1. Pay off your tuarewa (debt)
Put your savings into paying off your tuarewa as fast as possible.
Start with high-interest loans such as credit cards and buy now pay later. This debt is costing you the most. Paying off a loan with 20% interest has the same financial benefits as getting an investment return of 20%, after tax and fees.
Repaying debt is good insurance against hard times. It’s also simpler than investing and you don’t have to select an investment or monitor it.
2. Join KiwiSaver (if you’re eligible)
It’s never too early to start saving for your retirement.
If you have a mortgage and you are an employee, only contribute enough to KiwiSaver to get the maximum incentives and put further savings into paying off your mortgage.
If you don't have a mortgage, how much you decide to contribute to KiwiSaver depends on your personality and circumstances. If you want to maximise your access to your savings, put enough into KiwiSaver to get all the incentives, and put your other savings somewhere else — for example — tūtanga pakihi (shares), bonds or managed funds. But if you like locking away your money so you won’t spend it — and you think it’s unlikely you’ll need the money before you retire — put most of your savings into KiwiSaver.
It’s probably best if you keep a few thousand dollars accessible in other investments.
Use the KiwiSaver calculator to find out how much money you can build up for your future.
3. Pay down your mortgage
Once you’ve gotten rid of high-interest debt, focus on putting extra money towards your mortgage.
This is equivalent to making an after-tax return on an investment that is the same as your mortgage interest rate. So, if you're paying 6% on your mortgage, repaying it's like earning 6% after fees and tax.
I want to pay off my mortgage faster
Let’s say you have a $200,000 25-year loan, at 6%. If you pay back an extra $50 a month, you will save about $17,500 in interest over the life of the loan, and pay it off 2 years early. If you repay an extra $200 a month, you’ll save more than $54,000 in interest and pay the loan off in less than 19 years.
You can use a mortgage calculator to help you work out how quickly you can pay off your mortgage if you make extra repayments.
Mortgage calculator | sorted.org.nz
If you’ve come into some money, such as an inheritance or bonus, it’s also a good idea to use that to repay debt.
If your mortgage is on a fixed rate, you may have to pay break fees or an early repayment penalty. Talk to your bank to find out the terms of your mortgage.
If there are early repayment costs, it’s often better to put extra mortgage repayments in a pūtea penapena (term deposit) and transfer the money to your mortgage when the fixed term ends.
Should I put money into my KiwiSaver or pay off my mortgage?
This depends on how your KiwiSaver fund is performing and the interest rate on your mortgage. But if we make some reasonable assumptions about those, how much you should contribute depends on your employment status.
If you're employed
If you’re employed, you should continue to make the minimum 3% employee contribution to KiwiSaver while putting extra savings into paying off your mortgage.
If your employee contributions are less than $1043 a year, it’s worthwhile making extra contributions to reach that level, so you get the maximum $521 government contribution.
If you're self-employed
If you’re self-employed, and don’t qualify for the employee contribution, put in at least $1043 a year to get the maximum government contribution.
Beyond that, put any extra savings into paying off your mortgage.