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Top tips for making your money grow

How to make your money grow

1. Pay off your credit card, whatever it takes.

Who needs your money more - you or your bank? Then stop giving them all that interest on your credit card. Say you put $1000 of purchases on your credit card each month, for a year. If at the end of each month you pay the full $1000 owing, then no interest accrues. But if you pay only $100 each month, you accrue interest on the value of all your purchases, not just on your outstanding balance. By the end of the year you will be accruing interest on almost $13,300. At an interest rate of 19.95% a year, that will cost you $7.25 a day, and rising, in interest.

2. Make savings every day. 

With a little effort, you can avoid frittering money away. For example, for about $4 you can probably make a healthy lunch that would cost at least $9 in a café. A saving of $5 each working day adds up to $1200 a year. Obviously, the same effect applies to cutting out a coffee or a beer, or to leaving the car at home and walking to work.

3. Whatever you do, start now.

Interest compounds. The longer your savings earn interest, the faster they grow. If you put away $25 a week, for example, and get a return of 5% a year, then after 10 years you will have accumulated $16,900. However, if you save for 20 years, you will have accumulated $44,600; for 30 years $90,400; and for 40 years $165,900. The earlier you start, the better.

4. Think of your finances as a whole. 

If you have debts, everything you spend is effectively borrowed. Say you spend $1000 on a new television, while at the same time paying 9% a year on a mortgage. That $1000 could have been used to reduce your mortgage, and therefore spending it costs you 9% a year. This is obvious when you have a revolving credit mortgage; less so with a regular mortgage. It's sobering to think that the money you use to pay for your groceries, drinks at the pub and lottery tickets is effectively being borrowed at 9% a year. Use it as a spur to pay off debt more quickly.

Read more: Sir Bob Jones on how we get it wrong with saving | Nigel Latta on why humans are 'super-flawed' with money

5. Look after your highest interest rate first. 

Pay off your credit card debt, which might attract interest of up to 19.95% a year, before you put more money towards your mortgage (less than 10% a year). And if it's realistic, pay off your mortgage before you start investing. Mortgage rates are about 8.5% to 9.5% a year. To get the same financial benefit from investing as from paying off your mortgage, you would have to be earning as much as 14% to 16% a year from your investments before tax. That's very difficult to achieve. But you can take this argument too far. People use it to justify taking on more debt, or buying a larger house than they really need, because paying off a bigger mortgage must be better than saving, right? (Answer: no.)

6. Check all your settings. 

Your current provider is not necessarily the best. Check to see whether you have the most competitive mortgage rate, credit card, insurance, bank fees, power company, etc. The internet is your friend when it comes to comparisons. See, for example, https://www.creditcardscompare.co.nz/, http://www.interest.co.nz and http://www.consumer.org.nz. Check your eligibility for Working for Families payments at http://www.ird.govt.nz/wff-tax-credits/entitlement.

7. Make it automatic. 

If you don't see your money, you don't miss it. After all, how many PAYE earners know exactly how much tax they pay each payday?

Ask your employer to pay some of your wages or salary into a savings scheme, or set up an automatic payment from your bank. Join Kiwisaver (www.kiwisaver.govt.nz) if you don't mind locking your savings in until retirement. If you are on a modest income (where modest has yet to be defined by the government), Kiwisaver also offers a subsidy towards buying your first home - up to $5000 for an individual (and therefore $10,000 for a couple).

8. If your workplace offers subsidised superannuation, join it

Join your work superannuation scheme if your employer makes a contribution. Say your retirement savings are earning 5% a year. If, in addition, your employer matches your contributions dollar for dollar, the effective return on your savings rockets up to 110% a year. Amazingly, that doesn't seem to be a big enough return to lure all employees into such schemes. Only half of the eligible public service employees have joined the State Sector Retirement Savings Scheme, which involves dollar-for-dollar matching of contributions.

9. Spend your millions wisely. 

A single person who earns the minimum wage for all of a 45-year working life will see around $850,000 pass through their bank account over this time. A person on the average wage ($45,000), with two kids, will put $1.7 million through their bank account over 45 years (including Working for Families payments). Someone earning $100,000 a year will put through $3 million. So take your salary seriously. And use it wisely.

10. But don't kill yourself to save. 

In the end, saving is not a virtue, it's a way of smoothing your purchases over time. When you are earning well, you can put some money aside for the times when you are not. What you give up to save $25 a week when you are in your first job earning $400 in the hand is much more than you give up to save $25 when you are getting $1000 in the hand. Typically, people's earnings rise as they reach middle age. That's also when retirement starts to become something more than a hazy concept. Both those factors make it a good time for serious saving. And if you don't do it then, when are you intending to start?

This article is from the Listener archive.