Today's Guest Post is written by Sean Hamilton. Maori Millionaire is honored to have Mr. Hamilton here again. This is his 3rd post. You Can see his other posts here:
Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.
Saving for Wealth, Not just a rainy day
Sean Hamilton
The fundamental building block for wealth is to create a surplus. This means that from any income source you have, you need to set some aside as savings.
This isn’t easy when you’re starting out and it can be difficult to maintain when you’re well established. It’s an often assert fact that the more money you make, the more you spend. To create your wealth, you have to be an exception to the rule. Start new savings habits.
Side note: Check out our giveaway for the Atomic Habits Book -
Where should you start?
There are various types of products to help you create wealth from savings, including stocks, KiwiSaver, term deposits, but the foundation is a savings account. There are around 4 different types of basic savings accounts in Aotearoa banks. The simple savings account, bonus savings account, notice savings account and online savings account.
Let’s briefly break down each savings account type:
1. Simple Savings account: This is the basic, no frills savings account. It usually has a much lower interest rate, which means you don’t earn as much as the other savings accounts for the same balance you have in it. It usually allows a much wider range of access and no penalties to access the savings.
2. Bonus Savings account: The best use of this type of account is to set up a regular deposit and not touch the account. Typically your given an extra special interest rate compared to other savings accounts, on top of a minimal base interest rate for regular deposits of around $20. You may lose that special interest rate if you take money out of the account during the month.
3. Notice savings account: This is a middle of the road type of savings account when it comes to interest rates. The catch with this account is you have to give the bank some advanced warning that you want to access your money, sometimes around a months’ notice.
4. Online Savings account: Access to this account is usually limited to digital channels, such as internet banking and the banks smartphone app. You might pay hefty fees to access it other ways, such as in person in a branch, or through the contact centre. As this account might have less costs associated with having less physical access, it can have a slightly better rate than a simple savings account.
A golden rule for savings is to remember that the more you set aside and the better the interest rate, the better your return. However, you need to choose an account that suits your lifestyle and savings behaviours. Saving accounts act much like an everyday account, with some differences.
In terms of similarities, you can put money in (deposit) and take it out (withdrawal) and access the account via apps or internet banking. There are also fees associated with savings accounts. Sometimes these fees are in place to guide specific behaviour by disincentivising you to make multiple withdrawals per month. Fees could also apply to how you take the money out and access the account, so best to pay attention to these. You can also get regular statements mailed to you, or check your savings progress digitally.
Savings accounts require discipline, something akin to an out of sight, out of mind attitude. They should be treated as a last resort when accessing them, like a back stop or emergency fund. The reason for this is to create a habit of regular contribution to the savings account and let the miracle of compounding interest take over.
Compounding interest is every savers must have tool to create wealth. Compounding interest occurs when the return on your savings is paid back into the account, and you then earn more interest on top of that interest and base savings amount. If you can take away anything from this series of articles, it is that compounding interest is one of the best ways to create wealth, never take it for granted.
A special note at the time of writing for this article concerning interest rates. The incentive for having a savings account is to maximise your return with an interest rate giving you something back for your regular deposits. In 2022, interest rates are still exceptionally low in Aotearoa. While this is a fact of the current economic cycle, it shouldn’t stop you committing to a savings habit. Wealth generation is a marathon journey, not a sprint, so best to have a long term outlook on savings accounts and their interest rates.
What is in it for the banks when it comes to savings accounts?
A banks fundamental way of operating as a business, is by lending people money and earning income from the interest paid on that money. But where do they get that money to lend to people? While there are multiple sources in our modern banking world, one way is from people saving money with the bank. The bank will pay you less interest for savings with them, than when lending from them, the difference is where a bank can make money as a business. It’s not always that simple, but this helps to illustrate the role your savings account has in the economy of banking and the other side of how it operates.
You get interest, helping to continue on your wealth creation journey, the bank gets income off the other side when it comes to lending. Keep this in mind, as our next article will start to explore the wider world of lending products from banks. It’s important to understand these, as most of us use them at one point in our lifetime. The more you know about lending, the better armed with knowledge you’ll be to use them properly and sparingly when that time comes.
Nga mihi,
Sean Hamilton
Maori Millionaire is on a mission to empower Maori to become financially independent. See below to hear our very first podcast. Joining us today is Tamatea Ngapo - Co Host for the Podcast.
Disclaimer: The information in this article is provided as general information. It is not intended as financial advice for the purposes of the Financial Services Legislation Amendment Acts 2019 (FSLAA). No investment objectives, financial situation and particular needs of any particular person has been taken into account in the publication of this article. Professional advice should always be sought before taking out any financial product.