Lockdown was brutal but, on the upside, it gave us a chance to save some cash. With the ability to spend on ‘want to have’ rather than ‘need to have’ items slashed, many Kiwis will have found themselves with a healthier than expected bank balance. And with Christmas just around the corner, this will be a helpful side effect of the lockdown pain. But what is the best way to spend this newfound lump sum? Canstar explores your options:
Pay lump sum off mortgage
Pay a lump sum off the mortgage. Rising interest rates have created a perhaps unexpected twist for mortgage holders on fixed rates. The costs for lump sum prepayments have dropped and in some cases, the prepayment charge is zero. As such, it’s a good time to drive down the mortgage if you can, pushing down the principal amount owed, which will in turn lessen costs as we enter a higher interest rate environment.
A Christmas ‘Shop Local’ splurge is one option. Businesses have suffered hugely during lockdown and supporting them through spend is a good option. The pandemic has highlighted the benefits of supporting local, but it’s also shown us how much we can do without – a lesson we’d do well to remember.
Save lump sum for rainy day
Save the cash for a rainy day. As the emergence of the Omicron variant shows us, this pandemic is far from over. So perhaps it’s time to lock in the lockdown cash. Rising interest rates means savings accounts returns are also on the up. Average term deposit rates have nearly doubled since July, with the most generous now offering around 3% returns. Inflation is rising at speed which undermines the value of these returns, but if you want the security of easy access to your cash, they could be a good opinion.
Invest lump sum online
Invest your money. Online trading platforms such as Sharesies have made it easier than ever to take small amounts and invest in shares. If you want to keep it simple, invest in baskets that track the overall market. Or, do you research and choose industries or companies you think are on the up. But be aware of unexpected costs when you dive into the world of investing, for example the costs of currency exchange if you invest in US stocks or markets. Alternatively, put extra funds into your KiwiSaver (or start one immediately if you haven’t!)
Grow your lump sum: keep saving!
Analyse how you saved money and save some more. Figure what your household budget was over lockdown, and which of these savings you can continue to make. Figure what you missed the most, and prioritise spend on that. And keep saving!
Latest Reserve Bank data shows how our outstanding credit card balances have dropped by more than 8% over the last year, while spend has dropped just over 5%. In other words, we are getting ourselves into a better financial position by paying down debt.
As we head toward a beautiful summer and Christmas with family, long may this continue. Who knows what 2022 will bring!
At least the decision can be driven by one thing we know very well, ourselves.
About the author of this page
Jose George is Country Manager for Canstar New Zealand. Jose has a strong understanding of NZ’s financial system, and a successful track record in banking and financial services. Before joining Canstar, he worked in senior positions in the cards and payments industry, at American Express and at three of the Big Four banks: ANZ, ASB and Westpac.