Saving - What's the point?
Over the last 40 days I have asked and answered 40 questions related to property as part of my 100 day adventure on all questions property.
Over this weekend I looked at the question of savings and whether it is actually worth putting money away at the bank. The short answer is no. My aim here is to make you consider one very important factor that often goes overlooked but is hurting our savings and our ability to actually get ahead by doing so.
Let's say we have a spare $10,000 saved up and we decide to put it into a term deposit at the bank where it will be locked up for a set amount of time - for this example I'll use 12 months, of which you would be offered an earning interest rate somewhere in the vicinity of 1%.
Over the next 12 months you would earn $100 in interest minus about $33 for tax depending on your overall financial situation. Sounds okay right? All you have done is just left your money in one spot for 12 months and resisted the urge to ask for it back. At the end of the 12 months you can have your money back plus $67 and go and treat yourself - perhaps a holiday or shopping spree.
Inflation is what is going to make you feel deflated when you learn that that $67 you made in interest has actually been completely eroded by a thing called inflation.
Inflation is what is caused by the increases in costs in production of goods or providing services. As an example - if the minimum wage increases over a three year period by 15%, goods such as fruit and vegetable which are picked by pickers most likely on the minimum wage, will simply become more expensive in the supermarket due to the increased cost of labour to pick that fruit.
Generally in the last decade, inflation in New Zealand has sat between 0 and 3%. In the last 12 months to October it was 1.44%.
The $10,000 you would spend on your shopping spree this year, would cost you $10,144 at the same time next year. Sounds a bit frustrating right?
We actually have ourselves to blame. Most of us want a fairer society - a society with a living wage, more money in our back pocket with increased wages, more public holidays and sick leave. The result - increased costs to businesses and the economy = inflation.
If I was to put $10,000 into a 12 month term deposit today, I would end up with about $10,067 in November 2021. However what I was going to buy has effectively increased to $10,144 in that same time.
By choosing to use a Term Deposit or bank savings account as my investment of choice, I have not kept up with the cost of living and my investment has actually cost me $77.
What do I do?
I'm not suggesting for one moment that property is the answer to your 12 month investment choice, shares or a managed fund would be better for that time frame. A good option could be one of the funds in sharesies. My point is that interest rates are forecast to remain low for the medium term, this problem of our savings being eroded is not going away anytime soon and so this is where property comes in.
Property, even if just held for five to seven years, is more likely to provide a solid stable return and harnesses the beauty that is leverage. You put in $100,000 either from usable equity and/or cash and the bank gives you another $400,000. A 1% gain, while highly unlikely to be that low, would bring in $5,000 in one year, far out stripping any term deposit return and providing a 5% return on your actual investment of $100,000.
Easier said than done of course but I maintain the view that so many Kiwi's who have owned homes in the last decade are most likely sitting on usable equity gold that is waiting to be unlocked and used.
As Kiwi's we are taught to save as we get older but at the moment its actually putting us backwards! Time to look elsewhere.