Savings strategies when interest rates drop

Co-author: Dhayana Sena

As the New Zealand interest rate drops, the savings picture is not nearly as rosy as it once was. In a low interest rate environment, figuring out how to save money can take some creative thinking. 

New Zealand interest rate hits historic low

The New Zealand Interest rate is at a historic low with the Official Cash Rate sitting at 1.0%. Further rate cuts are not out of the question, either, with inflation sitting below the midpoint of the target band of 1% to 3% (inflation is currently at 1.5%). 

To get any decent returns on savings, then, you will need to be smart about how to save money.

Canstar shares 12 possible ways to grow your savings when interest rates are low.

How to save money when interest rates are low

1. Think about the benefits of KiwiSaver

Too many Kiwis hit the age of 65 and take their money out of well-managed KiwiSaver funds and put it straight into term deposits with their banks, which give a lower return. KiwiSaver funds tend to grow faster. While mainstream advice is that you should have all of your money in a Conservative KiwiSaver fund by the time you retire, many older people who don’t need the cash in the near future do continue to keep a portion of their KiwiSaver in “growth assets”, which means shares and property.

Find out more about the different types of KiwiSaver investments here.

Compare KiwiSaver funds with Canstar

2. Think about growth assets

You should consider taking advice on how to save money by investing a portion of any savings you have – over and above KiwiSaver – in higher return investments such as shares or managed funds. As well as share-based funds, there are commercial property trusts such as Precinct Properties, or Kiwi Property Trust.

Do take into account the added risk of shares or commercial property over term deposits. Some people just can’t stomach the risk, and you don’t want to spend your retirement unable to sleep for fear of the markets crashing.

3. Don’t forget about credit unions

Credit unions such as NZCU Baywide and First Credit Union sometimes pay higher interest rates than the high street banks, even with a low New Zealand interest rate, as do second tier banks such as Heartland and The Co-operative Bank. 

4. Get a slice of the Pie

The unimaginatively named Portfolio Investment Entities (Pies) are a savings account or term deposit with a twist, offered by banks and other financial institutions. PIES are another option of how to save money in the current low interest rate environment. They pay a higher effective return because the tax is lower than the individual’s marginal tax rate. 

5. Check out notice saver accounts 

This is another new-style of savings account that pays a little more – the notice saver account. Notice saver investors must give 30 or 90 days’ notice to withdraw their funds. The bank is willing to pay a higher interest rate because it expects that it will, on average, keep the money for longer than it would with a traditional 30 or 90 day term deposit.

Make savings and transaction accounts work for you

6. Ladder your term deposits

Laddering term deposits is another option that allows you to take advantage of the best interest rates, even when the New Zealand interest rate is low. Laddering involves splitting your term deposit into multiple chunks set to different maturity rates, so that you always have a portion of the money about to mature.

You might divvy up your money and deposit a portion of it each year into a new term deposit set to a certain timeframe, until all your money is invested for that period of time, but maturities come up every year. It doesn’t have to be 5-year terms; it could be shorter periods, such as every 3 months, if you prefer. That way you can take advantage of any great term deposit promotions that are available.

Compare term deposits with Canstar

7. Ask your adviser about corporate bonds 

Bonds can be a relatively low risk way to get a slightly higher return on your money. When you buy a bond, you are lending to companies, governments and councils. You might, for example, buy a bond with Genesis Energy, IAG, Auckland Council, or even a bank. 

These companies need the loans to function and pay an interest rate called the “coupon rate”. You can sell your bond to a third party or buy them from others via the NZX’s Debt Market. The effective interest rate (yield) will differ from the coupon rate according to how much you paid for the bond. Don’t forget to include brokerage when calculating your returns.

8. Consider peer-to-peer lending

The idea of peer-to-peer lending is that you cut out the middleman by lending direct to borrowers via an online platform, such as Squirrel Money, Lending Crowd, Harmoney, or others. You can save money with peer-to-peer lending because you earn interest on the money you have loaned to a borrower (less a fee).

However, it’s wise not to put too much money into one single platform. There have already been articles about platforms churning loans to double their fees at the expense of investors. The old adage “too good to be true” must not be ignored when looking at the juicy rates on offer from these lenders. 

Remember that peer-to-peer lending is still a relatively new form of investment. 

Consider these wise words from financial services industry commentator Janine Starks:

“Having risen from (Finance Company) ashes, don’t be under any illusions. Your investment is being exposed to significant credit risk. You will be rewarded for that, but heed the past.”

Rules of P2P lending

9. Shop around for rates 

What this means is that you should compare the market, shop around, and don’t give your affections to one single bank or financial institution. Hedging your bets reduces the risk of having all your eggs in one basket, which is especially important as the New Zealand interest rate fluctuates.

Just don’t do what investors did a decade ago and split their money between a number of finance companies that all failed. That wasn’t proper diversification. Instead, spread your money across a wide range of investments and institutions. This reduces the risk of losing some of your money in a company or niche-wide collapse.

Property investors renting out rooms

11. Rent out your home and travel

For the adventurous, it may be cheaper to rent out your home and live overseas on the proceeds of your rental income. You can live relatively well for a few dollars a day in countries such as Cambodia, Vietnam and India. You might even be able to earn money teaching English along the way, or volunteer to get free accommodation and food. Be very careful, however, that you complete appropriate paperwork before leaving New Zealand and return often enough not to invalidate your NZ Super.

12. Move in with family?

This is a centuries-old tradition for saving money. Extended families all lived together in days gone by. If you can move in with your children or siblings or other relatives and pay them rent/board, you’ll all be better off financially.

Finally, whatever you do, don’t take too many risks with your money. As the oft cited mantra goes, “The return of your capital is more important than the return on your capital.”

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