February Stock Purchase Made Me Richer Already!

I mostly invest in index funds, nice and boring. Occasionally though, to stop myself from going mad on the slow journey to financial independence I like to dive in and buy some single stocks.

Last month I noticed I had a bit too much cash sitting in the savings account earning bugger all interest, I had to put those dollars to work! So I put some more money into squirrel (its a P2P lender, picked up a nice secured 9% loan!), paid $1000 off one of the mortgages (which I’m not really sure was a good idea, but debt reduction is good for my psychological well being) and treated myself to some shares.

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I purchased ABA.NZX that is, Abano Healthcare group. They are a company that has interests in audiology, dentistry and radiology. I work in healthcare so I guess I tend to invest in things I am familiar with when I pick out single stocks. I figure the index funds take care of diversifying my investments so I can afford to have a bias with the small amount of money I invest in shares directly.  I picked up 145 shares at $6.70 each (paying a stupid brokerage fee of $30). Really I should have waited till I had a larger lump sum to buy shares with to mitigate the fees here. I had been following the company for a while and I thought they seemed pretty good value at this price. The shares are now up to $7.30 a month later, a gain of $87 woohoo!  (Edit: its up to $8.01 as of June) For most investors in New Zealand there is no capital gains tax on shares so thats a win.  My single stock purchases are buy and holds I’m by no means a day trader, I definitely don’t have the time to do all they research required.

I usually stick to index funds (gotta love those low fees). Smart shares offer a monthly purchase with no brokerage fees! You can also get similar programs from Superlife. This months purchase was $190 worth of MDZ (a NZ mid cap fund) and $100 worth of DIV (a newish fund from smart shares that I’m trying out, its supposed to be divided focused, not that impressed so far!).

These monthly drip feed services have really helped me build up a portfolio before I was really all that serious about achieving FI (Financial independence) and even when times are tough the minimum contribution is only $50 a month. Thats well within reach of most people and its not so hard to sign up if you want to start investing in the sharemarket.

 

 

 

Understanding Marginal Tax Rates!

Nobody likes taxes, I figure thats why a lot of people don’t take the time to understand them.

When I was younger I thought the tax system was horribly unfair. Why would anyone want a pay rise if it meant getting taxed more! You might end up with less money in the hand after a pay rise!

Oh how wrong I was.

You see New Zealand has a marginal tax system, when your salary increases to fall in a higher tax bracket only the dollars over that income threshold are taxed at the higher rate.

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So if you get a pay rise from $48,000 to $49,000 only the $1000 over the $48,000 will be taxed at 30% rate NOT the whole $49,000. This way you retain the benefit of low taxes on a portion of your income.

Lets look at a breakdown of a real world salary, lets pick a completely random, no relation to this blogs author, made up, fictitious number out of the air……$66,740.

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Well that salary is not even large enough to get hit by the top tax bracket. How disappointing. (This person should really get off their ass and try hustle a pay rise). The table nicely breaks down the tax paid in each bracket, leaving a final cash in the hand annual salary of 53,698.

However there is one more tax to be paid in New Zealand, the ACC levy. The Accident Compensation Cooperation is a government run initiative that “provides comprehensive, no-fault personal injury cover for all New Zealand residents and visitors to New Zealand.” Yes you read that right, no fault and visitors covered. Its pretty amazing, most medical bills resulting from accidents are covered 100% and you can get income compensation payments if you can no longer work as a result of the accident. Like income tax it is deducted directly from wages.

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So even though the salary of 66,740 falls into the 30% tax bracket the effective rate is only 20.99%. The effective tax rate is much lower than the tax bracket your salary falls in.

If you want to see how your salary is taxed in New Zealand then the calculator at salaries.co.nz breaks everything down nicely, it even can account for student loan deductions and Kiwisaver.

I think I just made my first rich person mistake…..

So I have a stock tracker app on my phone and I track stocks online with my brokerage account.  I mean, you check our investments EVERYDAY RIGHT?!

No?Preview

Just me then?

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Anyway something wasn’t feeling right, my phone was tracking MELCA (Meridian energy installment receipts wtf) and the price never seemed to change. It was weird. I thought it was just a glitch in the app.  I finally got off my lazy ass and decided to double check, I went to the online share registry and discovered I had actually purchased MEL (Meridian energy ordinary shares).

Anyway the shares are worth $1000 more than whatever the hell I was tracking.

Best one day gain ever.

So there you go, my first ever rich person mistake! Thankfully in my favor!

 

Why I’m not maxing out my Kiwisaver and why I’m not worried about it.

*For the rest of the world Kiwisaver = 401K, retirement fund type thing.

I only put the minimum contribution into kiwisaver. A measly 3% of my income.

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GASP! – but how will you ever save enough to retire?

Well there’s more to retirement than Kiwsaver and there’s some really good reasons to not put all my savings in there.

  1. Can’t touch it till you’re 65. It’s completely locked down for most people. There’s a couple of exceptions, if you are buying your first home (Doh did that before Kiwisaver was even a thing), if you are terminally ill (holy heck hope it doesn’t happen to me before I’m 65) or if you are in a desperate dire “exhausted all your options” financial meltdown.  None of these are scenarios I’d actually like to be in!  I want to retire early so I’m going to need access to my funds from age 45-50 so I can’t have everything tied up in Kiwisaver. This is the biggest downside to Kiwisaver for me, It just doesn’t work for early retirement.

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    Oh Kiwisaver, why you let me down.
  2. Double contributions doesn’t equal double returns.  Another shocker but let me show you an example. Lets take a 25 year old woman earning $45,000 a year. Here are her projected Kiwisaver returns at the different standard contribution rates using the get sorted kiwisaver calculator.

3%     $244,562 – minimum contribution

4%     $284,560

8%     $444,055

As you can see moving from 3% to 4% doesn’t give you a 33% increase in your final figure. Nor does going from 4% to 8% double the return. That’s because of the magic of the employee match at the 3% rate. Currently employers only match the minimum 3% contribution rate. They will contribute monies equal to 3% of your wages to your kiwisaver account. NICE! 100% return straight away, can’t complain about that.

Another reason why returns don’t double is the way the tax rebate works. If you save $1042.86 annually into Kiwisaver you’ll qualify for a tax credit of $521 which will be added to your Kiwisaver account at the end of every financial year. This is a great bonus to my savings but there’s no increased rebate when contributing higher amounts.

So whats the answer?

The solution for me is to put my money into other investments but in a similar automatic way. Automatic payments on payday shift my money into brokerage accounts and savings accounts safely away from my spendy fingers. I contribute monthly to index linked funds (with no buy in costs or brokerage fee and overall low fees) and these are diversified across New Zealand, Australian and International sharemarkets and I can access them as soon as I’m ready to retire.

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But I keep the Kiwisaver going because the employer 3% match and tax credits are too good to pass up.

So You Want To Buy Some Shares……..On the New Zealand Share market.

 

I’ve noticed that for many of my friends and family buying shares is a mysterious and complicated process. They are more comfortable buying a house than trying to navigate the stock market! Not to mention the fear of losing all their money and the bad reputation shares have as an investment in this country (a hangover from the 87 crash). The irony is over 2.5 million New Zealanders have signed up for Kiwisaver and most will have some component of their retirement savings in the form of shares.

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NZX50 over the last 12 years or so

Choosing stocks yourself can be a difficult task, there is a lot of research available that you have to wade through and buying based on “gut” feeling alone isn’t really recommended. So its no wonder that most of us leave it to the professionals and get lured into investing in managed funds (whether in Kiwisaver schemes or not). The downside is that the purpose of these funds is to make money for the fund manager and they tend to do this by charging you lots of fees that eat into your profits (this is just my cynical view on it!). There is a good alternative to managed funds available, they require little management and charge the lowest fees. They are called index funds and are a very good entry point for investors who don’t have the time or the inclination to get deeply involved in researching companies, tracking balance sheets, following business news and all the other work required in picking your own stocks. They basically mirror the stock market and they are diversified covering loads of companies.

In New Zealand I’ve used Smart Shares and Superlife to buy low fee index funds. The Smart Shares are also traded on the sharemarket.

If you’ve got a handle on index funds and want to spice up your investing life with some individual stock purchases it really is quite a simple process. Its no harder than setting up a bank account or applying for credit. Here is a little information to help you get started and familiarise yourself with the process.

  1. Set up a brokerage account – This is the hardest part, if you are already with a bank that offers the service then its a bit easier. Basically you need to have verified copies of identification (e.g passport, drivers license signed by a justice of the peace or similar), a copy of a bank deposit slip AND proof of address (e.g a govt letter, council bill, power bill with your name and address). Gathering these is easy but it takes time and is a pain in the ass.
    You’ll also need to figure out your tax witholding rate. In NZ all the taxes are collected as dividends are paid out so the only obligation you have is to keep your witholding tax rate up to date. How handy is that! And no capital gains taxes for most investors (you have to be acting like a real bad ass day trader to attract the IRD’s attention, if you’re buy and hold you’re sweet).
    Now you’ll be asked to open a brokerage bank account, this is where you’ll put the money used for buying shares and it’s where the cash will end up when you sell shares. You can even have your dividends paid directly into this account (much better than having to deal with cheques). I’m with ASB securities, I’ve found them pretty chill to deal with. There are other brokerage companies that offer the same services, so do some research. You can start the application process online.ASB_Securities___Share_Trading___Home
  2. Common Shareholder Number CSN – You’ll be assigned one of these numbers after you sign up for a brokerage account. It’s how they track which shares you own. It’s your unique identifier. It will be sent to you old school styles in the mail. You’ll need to keep this in a safe place.
  3. Faster identification number FIN – You’ll also be sent a FIN. This is like your pin number for trading, 4 digits and easy to remember….maybe. Actually keep this in a safe place too. Again this will come in the mail.Other fun things to know!

The share registers (places that keep track of what shares you own) in New Zealand are Computershare and Link Market Services. Different companies use one or the other for taking care of the shares. You can get logins for both companies once you have a CSN (Common Shareholder Number) and they will send you snail mail or you can sign up for emails. They will send you mail every time you buy and sell shares letting you know your holdings. They keep records of dividends too.

OK I have a brokerage account now what?

  1. Put money in your account! – You need cash to buy those shares so set up some payments and get saving.
  2. Pick a stock – Once you’ve done your research and you are ready to buy you’ll need is the companies stock code. e.g. Auckland International Airport is AIA.
  3. Click on the buy button. – Somewhere on your brokerage site will be a button to buy, all you need to do is find it. Keep your stock code handy and enter it on the buy screen.Buying shares online
  4. What’s your price? – Buying shares is kind of like an auction, you decide what price point you want to buy at. In a way you are saying to the market how much you think the stock is worth. So you can put a limit order in for slightly less than the share last traded at to grab a discount. You can put a limit order in for any set price, you get to decide! However someone has to be willing to sell the shares at that lower price. If no one wants to sell their shares your order may sit there for a while.
    The other option is to buy at market. Your order will go for the current price offered by sellers. This is a faster way to buy.Place_an_order_-_ASB_SecuritiesThe opposite applies when you come to sell. You can set a limit sell order to make sure you get the price you want or you can sell at market.
  5. HANG ON, WAIT A MINUTE!How many shares should I buy? Well that’s a good question. What’s your budget? Lets say you have $3ooo. You can simply divide the $3000 by the share price and you can get an idea of how may shares you can afford to buy. Most brokerage accounts in NZ also charge a $30 fee (OUCH!) for each transaction. So you’ve got to take that into account. Buying only $300 worth or shares and paying a $30 fee doesn’t make much sense. Your share would have to increase in value by 10% to recoup the brokerage cost. If you can save up $3000 it makes the fee only 1% of the transaction, a much less painful figure.
    $3000 minus $30 fee divided by share price….. gives you the number of shares you can afford. If you set a limit price you know exactly what you are going to pay. If you set a market price you might want to make sure your brokerage account has a little cash buffer to account for any price movements.
    However that’s not all you have to consider. There is a minimum limit, you can’t just buy 1 share here and 2 shares there.

     

    Minimum purchase amounts for Shares on the NZX.

    2,000 Where the price does not exceed 25 cents

    1,000 Where the price exceeds 25 cents but does not exceed 50 cents

    500 Where the price exceeds 50 cents but does not exceed $1.00

    200 Where the price exceeds $1.00 but does not exceed $2.00

    100 Where the price exceeds $2.00 but does not exceed $5.00

    50 Where the price exceeds $5.00 but does not exceed $10.00

    25 Where the price exceeds $10.00

    e.g if a share price is $1.23 you would have to buy 200 shares for $246. If the price was $8.45 you have to buy 50 at a price of $422.50. Easy! Its just a little bit of basic math. For the most part you’ll probably want to buy parcels of shares larger than $1000 to minimize the impact of brokerage costs.

  6. Ok I’ve set a price and number of shares – Sweet, confirm the order and sit and wait…. if its successful you’ll get an email confirming the purchase. You’re the proud owner of some shares! Or maybe the offer will be too low and nothings gonna happen. If you really believe that the price you are offering is fair just sit and wait the marker may move and meet your offer. Orders made via ASB securities are valid for 30 days and the price may just drop to where you want it. You can amend your orders, cancel orders, create new orders at anytime so don’t panic.
    I hope this post has given you a little more confidence and given you some insight into just how easy it all is. At the very least maybe I’ve demystified it a little. There are plenty of optionS out there for you to get exposure to the share-market without doing it yourself but its easy enough to give it a go. Having a few percent of your total investments in individual stocks that you picked yourself makes it that much more interesting and satisfies my desire to meddle. I leave 98% of my investments alone but I can buy and sell my pet companies, feel like I’m doing something for my future without jeopardizing the majority of my investments.




Squirrel Money -WHAT KIND OF NAME IS THAT?! – A New Zealand Peer to Peer Lender

Squirrel have been around for a while in the guise of mortgage advisors and brokers. Despite the cutesy name they already had a fairly solid reputation so when they started peer 2 peer lending I was eager to see their take on it.

Squirrel have gone down a more conservative path by not lending to those with low credit scores. This means the interest rates on offer are not as high as a provider like Harmoney (up to 33% wut!?) but this does give squirrel one massive advantage. It can afford to guarantee all its loans, so should a borrower default, you will still get your regular repayment. They call this “Loan Shield” and its funded by a portion of the interest collected (with seed money from Squirrel to get the fund started). For the risk adverse this is the solution you’ve been looking for with Peer 2 Peer lending.

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Interest rates on Squirrel seem to be in the 7-9% range for 2-5 years. When investing you select an interest rate and a time frame rather than selecting individual borrowers. Because of the loan shield there is no need to diversify your lending into multiple small notes so the whole amount can be invested at once or split into different loan periods of 2,3 or 5 years.

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The minimum investment amount is $500. While this isn’t all that high it limits how easily you can reinvest profits and principal repayments. For example I have $35 dollars sitting in my Squirrel account from principal and interest payments, at Harmoney I could reinvest that straight into a $25 note. With Squirrel I need to take the funds out and put them somewhere else to be utilised or add more money to buy  another $500 note. To a small time investor like me this is the biggest downside. I don’t like my money not earning its keep! It is probably less of an issue when investing larger amounts.

So far I’ve only invested $1000 with Squirrel. Strangely all my loans were paid back in the first month and then frustratingly Squirrel closed for Christmas. GAH! But with the new year I have reinvested and I should get my first payments on the new loans around the 6th of Feb.

I think Squirrel is great for regular investors and the retired. I would certainly use it instead of a fixed term deposit.  With the loan shield and interest rates more than twice of what banks are currently offering I feel it offers good returns that seem fairly secure. Squirrel is also about to introduce a secondary loan market so you can exit the investment early by on-selling to another investor should you need to liquidate.

Pros:

Loan Shield – Guaranteed payments woohoo!
No loan shark interest rates –  No make you feel bad
Pays the tax for you as you go
Interest and principal paid back monthly

Cons:

Difficult to reinvest profits if working with small amounts
Narrower range of interest rates compared to other P2P lenders
(But still better than a bank deposit!)
Currently difficult to liquidate (will be easy soon!)

*By the way I’m not affiliated with Squirrel, these are just my thoughts on it.