Rich Enough?

A CONVERSATION WITH MARY HOLM, MBA

Turns out, like that mythical king, we’re also obsessed with wealth! So, when we read the title of Kiwi finance guru Mary Holm’s latest book – ‘RICH ENOUGH?’ – our curiosity was aroused. And here’s the good news: whether you’re drowning in debt, scraping by from one payday to the next, or wondering if you’ll ever know what ‘rich enough’ feels like, Mary’s time-tested tips will help you improve your financial outlook.

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GRAPEVINE: You’ve presented lots of seminars and authored several books on how to handle money. What inspired ‘Rich Enough?’

MARY HOLM: When my publishers suggested it was time for a new one, I felt strongly that the message should not be “the more money, the better!” Instead, we decided to focus on the idea of getting your finances sorted so you’ve got enough money to be comfortable. 

The book opens and closes with a discussion about the connection between money and happiness. Of course, when you haven’t got enough money to put good food on the table, then having that bit more will increase your happiness. But there’s been quite a lot of research suggesting that – beyond a certain level – having MORE MONEY can actually make you LESS HAPPY. This same topic has been explored in many different countries around the world, with pretty much the same results. 

GV: So when you say, ‘rich enough’, what kind of numbers are we talking about?

MARY: Well, research here in New Zealand has suggested an annual income from around $80,000-100,000 to $180,000 per year … But there’s really no magic number, because there are so many variables. 

My message is: you don’t want to make money your main focus – and you don’t want to become totally consumed with trying to accumulate more and more. But, at the same time, if you haven’t got enough to live comfortably … to pay your bills … and to feed your kids well … then money’s going to be a big worry. 

Smart goal-setting

GV: Most people would love to get their money sorted, but they don’t know where to begin … 

MARY: Or they think it’ll take a lot of work and research (which can be intimidating) … or they’re too busy, and they keep putting it off. But I maintain that, if you can set some financial goals, you can get on with the more important things in life. And the first step is to just get started … 

I like to use the acronym ‘SMART’ to help people make a plan to deal with debt, increase their savings, and make the most of their money. 

The ‘S’ stands for SPECIFIC. You want the goal to be clear – not, “I’m going to save more money …” but, “I’m going to set aside money for a holiday next year.” 

The ‘M’ stands for MEASURABLE. Once you’ve got your goal – e.g. “I’m going to save $50 (or another specific amount) a week” – you want to be able to see your progress. And be kind to yourself! If some unforeseen expense comes up one week, don’t give up – just return to saving the following week. Don’t double up the payment (unless it’s easy to do so), or you risk giving up on your goals – because you’re human, and that kind of thing makes it too difficult to sustain your efforts. 

The ‘A’ in SMART is for ACHIEVABLE. It’s got to be something reasonable. Just like with New Year’s resolutions, we sometimes set ridiculously high goals, and then we wonder why they don’t last more than a few weeks! 

The ‘R’ is PHONETIC – which stands for written. Research shows that the process of writing something down helps with the mental aspect of your commitment, so you’re more likely to do it. I recommend writing your goal on a piece of paper and sticking it to the fridge or the bathroom mirror as a reminder. 

Then finally, the ‘T’ is for TIME. Setting a deadline for the goal, or even for steps towards the goal. You might aim to have saved a specific amount by the end of the year, and however much more by next June (or some other benchmark). 

Oh, and one more thing: It’s not specifically one of the ‘SMART’ steps, but it’s really helpful to tell other people about your goals – a friend or a partner or somebody else – because that helps a lot with accountability.  

Good debt & bad debt

GV: I suspect that one of the first things most of us need to tackle when making a financial plan is the money we owe …? 

MARY: That’s so true! And it’s especially important to get rid of high-interest debt – which is most debt besides a mortgage. That stuff’s an absolute killer! People are often paying 20% interest on credit-card debt or ‘buy now, pay later’ debt – which is a huge drain on your wealth. So dealing with that is vital. 

If you pay off a 20% debt, that improves your wealth in the same way as an investment paying a 20% return. Now, the only way you’d ever get a 20% return after fees and taxes is by taking really high risk and having a huge amount of luck! But paying off high-interest debt improves your wealth in exactly the same way. 

GV: So, should we be cutting up our credit-cards? 

MARY: I think that some people do need to cut up their credit-cards – or freeze them in ice to at least delay impulse buying! But in general, it’s better to become what I call a ‘credit-card winner.’ And the way you do that is to simply use the card and pay it off in full every month. This means you must always be aware of your growing bill as you’re running things up. 

However, so long as you’re always prepared to pay that amount in full, then you’ve had the use of the money in the meantime, and you’re maintaining good credit.

GV: But not all debt is bad – is that correct? 

MARY: Yes. I differentiate between ‘good debt’ and ‘bad debt’. For example, I consider a student loan a ‘good debt’ – especially because it’s interest free if you continue living in New Zealand.* Research shows most people earn more with a university qualification than they can without one, so you can consider a student loan an investment in your future income.

*Student loans do start accruing interest if you move overseas. So it’s a good idea to save up and pay the loan off before you go, if possible, or at least keep making payments while you’re away. 

Renting, buying & mortgages

GV: I’m guessing that a mortgage is another example of a good debt. 

MARY: That’s right. In general, buying your own home is a good investment – not purely financially, but also because of the sense of security it provides. Most Kiwis (especially families) would prefer to own their own home. 

GV: Most people would prefer that. But for those who haven’t yet managed to get onto the property ladder, you make an encouraging point: “You don’t have to ever own a home to be financially well set-up …”

MARY: Yes. I felt that was a really important to say, because New Zealand is quite home-crazy! We overemphasise the ‘need’ to own your home if you want to make it financially. But you don’t have to be a homeowner to be financially sorted. 

GV: So how can non-homeowners prepare for retirement without the security of a house? 

MARY: If you haven’t managed to buy … or you’ve decided not to … or you’ve opted out of the homebuying market for now … you’ll need to save seriously to retire with a fairly big sum to cover your rent for the rest of your life. 

However, by saving really hard and contributing to KiwiSaver, you might have an opportunity to buy if you choose to do so in the future. House prices might continue to fall (or at least stabilise) … you might start a family (which often prompts that desire for your own home, to provide a base for your kids) … or your circumstances might otherwise change. And the more you’ve been saving in the meantime, the stronger your position to go into the housing market.

A bigger deposit can make a huge difference to your eligibility for a mortgage – and the affordability of repayments. Either way, it’s good for people to get into serious saving. 

Budgets, piggy-banks, & savings

GV: So how about some tips for doing better at this? 

MARY: Well, there are all sorts of online budgeting tools to help track your spending. And using something like that will help highlight areas where you can save. 

If you’re trying to build up your savings, start small. Commit to putting aside $5 a week – just set it up as an automatic transfer – and then gradually increase it. Maybe after 6 months or whatever, raise it to $8-10 a week. By steadily increasing that sum by tiny amounts, it adds up over time. 

And if you get a pay rise – let’s say $30 more a week – keep $10 to spend for fun, but increase your savings by $20. That’s where it’s fairly painless to save more; with an increase in pay … a tax cut … or if one of your expenses ends (you pay off your student loan or something). 

Enjoy some of it, for sure – but put half or more of it into extra saving.

GV: You talk a lot about getting your finances sorted so you can look ahead and not just live day-to-day. But what’s the best way for people who are self-employed (and therefore not receiving employer contributions) to use KiwiSaver? And is it still worthwhile their doing so? 

KiwiSaver to the rescue

MARY: This is something I feel quite strongly about. I think KiwiSaver is still really good, and it’s a pity if people don’t make the most of it. Even though various Governments have tended to make it less appealing than it was originally – and even without employer contributions – you’re still getting 50 cents from the Government (up to $521) for every dollar (up to $1043) you put in each year, and that really does boost your savings. 

If you saved $100,000 for retirement without using KiwiSaver, those same savings would have ended up being $150,000 if you’d been in KiwiSaver. So it’s a huge difference. 

GV: What about setting KiwiSaver up for kids or grandkids? 

MARY: I think it’s a good idea to do that when they’re babies. The account has to be opened by parents or guardians – but once it’s set up, others (aunties, uncles, grandparents, etc.) can pay into it. 

I know some families where relatives have set up a weekly contribution of $5 or so. What a gift it is for that child! When they turn 16, the Government contribution starts, and if they’ve got a part-time job, they can begin making their own contributions – which would help them get to that $1043 per year for the maximum Government input. And the employer contributions will be going in as well. 

GV: Is it worth trying to maximise KiwiSaver? 

MARY: Definitely. Choosing KiwiSaver funds that are at the right risk-level is really important. It’s pretty much a one-off decision, and then you can go away and forget about it – but it’s key.

The growth and aggressive funds are the riskiest ones – and that’s ‘risk’ in terms of volatility. Some people say ‘risk’ is the wrong word to use, because you’re not actually going to lose all your money. But when you’re in these types of funds, the balance will go up and down with the markets, and you’ve got to be able to just stick with it. 

When it goes down, you mustn’t panic and move the money at that point – because that’s when the loss has become real. If you don’t move it – you just leave it there – then it’ll come right. It might take a few months or even a year or two for that to happen, but it always does. And, if you give it time, on average those funds have higher returns. 

Especially if you’ve got 30 or 40 years ahead of you, being in high-risk or low-risk funds can mean a difference of retiring with $1M versus $300,000-400,000. It’s a massive difference over long periods – and there are various tables in my book to illustrate that. So the most important thing is to choose the right risk-level.

If you’d like to try a bit more risk, but you can’t cope with seeing your balance go up and down, most KiwiSaver providers let you have more than one fund – so you can put some of your money into a higher risk fund, and the rest into a lower risk one. 

GV: What about choosing a KiwiSaver provider?

MARY: That’s another important decision. Many people go for the providers who’ve had high returns recently, which seems to make sense, but there’s lots of research to show that KiwiSaver funds (or managed funds in general) that “did well last time” are probably more likely to do badly this time. They might be riskier funds, or the strategy that worked in one market doesn’t work in another market … 

So while everybody automatically wants to look at who’s got the higher returns, my unpopular opinion is: choose one with low fees. By all means have a little peek at the return trends – because you don’t want something that’s done terribly over the years – but go for low fees, because they tend to consistently stay low from year to year. 

You can find one using the Smart Investor tool on www.sorted.org.nz, which is the Retirement Commission website. Choose KiwiSaver … choose the risk level you want … and then you can rank all the funds in different ways. I suggest that you rank them by fees, and then choose from amongst the low fee options.

Insurance & rainy days

GV: What are your thoughts about insurance?

MARY: Life insurance and a basic ‘rainy-day’ cover is essential. And if you’re a breadwinner, you need at least some income protection cover in case you’re suddenly not earning due to an accident or disability. It’s such a common story: people are doing okay … they’ve got enough money to cover the basics, and things cruise along – but then they’re in a car crash, or the roof of their house starts leaking, or the main income-earner’s made redundant. 

I mean, who gets through life without some stuff like that happening out of the blue?! And these events are usually psychologically devastating as well as financially awful. The last thing you need is financial trouble on top of coping with the loss if your house burns down or your partner dies. These things should be tackled early on, rather than waiting for something bad to happen and then being totally unprepared.

People should set themselves up with an insurance plan. But the problem again is, where to start? No one enjoys wading through pages and pages of policy! So, in my book, I’ve taken a step back and said, “Here’s a broad idea of why insurance is necessary … then shared some ways of doing that more cheaply. 

I’ve also given some tips on setting up an emergency fund. 

Christma$ & holiday $pending

GV: Christmas is coming up, and that means increased financial pressure for so many people. Can you share any tips for our readers on ways to reduce that stress? 

MARY: Absolutely. I feel really strongly about this. I hate seeing people running up huge debt in the lead-up to Christmas and then feeling totally stressed afterwards as well! 

One year I asked the folk who read my Weekend Herald column for Christmas gifting ideas. And people wrote in with all sorts of things, like: “We have a family rule that everything’s got to be bought from Op shops …” or “Everything’s got to be homemade …” (your own cooking or sewing, gardening, woodwork, or other crafts – so apart from materials, there’s no huge outlay). 

That would work brilliantly for some families, but for others it would just add to their stress – so you have to know your people! 

Some families draw names each year for who they’ll buy for. Or they donate money to a charity in the name of a family member (which is a helpful option for those hard-to-buy-for people in your life!).

Honestly, as you look around the room after all the Christmas presents have been opened, don’t you sometimes wonder how much any of it means to anyone? In my family, we now only buy Christmas presents for quite young children (and perhaps give a bit of cash to the teenagers). The grown-ups get gifts on their birthdays; this gives us all a chance to think about what that person might really like on their special day. 

I reckon that it’s a good opportunity to suggest some of these changes when the family’s together for the holidays … Say, “Okay, everybody, while we’re all here – what are we going to do next year?” And discuss what you might do differently the following Christmas. There’s certainly no need to take the joy out of the season, but if you’re going into debt to buy presents … then I’m not really sure if there is much joy. Isn’t it more about good food and having the  family all together?

GV: Things like overspending on Christmas – or going into debt to have a holiday – are obvious habits that can harm our financial wellbeing. How do we harness the power of habits for our financial benefit?

MARY: Research suggests that a lot of habits are formed without a great deal of effort. If you just set a goal of changing a habit for a month (not with the idea of making a forever-commitment), you’ll often find that after the initial ‘trial period’ the new habit has been established. You’ve made a positive change without much effort. 

If you’re used to putting holiday expenses on your credit-card and gradually paying it back (along with high interest) when you return, you could commit to saving first (and perhaps going on a less expensive holiday) for one year – so that you get into a pattern of saving for trips in advance. That’s a good way of making interest your friend instead of your enemy. 

If you make a point of getting into good habits like that, it can be a pretty simple way of creating financial gains.

GV: Are there any other areas of habitual spending that we should re-examine – and maybe change? 

MARY: Daily habitual spending is where a lot expenses creep in without you really thinking about them. If you get a coffee every day, or have a glass or two of wine with dinner, it can start out as a treat but quickly become something you do all the time, and just take for granted. In some workplaces, buying lunch is just a daily routine – but it’s almost always cheaper to bring something from home. 

These may seem like little things, but they can add up a lot – so when people say, “I really can’t cut back my spending anymore …” at the risk of sounding like a grinch, I challenge that. There are almost always things we can change that we just haven’t really considered yet. 

Retirement – what’s enough?

GV: Some of our readers are nearing (or already into) retirement. How can people head confidently into this new stage of life? And when is enough enough? 

MARY: My key message for them is: you don’t need to have a million dollars for retirement! And I get cross with advisers and advertisers who say you do! I receive letters and emails from Kiwis who live only on New Zealand Super – and some of them are doing fine. It obviously helps to have a mortgage-free home if you’re relying on Super, but these retirees lead happy and fulfilling lives. They go to the public library … they belong to book clubs and things like that … they use public transport (which is free for Gold Card members in off-peak hours) …

When people ask me, “So how much do I ‘need’ for retirement?” I often say, “Well, how long is a piece of string?” The idea that we all have to be millionaires by the time we retire can prove very depressing … and it can lead people to just sort of just give up. 

Okay, $100,000 is better than nothing. But my main message for older folk is, “Whatever you can come up with will make things easier.” So do your best – and don’t panic!  

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TO LEARN MORE, CHECK OUT MARY HOLM’S LATEST BOOK – RICH ENOUGH: A LAID-BACK GUIDE FOR EVERY KIWI – WHICH IS AVAILABLE AT ALL GOOD BOOK RETAILERS.