Buying your first home is an exciting goal, but putting together a deposit can sometimes feel like a long road. Between saving regularly, keeping up with everyday expenses (especially with things only getting more expensive) and trying to make your money grow, it can be hard to know where to start.
So now the question pops up... "what to do with my savings?". Should you put more into KiwiSaver, invest outside it, or leave your money in a bank savings account?
And well... the answer depends on a few things, including when you want to buy your first home and how comfortable you are with managing your money.
Let's look at how you can approach it.
Step 1: Build an emergency fund first
If you take any advice today, let it be this.
Before you start focusing on your house deposit, I always, always, always recommend having an emergency fund first!!!
Life happens, we all know the saying. Your car might break down, an unexpected bill could arrive, or you might find yourself between jobs. And the last thing you want is to have to dip into your house deposit or sell investments at the wrong time to cover an unexpected expense.
Your emergency fund and your house deposit should be separate and be used for two separate jobs. One protects you from the unexpected, while the other helps you get closer to owning your first home.
Once you've got a financial safety net in place, you can start thinking about how to make the most of your savings.
Some people might suggest starting with $2,000 to $5,000 and then eventually you want to start working up to 3-6 months of living expenses, if that works for you. But start small, heck, please just start!!!
Be honest about your money habits
Now, here's the question to ask yourself before reading further.
Step 2: How good are you at leaving your savings alone?
Hear me out, imagine you've saved $30,000 towards your first home, and it's sitting in an account you can access at any time. Would you leave it there, or would you be tempted to dip into it for a holiday, a new car or something else you've had your eye on?
There's no right or wrong answer, but it's worth being honest with yourself as it might change the best approach for you.
If you're good at sticking to a plan and leaving your savings untouched, you may have more options available to you. But, if you find it difficult to resist spending money when it's readily available, KiwiSaver could be a useful tool to help you stay on track.
So let's have a look at both approaches.
Step 3: Consider investing outside KiwiSaver
If you're disciplined with money and have several years before you plan to buy, it may be worth researching low-cost, diversified index funds from providers in NZ. Even better if the funds they offer are PIE funds, because then the tax is done for you... most of the times.
So instead of bumping up your KiwiSaver contributions, take the extra amount you would have used and it to one of these investment accounts instead.
Providers such as Kernel and Smartshares offer funds that give you exposure to different markets and companies. For example, you might come across funds that track the S&P 500, the Global 100 (Nasdaq 100) or a broader total-world share market.
But it's important to understand what you're investing in. The S&P 500 focuses on large US companies, while a Global 100 fund holds a more concentrated selection of large global companies. Holding both doesn't necessarily provide as much diversification as you might expect, because many of the companies can overlap. A total-world fund generally offers broader exposure across global markets and thus, better diversification.
You should also compare fees, investment risks and what each fund actually holds before making a decision.
The most important factor, however, is your timeframe.
If you're planning to buy a house within the next year or two, putting your deposit into share-market investments can be risky. Markets can fall, and you don't want to find yourself with a smaller deposit just when you're ready to buy.
If you're several years away, you may have more room to consider growth-oriented investments, depending on your circumstances and how comfortable you are with potential losses.
As your buying date gets closer, you can gradually move the money you'll need into lower-risk options. Please don't leave this until the last minute: the right time to start reducing risk depends on your timeframe and how flexible your plans are.
Investing can help your money grow, but it doesn't guarantee you'll reach your goal faster.
Step 4: When KiwiSaver might be the better option
What if you're someone who finds it difficult to leave savings alone or feel like you want to reach for that money?
This is where KiwiSaver can be helpful. Because your money is locked away until you meet the withdrawal rules, it can make it easier to avoid spending the money you've set aside for your first home.
You could consider increasing your KiwiSaver contributions to help build your balance, but only it fits your budget and other financial priorities. Don't go increasing your contributions to 10% just because you want to save faster but means you can't buy yourself food towards the end of the week.
Just remember that KiwiSaver isn't a savings account you can freely withdraw from whenever you like. First-home withdrawals have eligibility requirements, including a minimum membership period of three years, and you generally need to leave at least $1,000 in your account.
You'll also need to think about which KiwiSaver fund suits your plans. If you're many years away from buying, a growth-oriented fund may be worth considering. If you're getting close to purchasing, a more conservative option may be better suited to help protect your balance from market fluctuations.
The right choice depends on your circumstances, your timeframe and how much risk you're comfortable taking.
Step 5: Put a plan in place and review it regularly
When saving for your first home, please don't just pick a fund and hope for the best. Make sure you have a plan and adjust that plan as your circumstances change (and it will change... life tends to work that way).
Start by building your emergency fund first!
Set a realistic deposit goal and deciding how much you can afford to save each payday, but don't forget to live either! From there, you can work out where your savings should sit and how much investment risk makes sense for your timeframe.
As you get closer to buying, it's worth reviewing your progress and making any changes needed to keep your deposit on track.
And if you're unsure which KiwiSaver fund to choose, or whether investing outside KiwiSaver makes sense for you, that's where getting some guidance can help.
Need a hand with your KiwiSaver?
There isn't one perfect strategy for everyone (I wish there was, would've made my job a lot easier). The best approach depends on your goals, your timeframe, your finances and how you manage your money.
At KiwiGrowth, I help people understand their KiwiSaver options, review their current setup and work through a plan that fits their goals. We can look at where you are today, where you want to be and what changes might help you get there.
If you're working towards your first home and want to make sure you're on the right track, I'm only a phone call or email away.
Your first home might be a few months or a few years away, but having a plan is a great place to start.
Get in touch with KiwiGrowth for a free, no-pressure chat about your KiwiSaver.