Applying The Barefoot Investor in NZ
The Barefoot Investor (BF) by Australian Scott Pape is an excellent book and it has been instrumental in changing the financial direction of not just Australians but also of Kiwis. To write this blog post I read his entire book again and it’s like getting a shot of motivation. If you have not read it, do so, this blog post is aimed at people who have read his book - or intend to! His book is so good because he gives great detail about exactly which accounts to open, insurance to use etc and he puts the details in that many other personal finance books are missing; they seem to never give you the nuts and bolts of who to actually use. However, many of the banks or providers he says to check out do not exist in New Zealand and also the Australian tax system is different to ours.
Many people have asked me to work out what the Kiwi equivalents are of the providers he recommends. It has not been an easy task. With so many institutions vying for our money, our debt, our retirement savings and our insurance, it’s a minefield! I’m not saying this is a conclusive list, but I’ve given it my best shot. However, you may well have your own specific details to add so please do so in the comments section and this may be a blog post that I keep refining to keep it as relevant as possible and I will work in suggestions as I receive them. Facebook has an excellent and supportive group called “Following the Barefoot Investor - New Zealand” where you can ask any curly question you like and everyone will give you their considered opinion. It’s really helpful.
Also, keep in mind this post is NOT endorsed by Scott Pape and nor am I getting any kickbacks from any provider I mention. I’m not an AFA, these are just my opinions, at the end of the day, do your own research too.
Day-to-day banking accounts:
Aim for NO fees - this is actually pretty difficult to achieve in New Zealand but doing all of your banking online, receiving no paper statements and no cheque book will make this more doable. Aim for a “reasonable interest rate” but keep in mind that it’s slim pickings when it comes to earning interest on a bank account at the moment. Our bank accounts seem to always come with fish hooks like minimum deposits, a high starting balance or my least favourite, make a withdrawal and lose ALL interest for that month...
Here are some possibilities to consider:
This is the BF banking structure and I have added some bank accounts with TSB as the primary bank:
Account 1 - Everyday transaction account - Daily Expenses - (TSB Personal)
Sub Account 1 - Online Saver Account - Smile (TSB WebSaver)
Sub Account 2 - Online Saver Account - Fire Extinguisher (TSB WebSaver)
Account 2 - Everyday transaction account - Splurge - (TSB Personal)
Account 3 - Different bank altogether for emergency money - Mojo - Online savings account. Open with $2,000 in it (Heartland Direct Call)
This is the BF banking structure and I have added some bank accounts with Kiwibank as the primary bank:
Account 1 - Everyday transaction account - Daily Expenses - (Kiwibank Free Up)
Sub Account 1 - Online Saver Account - Smile (Kiwibank Online Call)
Sub Account 2 - Online Saver Account - Fire Extinguisher (Kiwibank Online Call)
Account 2 - Everyday transaction account - Splurge - (Kiwibank Free Up)
Account 3 - Different Bank altogether for emergency money - Mojo - Online savings account. Open with $2,000 in it (Heartland Direct Call)
BUT… Do you have a mortgage?
You may already be in at the deep end with a mortgage and switching banks to get no transaction fees may be too big an ask and/or not worth the effort, but the way you structure it does have a material impact. Prioritise mortgage rates over general banking fees when deciding on your banking setup as there is little point chasing a no-fee account when that bank has a higher mortgage lending rate. If leaving your current bank is not an option AND you are paying everyday transaction fees then pick up the phone and negotiate to have these additional fees cancelled. And don’t hang up the phone until they agree with you, they are making their money out of the interest you pay on your mortgage, so what’s a $10 a fee month to them anyway?
Everyone structures their debt differently (revolving credit, fixed or floating) but paying down the debt by maximising repayments and not extending the loan is the best thing to focus on. Current mortgage interest rates are low so NOW is the best time to nail your debt by paying it down aggressively. Follow that up by negotiating hard with your bank and ensuring you are not excessively out of sync with market rates should keep them on course.
www.interest.co.nz have an up to date list of current interest rates etc and through researching for this blog post I noted that BNZ and ASB were also banks that were regularly mentioned by BF followers who had debt.
(This is my two cents here because I couldn’t resist: Banks put a lot of marketing dollars into creating products to bamboozle you into thinking you are getting a better deal. When people email me and explain their five-tiered mortgage structure, with five different time periods and five different rates, with offset XYZ I have to admit to shaking my head a bit. On the flip side, those who contact me and are furious at having a mortgage, are pissed off that the bank won’t let them make additional payments and are desperate to get out of any fixed lending, these are the people that do everything they can to throw every cent at their debt, get rid of it asap and get on with life).
Australia has a lot of super schemes that are offered by employers. In Oz, the employer contributes 9.5% of your wage into your chosen super fund (compare that to our min 3% IF you choose to use KiwiSaver) and they pay less tax on their super funds too. On the flip side, however, Australia’s pension regime is means tested, unlike the universal NZ Super system here. Here we pay tax on our KiwiSaver returns. Things are different here and although some of you lucky sods may have a long-running private super scheme the majority of us will use KiwiSaver (as well as savings outside of these funds). And when we put our money in there, there it is meant to stay, until you are 65.
We have a mind-boggling and ever-growing list of schemes in NZ with expensive marketing campaigns that want YOU to invest with THEM. It’s very difficult to make a choice and compare apples with apples, especially when in the past they were hiding half of their apples (fees)! (Back in July I compared the fees from two KiwiSaver providers: KiwiSaver Fee and Performance Comparison)The fees you pay are extremely important but it’s also worth considering the approach of the investment manager i.e. two providers may have similar fees but they invest your money in polar opposite investment strategies such as actively managed vs passive management.
Checking your current fund is a good place to start your search and you can do it here: Fund Finder - Check your current fund. The point of trying out this fund finder is that it at least shows you how your current fund compares to the one you may be considering changing to.
I’m going out on a limb here to say that in New Zealand, Simplicity (www.simplicity.kiwi) would adhere to the BF principals of a low cost, indexed balanced fund. Remember that you get to choose what stage of life you are at and whether conservative, balanced or growth is appropriate to you.
If you have other thoughts, then let’s hear them.
Like BF, Jonny and I lost our entire house and insurance paid for it to be rebuilt. Insurance is a really really good idea! But only get what you need and review it when it no longer fits that need. There are a lot of people trying to sell you insurance and if you can think of it, there is probably an insurance policy for it. At a price. BF recommends choosing a higher excess to lower your premium costs. BF also heads this chapter “Your insurance sorted in one beer”. Well, I say, grab yourself a crate, insurance is a complex beast!
In Australia their super funds offer insurance, but only some providers (e.g. SuperLife) offer it as an option here in New Zealand. In regards to finding the right insurance, the best bet would be to contact an insurance broker as personal situations that affect underwriting vary so widely that I would be here for a month of Sundays trying to work out exactly which provider fits the BF strategy. But choose carefully and avoid the insurance salesperson who wants to sign you up to a specific company because they get a big fat commission and/or the salesperson who works FOR a specific company (obviously their insurance will be the “best” fit for you). You want them to help you, not sell to you. A great broker will get a full understanding of your situation and give you adequate insurance at the best rate for it. And if you need to claim, they will walk you through that process too.
From the “Following the Barefoot Investor” group on FB I gleaned the following suggestions:
Crombie Lockwood (broker) - www.crombielockwood.co.nz
FMG (broker) - www.fmg.co.nz
Partnerslife (insurer) - www.partnerslife.co.nz
SuperLife (insurer) - www.superlife.co.nz
The BF recommends you have:
“Comprehensive private hospital insurance”
Hospital Only Cover
However, just a note here. This is another situation where NZ and Oz are different. In Oz people above a certain salary get a tax deduction for having health insurance and there is a bigger distinction between private and public health systems. The argument for health insurance is much stronger in Australia than here in New Zealand.
INCOME PROTECTION INSURANCE
Covering 75% of salary to age 65 or 70. If you can afford to self insure for three months, make the waiting period three months.
LIFE INSURANCE + TOTAL PERMANENT DISABILITY INSURANCE
You need to ensure that if you are dead or disabled that your family (and yourself) have the money to carry on and not be forced into hardship.
Choose the right cover for the vehicle you drive.
BF mentions investing inside and outside of your superannuation fund. Remember that in NZ our KiwiSaver is locked away until 65; except first home buyers can get most of that money back out again or you can access it if you can prove extreme hardship. If you are following BF though you should not need to access it until 65, because you have yourself sorted financially right?
He specifies pre-tax super contributions of 15%. So, you can just increase what you are already putting into your KiwiSaver fund OR you can split it and put some in a fund that you can access outside of KiwiSaver. Remember that IF your employer offers to match a higher contribution rate than 3% then it’s a good idea to take it!
There are a number of options now for people to consider outside of KiwiSaver. For those wanting a diverse choice of investment options, including active, then InvestNow would be a good starting point due to its low entry point and no fees.
For those wanting to invest directly into shares (BF does not advise this) then they could consider ASB Securities as it has the lowest fees and it is the easiest to manage.
You can then use Sharesight to manage and monitor their performance.
As an aside, it will be interesting to see what FNZC’s new online share app will look like (this is the integration of ANZ Direct Broking that they acquired).
There’s also www.hatchinvest.nz for US shares – although the fees are still high so the individual would need to feel some conviction for wanting to trade a certain stock or ETF.
There are a number of low-cost fund providers:
Simplicity (passively managed)
SmartShares (passively managed)
SuperLife (passively managed)
Each of these offers quite different solutions and this is where a focus on fees can lead investors down the wrong path.
The key, whatever path you choose, is to automate it.
He talks about investing in property but not in the way you would think. BF invests in BWP Trust, they own 80 Bunnings Warehouse properties etc. There are very few New Zealand property funds but two options could be:
SmartShares NZ Property Fund (NPF)
SuperLife Property Fund
And remember, that if you already own your own home then you already have a significant weighting to property, plus investors will also have in the region of 5% exposure to property via the typical KiwiSaver provider.
For any New Zealand based newbie Barefoot Investor devotee, this list will give you a pretty good starting point to apply his book right here in NZ. Please comment below to share your experience or add a thought or suggestion for others to consider. The personal finance community in New Zealand is helpful and willing to share their knowledge so don’t be afraid to ask a question.