A Penny Saved is a Penny Earned

Q. I have made a New Year’s resolution to get on top of my spending and start saving into KiwiSaver.  I earn $45K per annum which is quite a good salary but I have racked up some big credit card bills.  Should I pay them off before I sign up to KiwiSaver?

A. That’s a good New Year’s resolution and I wish you luck with it.  Overspending is a habit and like any habit it takes a lot of effort to make effective and permanent change. 

You will be paying a high rate of interest on your credit cards.  It may be worth talking to your bank about consolidating them into one loan if you can negotiate a lower interest rate.  Cut up your credit cards and only spend money that you have.  Sell off all your possessions that you no longer use or need - through TradeMe and garage sales - and apply all the proceeds to your debts.  This takes a bit of time and effort but it may discourage you from further unnecessary spending – especially when you see how much less you get than what you paid for them. 

Develop a frugal mindset by recycling, buying at op shops and getting tips from websites such as www.oilyrag.co.nz.  This website is a mine of information listed alphabetically from Auctions to Weddings and with everything in between including such topics as Pets, Health, Transport and Fitness.

Should you sign up to KiwiSaver?  Usually repaying debt takes precedence over saving, but the attractive government top ups put KiwiSaver in a league of its own.  If you join now and contribute 2% of your salary, you will be saving $900 per year.  This is nearly enough to earn the maximum government top up of $521 per annum.  Once you have paid off your credit cards you can think about increasing your contributions to 4% of your salary, or you can top up your fund by $142 to get the full tax credit.  If you join now you will get a pro rata tax credit in July 2011 for the 6 months that you have been a member, but from July 2013 you should get the full tax credit.  Of course you will also get the $1000 ‘kickstart’ when you join, and your employer will contribute 2% as well. 

With the combination of kickstart, tax credits, employer contributions and your own savings you will have around $3000 in your KiwiSaver account in 12 months’ time.  This should make you feel more in control of your finances and help you maintain your new more frugal lifestyle. 

As published in the Hawkes Bay Today 27 December 2011

Shelley Hanna is an Authorised Financial Adviser FSP12241.  Her disclosure statement is available on request and free of charge by calling 8703838.  The information contained in this article is of a general nature and is not intended to provide specific or personalised advice.  If readers have any KiwiSaver questions they would like answered please go to www.peak.net.nz or email shelley.hanna@peak.net.nz.