Kiwi Saver, Mary Holm financial writer and columnist

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Weekend Herald

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 August 6 2005

Q&As: 18-year-old should wait a bit before buying a house.
Saving for the grandchildren - how much risk is good?
Rental property depreciation risks.

Question: I am an 18-year-old apprentice electrician and I aspire to own a house at a young age.

I have saved money from work and have bonds and have established an amount of roughly $14,000 to start investing.

I'm looking at safe investments within banks, but I know there are other ways of making money - bonds, stock market, long-term, short-term, compound or nominal interest.

I have read your column and have understood that I should look to get compound interest and try for quarterly payments.

What is on my mind, and I'm sure many other young investors', is: What's out there? What can we get? Is it too early to look for a house?

Where do I start? I would be grateful for a push in the right direction and for any of your wisdom.

Answer: I've taken note of your name and will be watching for you on the Rich List in the years to come!

You've made a great start - saving lots and taking an interest in your options.

Given how keen some mortgage lenders are, you could probably already buy a house.

But I would wait a few years, for several reasons:

* By then you will have saved a bigger deposit. That makes the investment less risky.

* It's reasonably likely that house prices will fall, so you may get a better buy than now.

* You will probably be on a higher income, making it easier to meet mortgage payments and cover maintenance, insurance and rates.

* As a buyer of a first home, you may be a beneficiary of the government's proposed KiwiSaver plan. If you take part, the government will give you $3000 after April 2010, or $4000 after the following April, or $5000 after April 2012, to put into your house purchase.

If you're thinking of putting off your purchase for a few years - and KiwiSaver survives the election - you might as well make the most of it.

What should you do with your savings in the meantime?

If you want to buy a house within a few years, you're probably best to stick with bank term deposits. There are no entry or exit costs and, over such a short period, you don't want to invest in something that might lose value, such as shares.

Look for the best term deposit deals on www.nzherald.co.nz (click on "money"), www.interest.co.nz or www.depositrates.co.nz.

You will probably notice two things on these sites:

* At many banks you can get higher interest for terms of less than a year than for longer terms.

This is uncommon. Usually, a bank pays you more as a reward for tying up your money for longer.

In the current economic environment, though, banks are expecting interest rates to fall over the coming few years. That puts downward pressure on longer-term rates.

Be wary, though, of going for the higher rates over shorter terms. It's better to get 6.4 per cent for two years than 6.7 per cent for six months and then find you can get only, say, 6 per cent or less after that.

Generally, if you're planning to save for a few years, you're better off investing the money for that full period.

* You can get higher interest for some non-bank deposits. But that's because those institutions are riskier. You have been warned!

If you want to invest in them, at least spread your money around several, in case one goes belly-up. And go for the ones with higher credit ratings, as they are financially stronger.

On www.interest.co.nz, the ratings are called SQP scores. AAA is the best score, DDD is the worst. More information is available if you click on Consumer Guide, and I recommend you read it.

On www.depositrates.co.nz , most of the ratings are from Bondwatch. G1 is the best, G8 is "for sophisticated investors only". For more info, click on the link to Bondwatch. The site also sometimes uses Rapid Ratings (A1 is best, E4 is worst) or Standard & Poors (AAA is best, DDD is worst).

If an institution is not rated - labelled "NR" on the depositrates site - and it's a mainstream bank, that's fine. Otherwise, I would skip non-rated institutions.

I would wish you luck, but something tells me you won't need it. You'll succeed financially anyway.

Question: Although we are in no way rich, we would like to help our grandchildren when they'll turn 18.

Based on the idea that you can financially adopt a child in the third world by donating a dollar a day, we've been doing just that for our grandchildren.

Banks don't offer a very rewarding savings account, especially if you deduct the monthly account fees.

We've been waiting forever for the government to start a savings plan, so we turned to medium-risk term deposits (8 per cent for three years). The interest is compounded quarterly and at maturity we re-invest the lot and add the $30 a month we've been saving per child.

The term deposits are in my name because of the lower tax bracket.

Our children don't know that we are doing this for their offspring, partly because we like the surprise at the end of the plan and partly because the whole thing could fall over if the company we invest with goes broke.

Are we on the right track with what we are doing or do you have a better idea?

Answer: Some kids, and their parents, are going to be lucky. I wonder how many people will be asking leading questions after reading this!

Basically, I like your idea. With the relatively small sums you are talking about, it's probably best to stick with term deposits rather than, say, a share fund.

I'm not sure, though, whether it's worth taking on the extra risk for a higher return.

Assuming you are in the 21 per cent tax bracket, $30 monthly deposits for 18 years would grow to about $12,500 at 8.75 per cent.

At 6.75 per cent - a more typical bank rate - the money would grow to $10,700. That's still a great contribution for your grandkids. And you know it will be there.

If you insist on going for higher risk and higher return, check out the finance companies' ratings on the websites in the last Q&A to make sure you're not taking more risk than you realise.

And the same advice applies to you as to the young electrician: spread your money around.

Question: Being a registered valuer, I was interested in your comments last week to a question on the depreciation of residential buildings.

I get many requests to complete "chattels" valuations that are to include items such as non-load-bearing walls etc, but have declined to complete the same as I have considered the practice somewhat dubious and not representing a true depreciation of the property.

However, the practice is common, and one firm appears to specialise in the "chattels" valuations, promoting the same in regular articles in a glossy investment magazine.

The impression one gains is that this firm are the experts in the subject and have gained approval from IRD for the practice.

It is the IRD's lack of response that has also given the impression all is OK. After all, IRD does not have to audit anyone but merely check the IR 3R Rental income form that shows the details of depreciation claimed.

Perhaps they are biding their time and plan to claw it back later?

Answer: It must be galling watching others profit from doing something you don't consider quite ethical. But good on you for maintaining your standards. And your clients may yet thank you.

"Inland Revenue has not approved this practice," says a spokesperson. "Some firms may have adopted a liberal view of Inland Revenue publications in adopting and promoting practices, which may not be in the interests of their clients."

Sounds a bit ominous, that last phrase.

The spokesperson goes on to say, "Inland Revenue has not published any detailed statement, but a review is in process and the Department hopes to publish its position at some point in the future."

With all the uncertainty out there, here's hoping it's sooner rather than later.

 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 maryh@pl.net 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.

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