Why are so many New Zealanders such poor savers?

We’re lead to believe we’re short term thinkers and just plain bad with money. But what if this isn’t what’s causing our savings problems? Perhaps being bad with money isn’t our national character trait? Perhaps New Zealanders aren’t any more work shy or spendthrift than any other Western nation? So if it isn’t any of  the above, there must be some fundamental reason why we’re not saving? So if it’s not entirely our own fault where should we look to find the cause?

Do we blame the Government? The banks?  Both are our traditional scapegoats for any perceived  financial failure. But maybe, just maybe, in this lack of savings instance, we have a case.

For example most of us realize we pay our home loan lenders 2-3 times the price of our house in interest but tend to think there’s not much we can do about it.

 Some people maintain that if you pay the lender more you will be out sooner. This is indeed true but such beliefs blind us to the fact that the reason our loans are so expensive and long term is that they are poorly structured and never managed in ways that significantly advantage the customer.

So, I would suggest that, if we New Zealanders have a national fault, it’s believing we can’t do anything to change these circumstances.

The first step is to properly understand the true cost of borrowing money. Not understanding this and not recognizing how much change occurs in the span of an ordinary life time often results in us signing contracts that end up preventing us from being able to save for our future security.  

Deana and Murray’s story exemplifies that by extending their borrowings without researching the consequences they unwittingly affected their ability to have a debt free retirement.

1983   Deana and Murray decide to buy a house together. The house Deana likes is a character bungalow in a suburb close to town. Its sale price is $28k

 Deana says, “It’s stupid to rent when we could be putting the money into buying our own home.”

Murray agrees. He is two years into his building apprenticeship and will soon be earning good money and Deana is a secretary who has been working since she was 17. She’s lived at home until meeting Murray and has already saved $17 k. Murray has saved 2k but has invested this in the reliable car he needed to drive between building sites.

“I can’t see a reason not to,” Murray says. “If you put down the deposit, I’ll take over the mortgage completely once I’m fully qualified.”

1987   Deana is now a full time mother. She has two children under five. Motherhood suits her. She has a circle of local friends and has developed her garden and is working on persuading Murray to become a vegetarian.

1990    Deana has decided that their three bedroom house won’t be big enough now she’s pregnant with her third. Murray is reluctant to move as he belongs to the local rugby club and doesn’t want to lose his mates but as Deana tells him: “Look Hon, the real estate agent brought us an offer of $52k which means this house has almost doubled in value in four years, so we’d be mad not to take our profit forward into another better house.”

A few weeks later Deana shows Murray a house in a beach suburb. “It’s on the market for $125K but if it’s anything like our current house it’ll be worth $250k in no time at all.”

 Murray is not so keen. “The last bloody mortgage took 25% of my income and this one’s going to be close on 45%. Cost of living isn’t getting any cheaper, either.”

                                                                                    

 “We can take a longer time to pay it off Muzz,” Deana replies.

                                    

 In the end they agreed to pay a $100k mortgage and add a further 35k for renovations and for Murray to update his car.

Murray is still uncomfortable. “Bloody hell, Dee,” he says, “ I’m 33 now and putting another 25 years on the mortgage means, I’ll be 58 before I’m done!”

 “Once our youngest is at school I’ll get a job,” Deana promises.

2000   Murray has joined an investment syndicate restoring cars. He’s borrowed more money against the house so he can finance his first vintage car and contribute his share to the cost of purchasing a workshop.

 Deana is working full-time now and seems to spend all her spare time coping with the delinquent habits of her teenagers. She’d been to court twice on his behalf her eldest son. At work her boss is paying her a lot of attention which she admits is welcome because Murray no longer takes much effort with his appearance and is always out with his mates.

2001   Murray finds out about Deana’s affair with her boss and they decide to separate. Murray is upset at first but a few months later he meets a woman who has a similar passion for vintage cars as himself.

2002   Towards the end of the year, when Murray and Deana finally divide up the estate, they have exactly $40k each. Murray isn’t too fussed, because his new partner owns her own house in another town and Murray moves to be with her on a permanent basis.

Meanwhile, Deana’s employee had ended what he called “their little affair.” Deana suspects the thought of her three teenage kids did not appeal.

Deana uses her $40k as a deposit on a three bedroom town house. Her income is $41k net per anum and to afford the $400k of principal and interest loan on her new home, she has needed to take her mortgage out to 30 years. Because her income is tight, Deana is forced to use her credit card, for unexpected expenses but believes that, once the kids have left home, she’ll be better off. She recently put her credit card debt into her mortgage but this has extended her mortgage by eighteen months.

“At this rate,” Deana exclaims, “I’ll be 72 before I’m debt free.” 

                                                                           

Throughout the life of their joint mortgage, Murray and Deana made what they considered to be rational decisions. Their assumptions about not renting and the power of capital gain were widely held  beliefs in the community and they acted on the popular wisdom of their time.

So what should Murray and Deana have known that might have prevented them ending up in their fifties with only $40k saving each after effectively both working full time for 20 years?

Would they have done differently if they had had better information around the true cost of debt?  

Would they have been prepared to do more research if they had been better educated about the dangers of on-going borrowing against a fixed income? 

But perhaps the most pertinent question is, who is ultimately responsible for what happened to Deana and Murray? It’s not only cost them, a secure retirement, it’s done unmeasurable harm to the national economy. That’s because it’s not only Deana and Murray who have been caught in an impoverishing debt spiral it’s all of us, isn’t it?