Ngā Take Pūtea
How to invest on $1 a day
nā Diana Clement
Looking for financial security? Don’t know where to start? Putting aside $1 a day really is the answer. Bigger and better savings and investments come when you’ve mastered the basics.
Think “I can”, not “I can’t”. It’s a rare whānau that wastes no money at all. Be honest with yourself – there must be something that you could cut from your spending that would add up to $1 a day – or more. It may be something you do daily, such as buying coffee or Coca-Cola, or eating lunch out instead of bringing it from home.
If nothing jumps out for daily savings, then look at less common but larger spending such as weekly takeaways, monthly magazines, clothes, shoes, and so on.
Don’t get too excited and cut everything out in one fell swoop. That’s a recipe for failure. Just limit them. Set rules. Buy coffee twice a week instead of daily, and take your lunch two days a week. You can always move on to bigger and better saving when you’ve conditioned yourself to your new spending plan.
Day-to-day spending isn’t the only thing that holds you back from investing. There are other barriers such as:
The grey matter between our ears. We are socially and economically programmed to make spending decisions that may not be logical. What’s more, we treat money from different sources such as wages and bonuses differently. Also, we are programmed to prefer smaller rewards now to a larger reward later. Tame that brain by learning about behavioural economics.
That naughty credit card. Every cent of interest you pay is a waste of savings. Advice from sorted.org.nz states that even if you pay your credit card balance in full every month, you spend as much as 30% more when you use a credit card than you would if you spent cash. It’s more painful to hand over cash than to pay by plastic.
I don’t know enough. That’s easy to overcome. You can read books or online articles, and dip your toe in the water with small investments to start with.
Excusitis. Do you find yourself saying: “I don’t earn enough”, “I wasn’t taught in school”, “I don’t have enough time”, or “I want to wait until I get my next pay rise?” These are symptoms of the modern disease “excusitis”. Stop these thoughts and ask yourself: “How can my whānau succeed?”
No support from the whānau. To really make a success of this, the entire whānau needs to sing from the same song sheet. Start by having a kōrero. Make joint financial goals and discuss how you’re going to achieve them.
Investing $1 a day over and above your KiwiSaver isn’t going to make you rich. But it’s a start, and small savings add up. If you’re 25 years old now, your $1 a day will be worth nearly $30,800 by the time you retire. That’s based on 4% interest, 17.5% tax, and 3% inflation. Give up a packet of cigarettes a day and put the money you would have spent in that same savings account, and you’ll have nearly $520,000 saved by the time you retire.
Make sure you open a fee-free savings account, and set up a regular transfer so that your savings are kept separate.
Ideally, whānau should build up three months of living expenses in an emergency fund. Once that’s achieved, the next step is to graduate from “saving” to “investing”. Saving is about keeping your money safe, and investing is about making it grow. The idea with investing is that you use the money you’ve saved to buy something such as a property, a business, shares, or funds that you think will grow your money over time.
You’ll need to learn some investing basics such as the trade-off between risk and return. All investments have some risk. The lower the risk, the lower the return. And conversely, the higher the risk, the higher the return. Everyone’s circumstances are different, and it’s worth finding out more about your own risk tolerance.
If you need budgeting advice, see a budget adviser. SHARE NZ financial advisor Paul Cootes (Ngāi Tahu) recommends consulting a financial adviser if you have reached the stage of investing.
Diana Clement is a freelance journalist who writes on personal finance, and property investing. She has worked in the UK and New Zealand, writing for the top personal finance publications for over 20 years. In 2006 and 2007 she was the overall winner of the New Zealand Property Media Awards.