Cautious backing but misgivings on savings protection

Explainer: A deposit guarantee scheme could be in place for next year, but don’t bet on it, writes Rob Stock.

Iwant to run a marathon this year – the New York City Marathon, to be precise. I haven’t run one before – I have two kids, several businesses to run and an intense job – so it might sound like the kind of wishful thinking that New Year resolutions are renowned for.

But it’s not a resolution – they’re usually abandoned by now anyway (the 19th of January to be precise).

It’s a goal, and I’ll be applying many of the same methods that I apply to helping my clients achieve their financial goals.

Whether it’s buying a first home, repaying the mortgage, preparing for retirement, or growing wealth – or if it’s a financial goal that’s less about dollars and cents and more about wellbeing, such as not fighting with your spouse about finances – it’s not the goal that gets it done.

By all means, make the goal SMART (specific, measurable, achievable, relevant and timely) and all that, but it’s the system you apply that will get you there.

As James Clear, the best-selling author of Atomic Habits, says: ‘‘You don’t rise to the level of your goals; you fall to the level of your systems.’’

So here are some of my tips for nailing your financial goals this year.

Make it a goal that excites you, but factor in some self-awareness

Understand what’s possible based on where you’re starting from and the opportunities and obstacles that are unique to you.

That will involve a bit of personal analysis – don’t set yourself up for disappointment by aiming to become Elon Musk levels of wealthy by Christmas.

That self-awareness should also factor in your own tendencies, so you can get them working for and not against you.

I know my tendency is to be an ‘‘obliger’’, meaning I default to prioritising external expectations over internal, so I know I need a trainer because accountability works for me. I know my tendency is to be a shopper, so my financial goals need to be exciting enough to make sacrifice worth it.

I also know I’m time-poor, so understanding what actions will create the most impact is crucial.

Focus on the foundations

I’m not going to go out running in my flip-flops. I’ve got good shoes, and I’m working on recruiting the right muscles (glutes, I’m looking at you).

With your finances, that approach might look like getting good advice, the right tools for the job, or getting rid of inefficient debt or investments that are no longer fit for purpose.

A financial plan is crucial

Having a goal but not a plan is like knowing the destination but having no idea how to get there.

The plan has to consider everything – the time that’s available, the income required, fixed expenses, the milestones that need to be hit, the strategy that suits best.

It also needs to be adaptable, so you don’t give up in the first week that things don’t go to plan.

Track your progress

You always need to know if you’re on target or whether you need to make changes to get back on track.

This needs to feed back into the financial plan, so you know your options if your trajectory indicates you need to make up ground.

Automate what you can

Our willpower is a muscle that gets fatigued, so I always think it’s worth automating the outcome you’re after. That could look like automating how the money flows to reduce the chances of overspending, or so that a savings investment target is prioritised.

It could be as simple as setting up direct debits so that you always get the prompt payment discount.

Consider what you don’t want to happen, too

If you were on a diet, you wouldn’t fill the fridge with chocolate. The same thing applies to your finances.

That might be as basic as not having your credit card pre-saved in your internet browser (especially if your tendency is to be a shopper).

Pace yourself

You want a sense of urgency in your progress, especially while the headlines scream at you about impending recession.

But you also don’t want to run out of steam or resort to shortcuts (such as get-rich-quick ‘‘investments’’) that you don’t have the financial resilience or risk tolerance for and which inevitably leave you poorer and further away from your goal.

Introduce accountability

Generally, I’d advise against making that person your spouse – there are too many emotional undercurrents going on there. It needs to be someone you’re willing to take critique and direction from.

Commit to the bounce-back

Most of us let perfection stand in the way of progress.

If nothing goes wrong, we are fine. But if life throws us something unexpected, we sabotage our own efforts by jumping off the wagon before we fall from it.

I do it with exercise and diet; most of my clients do it with money. Life can upset any financial plan – the key is to course-correct and refocus on what you can control.

Remove the emotion where you can

Sentimentality can make us want to hang onto an investment for the wrong reasons.

Panic can make us choose the wrong option.

Fear can stop us taking bold actions – or even stop us from taking the very first step.

And one thing is for sure, you definitely don’t get to the finish line if you’re not brave enough to start.

Adeposit guarantee scheme will reduce the return people get on their savings accounts and term deposits. However, it’s not one of the cost-adding Labour Party policies being targeted by business or the Opposition.

Since Chris Hipkins was sworn in as prime minister this week he has pledged to ‘‘take a ruler’’ to all Labour’s policies before the general election. Business and rightleaning Opposition parties are putting pressure on Hipkins to axe fair pay agreements, Three Waters reform, and the proposed worker income insurance scheme.

But there’s cautious cross-party support for New Zealand joining the likes of Australia and the United Kingdom in having a deposit guarantee scheme.

The scheme is intended to guarantee $100,000 of each individual’s savings at a bank or other deposit-taker that fails.

Consumer NZ says that would cover 93% of bank deposits, but that could rise if wealthier people start strategically spreading their deposits across multiple banks to maximise their protection.

The scheme would be funded by a taxpayer-backed fund like the Toka Tū Ake Earthquake Commission fund, built up over time by levies paid for by deposit-takers, which all parties agree will be ultimately passed on to depositors as lower savings and deposit rates.

The levies will be set by regulation, and the size of them is not yet known, which is making banks, other deposit-takers and National MPs nervous.

Nicola Willis, National’s deputy leader, told Parliament in September that if the bill was done badly, it would come at high cost to depositors.

Low deposit rates and high inflation have eroded the value of people’s money in the bank.

In July last year, when inflation hit a 32-year high of 7.3%, the average weighted six-month deposit rate was just 2.89%, data from the Reserve Bank Te Pū tea Matua shows.

By the end of the year, the average deposit rate was just over 4%, and inflation was 7.2%.

While the Government hopes the deposit guarantee scheme will be in place by early 2024, banks want things to go more slowly.

They have told MPs that care is needed to minimise the chance of unintended consequences, saying the Government botched up consumer lending reforms in late 2021 and caused a slowdown in lending by moving too fast and without care.

Banks are keen that levies are risk-based so that smaller, riskier deposit-takers don’t get a boost by being able to offer guaranteed deposits while making riskier loans. Banks also want a guarantee that in the event of a deposit-taker failing, they don’t end up paying higher levies to rebuild the fund that will back the scheme.

The Taxpayers’ Union has called for finance companies to be excluded altogether, given the sector’s history of ‘‘scandal and Serious Fraud Office investigations’’.

Giving finance companies a taxpayer guarantee would risk a repeat of a sudden flow of money into riskier companies, it said.

Finance companies themselves fear that they will end up subject to high costs and ‘‘intense’’ regulation. Simon Jensen, a consultant at law firm Buddle Findlay, described this as ‘‘the stability of a graveyard’’ in his submission to Parliament.

The Financial Services Federation, a lobby group for finance companies, said there were now just 15 non-bank deposittakers left.

‘‘Their combined size when compared to any of the registered banks is miniscule. However, they provide valuable competition to the banks and distinct benefits to those individuals and businesses who choose to use them,’’ executive director Lyn McMorran said.

Banks have told MPs care is needed to minimise the chance of unintended consequences.