Life is full of both the planned and the unexpected. You plan to buy a home and eventually retire, but you don’t expect to need four root canals at once. So, how do you save for both the known and unknown? We recommend you have multiple ‘buckets’ of cash on hand or that you could access when needed. These buckets need to be structured differently to suit their different purposes.
As a starting point, we suggest you have a bucket for each of the following:
- Emergencies – unexpected bills, insurance excess or in case of illness
- Fun stuff – holidays, car upgrades etc
- House deposit (if applicable)
- Retirement
Savings in case of an emergency
Emergency money needs to be in an on-call type facility. For your emergency funds, you need to protect the capital (savings) and get access to the funds quickly. If you have a mortgage, a revolving credit or an offset mortgage account is a good option for an emergency fund, as the money reduces the interest costs for your mortgage while it sits in the account. The bonus is this can pay off your mortgage faster if you don’t have emergencies!
Fun stuff savings
These savings are as fun as they sound! This is the bucket in which you put a portion of your earnings towards luxuries such as holidays and experiences. Fun stuff savings generally are used within 12-24 months unless it is a big OE adventure or something similar, which may take 3-5 years to save for. You want to protect the capital but may be prepared to take a little risk to get a higher return and speed up the process. You can take advantage of term deposits and some conservative managed funds to do this.
Saving for a house deposit
House deposits can take 2-8 years, depending on the purchase value and the level of debt you can service. The obvious investment option is your KiwiSaver. However, you would ideally also build some savings outside your KiwiSaver so that funds are available for the due diligence needed to make an offer on a home. Managed funds are a great way to grow your non-KiwiSaver savings, and you can choose a risk level depending on how close you are to buying a property.
Saving for retirement
Retirement savings are covered in the main by KiwiSaver. But growing additional savings outside of KiwiSaver means you can access funds before turning 65. This allows you to supplement your income if you want to ease back from 5 days to 4 days before turning 65. You can choose different funds with different risk profiles than your KiwiSaver, depending on when you need the funds.
Whatever managed funds you use, the structure of your retirement portfolio should change throughout your working life, starting with high-growth funds and becoming more conservative as you approach retirement.
There are alternate options such as property investment, businesses, shares, crypto, and so on. The key thing is to match your long-term saving choices with your risk level, knowledge and skill. We can talk you through the pro’s and con’s of the different investment options.
For advice on KiwiSaver and other managed funds and the best fund structure for you, contact Elise at elise@bob.kiwi.nz for a free review.