak picture you paint. And I certainly can't guarantee oil prices won't soar, bird flu won't strike and so on.
I think, though, that you exaggerate the gloom. Example: Baby Boomers, born from 1946 to 1964, are starting to retire now, and some will still be alive in 2060. Sure, many will move to smaller properties at different points in their retirement. Many will be selling shares, too. But any market influence that is spread out over more than 50 years will hardly be abrupt.
Also, our Reserve Bank and others in the developed world put more emphasis these days on controlling inflation.
Having said all that, most experts agree that future long-term average returns on all investments are likely to be lower than in the recent past. But that doesn't mean we shouldn't invest. In fact it's all the more reason to save harder. Whether you regard it as not spending or saving doesn't really matter, as long as you do it.
A couple more things:
* I don't say you can't predict the next 20 years from the last. Average relative returns - the differences between shares, property, bonds and so on - will probably stay roughly the same over 20-year periods, although absolute levels will differ.
It is certainly true, though, that over just a few years the past is a poor forecaster of the future.
* Nor do I say rental property is bad. Rents are falling in some places, but that won't last over the long term, and property is a long-term investment. While now doesn't feel like a good time to buy a rental - and investors should always be aware of the risks they run - rental properties are often good investments.
Question: I read your column regularly and with great interest, and was thinking about wealth, lifestyle, happiness, etc, and thought these comments of Martin Seligman's about the effect of wealth on happiness, in a recent speech in Sydney, were very interesting:
"Most of you probably think the wealthier you are the happier you will be. Well, it turns out there is a good study of the Forbes 150, who are the 150 richest people in North America. They have the same levels of happiness and depression that you do.
"Here's my guess - if you are thinking about giving up three weekends next year to earn an extra $10,000, my suggestion is don't do it. Quantitatively, it turns out that spending those three weekends with your friends and your family will bring you more life satisfaction than another $10,000."
Seligman is the leading authority on the psychology of "happiness", and worth paying attention to. For many years he researched depression and what difference being an optimist makes in contrast to being a pessimist. In my business, we make a lot of use of his research and the tool he devised for measuring optimism/pessimism.
Here's the bad news: Pessimism is alive and well in NZ, and it's endemic. The good news is that it can be changed.
Answer: Thanks for a largely upbeat follow-up to the previous letter, and food for thought. Treasure those weekends, everyone!
* Mary Holm's advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following her advice. Send questions to firstname.lastname@example.org or Money Column, Business Herald, PO Box 32, Auckland. Letters should not exceed 200 words. We won't publish your name. Please provide a (preferably daytime) phone number. Sorry, but Mary cannot answer all questions, correspond directly with readers, or give financial advice.