How the numbers work: saving and investing

What is Risk in Financial Terms?

1. Low Risk Example:
2. Bank term deposit: $10,000 at 5.0% for 1 year
3. Outcome: Guaranteed $10,500 (excluding bank failure)
4. Range of outcomes: Very narrow (essentially certain)
5. Risk level: Very low
6. High Risk Example:
7. $10,000 invested in NZ shares portfolio
8. Possible 1-year outcomes: Anywhere from $7,000 to $15,000
9. Range of outcomes: Very wide (highly uncertain)
10. Risk level: High

What is Return in Financial Terms?

1. Buy shares: $10,000
2. One year later value: $11,200
3. Dividends received: $300
4. Total return: ($11,200 - $10,000 + $300) ÷ $10,000 × 100 = 15%

Why Risk vs Return Matters in NZ Context

1. Starting balance: $10,000
2. Contributing: $3,000/year
3. Time horizon: 40 years until 65
4. Conservative fund (5% average return):
5. Age 65 balance: $382,000
6. Growth fund (9% average return):
7. Age 65 balance: $1,118,000
8. Difference: $736,000!
9. Cost of avoiding risk: Three-quarters of a million dollars

Common Misconceptions

1. Growth fund over 20 years:
2. • 95% of 20-year periods: Positive returns
3. • Average: +9% annually
4. • Worst 20-year period: Still +6% annually
5. • Risk = path volatility, not final destination

Common Misconceptions

1. $100,000 in savings account (3%) for 30 years:
2. Grows to: $242,726 nominal
3. But with 3% inflation, real value: $100,627
4. Gained almost nothing in purchasing power!
5. Same $100K in balanced fund (7%) for 30 years:
6. Grows to: $761,226 nominal
7. Real value: $315,827 (tripled purchasing power!)

Common Misconceptions

1. Portfolio of 50 NZ companies vs single company:
2. Specific risk: Reduced 90% (company failures average out)
3. Market risk: Unchanged (all fall in recession)
4. 2020 crash: Diversified NZ portfolio still dropped -25%

Why Time Changes Everything

1. $10,000 in growth fund
2. Best year: +25% = $12,500
3. Worst year: -20% = $8,000
4. Range: $4,500 (45% swing!)
5. Probability of loss: ~30%

Why Time Changes Everything

1. $10,000 in growth fund
2. Average outcome: $15,386 (+54%)
3. Bad scenario: $12,500 (+25%)
4. Excellent scenario: $19,000 (+90%)
5. Probability of loss: ~10%

Why Time Changes Everything

1. $10,000 in growth fund
2. Average outcome: $56,044 (+460%)
3. Conservative estimate: $38,000 (+280%)
4. Optimistic estimate: $85,000 (+750%)
5. Probability of loss: <1% (historically)

Volatility vs Actual Loss

1. January 2020: NZ50 index at 11,800
2. March 2020: Dropped to 8,800 (-25%)
3. $100,000 portfolio value: $75,000
4. Investor A (panicked):
5. Sold at $75,000 = Actual loss -$25,000
6. Permanently locked in loss
7. Investor B (stayed calm):
8. Held through volatility
9. December 2020: Index at 12,500 (+6% vs January)
10. Portfolio value: $106,000
11. Experienced volatility, but no actual loss
12. Ended +6% for year

Diversification: How It Works

1. Good year: +40%
2. Bad year: -50%
3. Bankruptcy risk: Lose 100%
4. Extreme volatility: ±50%

Diversification: How It Works

1. Good year: +20%
2. Bad year: -15%
3. Some companies fail, others thrive = averages out
4. Reduced volatility: ±20%

Diversification: How It Works

1. Good year: +18%
2. Bad year: -12%
3. Regional crashes offset by other regions
4. Further reduced volatility: ±15%

Asset Allocation: The Risk Dial

1. 80% Fixed income (bonds, term deposits)
2. 20% Growth (shares, property)
3. Expected return: 4-5%/year
4. Volatility: Low (±5%)
5. Worst year: -3%
6. Best for: Near-term goals, retirees, low risk tolerance

Asset Allocation: The Risk Dial

1. 50% Fixed income
2. 50% Growth
3. Expected return: 6-7%/year
4. Volatility: Moderate (±12%)
5. Worst year: -10%
6. Best for: Medium-term goals, balanced approach

Asset Allocation: The Risk Dial

1. 20% Fixed income
2. 80% Growth
3. Expected return: 8-9%/year
4. Volatility: High (±18%)
5. Worst year: -20%
6. Best for: Long-term goals, young investors, high tolerance

Asset Allocation: The Risk Dial

1. 5% Fixed income
2. 95% Growth
3. Expected return: 9-10%/year
4. Volatility: Very high (±22%)
5. Worst year: -30%
6. Best for: 20+ year horizons, strong stomach

🌍 Real-World NZ Risk vs Return Scenarios

1. Conservative choice costs: $704,000!
2. Over 40 years, growth fund gives 3x more money
3. Yes, growth fund will have scary drops:
4. • Probably 5-8 years with -10% to -25% returns
5. • Maybe 2-3 crashes of -30%+
6. • But 40 years is long enough to recover every time

1. Extra $1,500/month to principal
2. Pays off mortgage in 18 years (vs 25 years)
3. Saves $125,000 in interest
4. Age 56: Mortgage-free
5. KiwiSaver age 65: $348,000 (conservative, 27 years)
6. Total wealth age 65: House ($1.2M) + KiwiSaver ($348K) = $1.55M

1. $750/month extra to mortgage
2. $750/month to investments (balanced fund 7%)
3. Switch KiwiSaver to Balanced
4. Mortgage paid off in 21 years (vs 25)
5. Investment account age 65: $435,000
6. KiwiSaver age 65: $488,000 (balanced, higher returns)
7. Total wealth age 65: House ($1.2M) + Investments ($435K) + KiwiSaver ($488K) = $2.12M

1. Minimum mortgage payments
2. All $1,500/month to growth investments (9%)
3. Switch KiwiSaver to Growth
4. Mortgage paid off normal 25 years
5. Investment account age 65: $655,000
6. KiwiSaver age 65: $598,000 (growth)
7. Total wealth age 65: House ($1.2M) + Investments ($655K) + KiwiSaver ($598K) = $2.45M

1. Stay 100% Growth (risky near retirement):
2. Best case: $1,020,000 age 65
3. Average case: $850,000
4. Crash scenario: $520,000 (if crash year 6)
5. Glide path (reducing risk):
6. Best case: $870,000 age 65
7. Average case: $740,000
8. Crash scenario: $660,000 (protected by conservative allocation)

1. Return: 5%/year
2. 10 years: $77,641
3. 20 years: $205,753
4. Volatility: None
5. Risk: Inflation (real return only 2%)

1. Return: 9%/year average
2. 10 years: $96,476
3. 20 years: $334,924
4. Volatility: High (±20% years)
5. Risk: Market drops (but time to recover)

1. Return: 7%/year average
2. 10 years: $86,732
3. 20 years: $260,913
4. Volatility: Moderate (±12%)
5. Risk: Balanced between options 1 and 2

Step 1: Calculate Your Target

1. Essential monthly expenses: $4,300
2. Target: 6 months coverage
3. Emergency fund goal = $4,300 × 6

= $25,800

Step 3: Automate Your Savings

1. Net monthly income: $5,500
2. Save 10% automatically: $550/month
3. Time to reach $25,800: 47 months (4 years)
4. Increase to 15%: $825/month
5. Time to reach $25,800: 31 months (2.6 years)

Step 3: Automate Your Savings

1. Save $500/month
2. Time to reach $25,800: 52 months (4.3 years)
3. Save $750/month
4. Time to reach $25,800: 34 months (2.8 years)

Building During Different Life Stages

1. Income: $3,500/month net
2. Essential expenses: $2,200/month
3. Target (3 months): $6,600
4. Save 15% ($525/month)
5. Time to goal: 13 months

Building During Different Life Stages

1. Combined income: $7,500/month net
2. Essential expenses: $5,200/month
3. Target (6 months): $31,200
4. Save 12% ($900/month)
5. Time to goal: 35 months

Building During Different Life Stages

1. Income: $6,000/month net
2. Essential expenses: $3,800/month (lower, mortgage paid)
3. Target (9 months): $34,200 (higher for age)
4. Save 18% ($1,080/month)
5. Time to goal: 32 months

🌍 Real-World Emergency Fund Stories

1. Emergency fund balance: $18,000
2. Monthly essential expenses: $3,200
3. Coverage: 5.6 months
4. Severance pay: 2 months salary ($10,000)
5. Total runway: 8.7 months

🌍 Real-World Emergency Fund Stories

1. Emergency fund used: $8,000
2. Remaining balance: $10,000
3. Time unemployed: 4 months
4. Debt incurred: $0

🌍 Real-World Emergency Fund Stories

1. Emergency fund balance: $22,000
2. Monthly expenses: $4,100
3. Coverage: 5.4 months

1. Used emergency fund: $9,500
2. Remaining balance: $12,500
3. Still had 3 months coverage
4. Interest paid on debt: $0

1. Normal monthly income: $8,000
2. Lost client revenue: $4,000/month (50% of income)
3. New income: $4,000/month
4. Essential expenses: $4,500/month
5. Monthly shortfall: $500
6. Emergency fund: $45,000 (10 months at full expenses)

1. Months 1-3: $500 × 3 = $1,500
2. Month 4: slight surplus, no draw
3. Total emergency fund used: $1,500
4. Remaining balance: $43,500

1. Emergency fund: $0
2. Monthly income: $3,800
3. Monthly expenses: $3,750
4. Monthly surplus: $50 (barely surviving)
5. Credit card debt: $2,500

1. Emergency fund: $7,100
2. Essential monthly expenses: $2,400 (reduced from $3,750)
3. Coverage: 3 months (goal achieved!)
4. Credit card debt: $1,200 (paid down $1,300)

&#128290; Worked Examples

1. Interest avoided in the first year: $5,000 x 22.95% = $1,147.50
2. This saving is guaranteed and is not taxed

Card cleared, $1,147.50 kept for certain

&#128290; Worked Examples

1. Expected fund gain: $5,000 x 7% = $350 (not guaranteed)
2. Less PIE tax at 28%: $350 x 0.72 = $252 after tax
3. Card interest still charged: $5,000 x 22.95% = $1,147.50

Net position: $252 - $1,147.50 = about $895.50 worse off

&#128290; Worked Examples

1. Government contribution earned: $500 x 25% = $125
2. Maximum available: $260.72 (needs $1,042.86 contributed)

Still on the table: $260.72 - $125 = $135.72

&#128290; Worked Examples

1. Top-up needed: $1,042.86 - $500 = $542.86
2. Extra government money: $542.86 x 25% = $135.72

That is an instant 25% return before any market movement

1. Guaranteed, tax-free saving: $10,000 x 5.99% = $599 in the first year
2. The saving is certain and shortens the loan

1. To beat the mortgage after 28% PIE tax, a fund must earn:
2. 5.99% / 0.72 = about 8.3% before tax, every year
3. A 7% fund after 28% tax is 7% x 0.72 = 5.04%, below 5.99%

On return alone, paying the 5.99% mortgage wins, with no risk

1. Three months of essentials: $2,600 x 3 = $7,800
2. Current savings: $6,000

Gap to fill first: $7,800 - $6,000 = $1,800

1. If he invests all $6,000 and then loses hours or faces a big bill:
2. He may have to sell shares in a downturn, locking in a loss
3. Or reach for a credit card at 20% or more, undoing his progress

Top the fund to $7,800 first, then invest the surplus

What round-ups are worth in a year

1. Per month: 40 transactions x $0.50 = $20.00
2. Per year: $20.00 x 12 = $240.00

$240.00 a year, which is real money and is also the whole of it.

The fee that eats it

1. Fee: $3.00 a month x 12 = $36.00 a year
2. Saved by round-ups: $240.00 a year
3. Fee as a share of what you saved: $36.00 / $240.00 = 15.0%

15 percent of everything you put in, before any investment return exists to pay it from.

Where a real gain comes from

1. At 0.10%: $10,000.00 x 0.10% = $10.00 a year
2. At 4.00%: $10,000.00 x 4.00% = $400.00 a year
3. Gain from moving it: $400.00 - $10.00 = $390.00 a year
4. After resident withholding tax at 33%: $390.00 x 0.67 = $261.30

$261.30 a year, after tax, for one afternoon of paperwork, done once.

The one nudge that beats round-ups on its own terms

1. Round-ups: $20.00 a month, arriving in scattered cents
2. Payday transfer of $50.00: $50.00 a month, arriving before you see it
3. Difference over a year: ($50.00 - $20.00) x 12 = $360.00

Same psychology, two and a half times the amount, no fee.

The KiwiSaver comparison, for scale

1. One percentage point: $70,000.00 x 1% = $700.00 a year
2. Against round-ups: $700.00 / $240.00 = 2.9 times as much

Nearly three times the round-up total, from one change, once.

Questions to ask before signing up

1. What is the fee, in dollars per year? Not as a percentage, which flatters flat fees.
2. What will I actually save per year? Multiply your real transaction count by 50 cents.
3. What is the fee as a share of that? Above 5 percent deserves a hard look.
4. What rate does the balance earn , and how does it compare with a plain savings account?
5. Could I get the same effect free with an automatic transfer at my existing bank?

The last question ends most of these decisions.

How It Works

1. You invest, say, $200 every payday
2. When prices are high, $200 buys fewer units
3. When prices are low, $200 buys more units
4. Your average purchase price evens out over time

It Does Not Remove Market Risk

1. Investing from each pay naturally averages your cost
2. A large lump sum is a separate decision
3. Both still carry market risk once invested
4. Choose based on your money, timeframe, and nerves

A Simple Approach

1. 1. Choose a fixed amount you can sustain
2. 2. Automate it on a regular schedule
3. 3. Keep going through ups and downs, especially downturns
4. 4. Do not tinker based on the news
5. 5. Review the amount yearly as your income grows

🔢 Four worked examples

1. Future value factor: ((1.05 to the power of 18) − 1) ÷ 0.05 = 28.132
2. Balance at 18: $1,040 × 28.132 = $29,257
3. Total contributed: $1,040 × 18 = $18,720

Balance about $29,250, of which about $10,530 is growth on top of what the family put in.

🔢 Four worked examples

1. Her own contribution: $12,000 × 3.5% = $420
2. Employer contribution (3.5% from 1 April 2026): $12,000 × 3.5% = $420, before employer superannuation contribution tax (ESCT) is deducted
3. Government contribution: 25 cents per $1, so $420 × 25% = $105 (her $420 is below the $1,042.86 needed for the full $260.72)

About $945 added in the year, of which roughly $525 is employer and government money on top of her own $420.

1. Default PIR of 28%: $500 × 28% = $140
2. Correct child PIR of 10.5%: $500 × 10.5% = $52.50

The missing IRD number costs $140 − $52.50 = $87.50 that year.

Fees Are Charged on the Whole Balance, Every Year

1. A fee is a percentage of your whole balance each year
2. As the balance grows, the dollar fee grows too
3. Money paid in fees is no longer invested
4. So it cannot compound for you in later years
5. The drag builds quietly over decades

Do Higher Fees Buy Better Returns?

1. An active fund charges more, aiming to beat the market
2. A passive fund charges less, simply tracking the market
3. After fees, most active funds do not reliably win long term
4. The fee saving is certain; the outperformance is not

A Simple Action Plan

1. 1. Find the total annual fee for each fund, not just the headline
2. 2. Compare funds of the same type against each other
3. 3. Ask whether an active fund's extra fee is justified
4. 4. Consider low-cost index funds as a sensible default
5. 5. Watch fixed dollar fees if your balance is small
6. 6. Remember the fee saving is the part you control

Why They Exist

1. The company earns profit and pays company tax on it
2. It pays you a cash dividend, with imputation credits attached
3. The credits represent the tax already paid
4. You offset your tax on the dividend with those credits

Gross Dividend and Your Rate

1. Cash dividend, say $72
2. Plus imputation credits of, say, $28
3. Gross dividend $100, taxed at 33% is $33
4. Credits cover $28, so about $5 of RWT is withheld

A Simple Approach

1. 1. Treat dividends as one of two ways shares reward you
2. 2. Remember the gross dividend includes imputation credits
3. 3. Expect tax at your rate, mostly covered by credits
4. 4. Know reinvested dividends are still taxable
5. 5. Use the dividend calculator to see the net result

The questions worth asking of your platform

1. Who is the custodian, and are they independent of the platform?
2. Are client assets held on trust and segregated from the platform's own assets?
3. Is my holding recorded individually or pooled with other clients?
4. Is the platform licensed by the Financial Markets Authority, and for what?
5. Who audits the custody arrangements, and how often?
6. What happens to my holdings if the platform ceases to operate?

All six should be answerable from the disclosure documents. If they are not, that is the answer.

Practical steps that cost nothing

1. Keep your own records of holdings and transactions, independent of the platform.
2. Download statements periodically, since a failed platform's website goes offline.
3. Check the FMA licence before the first deposit, not after a problem.
4. Spread genuinely large holdings across more than one provider.
5. Confirm the payment account belongs to the entity you believe you are dealing with.

The first two cost an hour a year and are worth the most if anything goes wrong.

Instant Diversification

1. Buy one index fund or ETF
2. Instantly own a slice of every company in the index
3. Pay a low fee for that diversification
4. Track the market's return over the long term

A Simple Approach

1. 1. Pick a broad, low-cost index fund or ETF
2. 2. Understand the index it tracks
3. 3. Invest regularly and hold for the long term
4. 4. Do not trade in and out on market noise
5. 5. Mind the fees and your tax rate

Time in the Market

1. Returns compound: gains earn further gains over time
2. A long timeframe smooths out the ups and downs
3. Starting early matters more than starting big
4. Money needed soon belongs in safer options

A Simple Beginner Plan

1. 1. Clear high-interest debt and build an emergency fund
2. 2. Decide your timeframe and how much risk you can hold
3. 3. Start with a low-cost, diversified fund
4. 4. Automate regular contributions
5. 5. Stay invested through the ups and downs and review yearly

The discount to net asset value

1. Net tangible assets per share: $1.50
2. Market price: $1.20
3. Discount: ($1.50 - $1.20) / $1.50 = 20%

You are buying property at 80 cents in the dollar of its valuation.

What to look at in a specific fund

1. Gearing, as debt against total assets, and how the debt is fixed and when it matures.
2. Sector and tenant mix, since industrial, office and retail have behaved very differently.
3. Weighted average lease term, which tells you how far the income is contracted out.
4. Occupancy, and what proportion of leases expire in the next two years.
5. Management structure, internal or external, and the fee basis.
6. Distribution cover, whether distributions are funded from operating earnings.

Weighted average lease term and expiry profile do most of the work.

The daily calculation, step by step

1. Step 1. Take the annual rate and divide by 365 to get a daily rate. At 4.5 percent that is 0.0123 percent a day.
2. Step 2. Apply it to the closing balance each day. On $10,000 that is $1.2329 a day .
3. Step 3. Add up the days in the month. A 31 day month gives $38.22 ; a 28 day February gives $34.52 .
4. Step 4. Deduct RWT at your rate. At 17.5 percent that is $6.69.

$31.53 is credited to your account. The bank pays the $6.69 to Inland Revenue on your behalf.

What to do this week

1. 1. Log in to each bank and find the tax settings on every interest bearing account.
2. 2. Check an IRD number is recorded. If not, that account is on 45 percent.
3. 3. Check the RWT rate matches your income tax rate. If nothing was ever chosen, it is on 33 percent.

On a $10,000 balance at 4.5 percent, those two checks are worth up to $123.75 a year.

Active vs Index Funds

1. A fund pools many investors' money
2. It holds a wide spread of investments
3. You get diversification for an ongoing fee
4. Index funds keep that fee low by tracking the market

A Simple Approach

1. 1. Use a diversified fund as your core
2. 2. Only pick direct shares if you want the effort and control
3. 3. Keep any direct holdings a small part of a diversified whole
4. 4. Watch fees, trading costs, and tax
5. 5. Invest regularly and hold for the long term

What the gap is actually worth

1. Term deposit, 39 percent RWT: $2,500 less $975 of tax leaves $1,525 .
2. Term PIE, 28 percent PIR: $2,500 less $700 of tax leaves $1,800 .

The PIE keeps $275 more from exactly the same $2,500, which is 18 percent more in the hand.

What to do with this

1. 1. Check what RWT rate each of your interest bearing accounts is actually using, at every bank.
2. 2. If any is on 33 percent by default or 45 percent for want of an IRD number, fix it.
3. 3. Find your PIR using Inland Revenue's tool rather than estimating it, and tell your provider if it has changed.
4. 4. Compare offers after tax at your own rates, not on the advertised headline.

If your rate is 30, 33 or 39 percent, a term PIE is worth pricing properly. If it is 10.5 or 17.5, decide on rate and terms instead.