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Economics - Savings and Borrowings Assignment
Transcript of Economics - Savings and Borrowings Assignment
•Anyone can have an account
•Kickstart $1000 when join
•Get tax credit - $521/year
•Have to be a NZ citizen
•You can contribute 2%, 4% or 8% of your salary/wage
•Your boss puts in 2% of your salary
•Once you reach 65, you can access the money for retirement
•You can access the money that you contributed when buying your first house
•If you leave a job, Kiwisaver goes with you
•When you are 18 you automatically are issued one but can opt out
•Money is automatically taken out of your account
•You can stop contributing for periods of time
•It’s transferrable but not able to be withdrawn as cash.
Interest Rates for Kiwisaver
Interest rates change regularly because of the changing value of the investments.
- Westpac Who this account is designed for:
This account is designed for kiwis as a voluntary saving scheme designed to help New Zealanders save for the future. Type of Savings #2 - Term Deposits Characteristics of Term Deposits:
•You can only withdraw by arrangement
•Earns you a fixed rate of interest for a fixed term.
•No fees unless you break the terms of the agreement
•Rates tend to be higher than savings accounts
•Your term can be anywhere from 30 days to 5 years
•The amount you receive will affect the interest rate you receive
•The bank accepts deposits from $1,000 to $1 million – this also effects the amount you received.
•When you invest for 1 year or longer you can choose to have your interest paid monthly or quarterly into any NZ bank account.
•When your term ends, the bank will reinvest or transfer your money depending on your instructions.
•You can change your maturity instructions as many times as you like during the investment term. Interest Rates for Term Deposits:
1 month: 3%p.a.
1 year: 4.60%p.a.
3 months: 3.70%p.a.
How is the account designed for?
It is for anyone who wants one but you must have a stable income before you get one. Type of Savings #3 - Life Assurance Characteristics of Life Assurance:
•The life assurance rate you pay will depend largely on your age, health, the length of the term of the policy and in some cases your occupation.
•Smokers and men get a worse deal, women fare much better.
•Term assurance rates are at their lowest for many years.
•If you apply for life insurance when you are young and are in good health, you will receive better ratings
•If you are 25 you will pay significantly lower rates than if you were 35
•You should purchase it at a younger age
•Permanent life insurance plans earn cash value over the life of the policy.
•As you pay your premiums, some of the money you invest is placed in a cash account where it earns money. This money is considered a living benefit and can be borrowed or withdrawn.
•When you plan earlier, you can save more and spend less on your insurance.
Interst Rates for Life Assurance:
Wide range of life assurance rates. Depends on age, health, term of the policy and your occupation.
• Life Insurance Online
Who is this account designed for?
Account is designed for anyone but the earlier you get one, the better. Borrowings Type of Borrowing #1 - Mortgage Characteristics of a Mortgage:
• Similar to a personal loan but it is secured with an asset (chattel)
• When you get a mortgage on your house, you give the bank the rights to your house if you don’t pay it back.
• The most popular home loan on the market today
• Maximum 30 years
• Up to 90% of a property’s value
• Option of weekly, fortnightly or monthly payments to suit your budgets
• If you are not a permanent resident of NZ you can only get a mortgage for up to 5 hectares.
• Extra payments: up to 5% of the loan balance each year of the fixed rate term - to a maximum of $10,000
• You can apply to suspend your payments for up to 3 months every 2 years – this is specific to the ANZ
• ANZ fixed rate mortgage is available to a split loan option with any ANZ home loan.
• To get a mortgage you must have: permanent residence in any country and a work permit. – ENZ website
• ANZ fixed rate term
Intere Interest Rates of a Mortgage:
ASB – Residential:
6 months: 5.75%
1 year: 5.70%
2 years: 5.85%
3 years: 6.10%
4 years is: 6.50%
5 years: 6.90%
Type of Borrowing #2 - Credit Card Characteristics of a Credit Card:
•It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services.
•Issued by the bank
•The different cards are Visa, MasterCard and bankcard
•They can be used at a wide variety of shops
•Independent companies such as Diners Club and American Express can also issue them
•They are based on credit
•The shop sends the credit card companies a record of purchase, who then pay the shop.
• It’s the highest rate of borrowing In Interest rates for Credit Cards:
ASB MasterCard – Standard rates
Interest free period – 55
Fee primary - $24
Fee additional - $12
No balance transfer
Cash advance – 19.45%
Purchases – 19.45%
Type of Borrowing #3 - Store Card Characteristics of a Store Card:
•Credit offered by a shop
•Shop issues the cards
•Allows you to put items ‘on account’ and then pay for them later
•A store card is very similar to a credit card except that it is issued by the store, not the bank.
Store Card Interest Rates:
Ballentynes interest rates are increasing from 12% to 15%. Effective May 1st 2012. Scenarios Here are 2 scenarios. For each scenario, you must state the BEST method of saving, and at least 2 reasons why you chose this method of saving over other methods. Scenario #1: Your family is going to fiji at the end of the year. Your parents will pay for your airfare and accomodation, but you need to SAVE for your spending money. To be able to survive and have a good time when in Fiji, you need to save at least $50 for each day because you also need to pay for food etc. Lets assume that we are going away for 3 weeks. Therefore I need $1050 for the holiday and I have eight months to save it.
The best way to save this money would be to use an ANZ serious saver bank account. The interest rate of this kind of bank account is 4.5% per annum. This is the best interest rate at the moment compared to ANZ term deposits which have a 4.3% interest rate, National Bank interest rates of 4.4% and Westpac interest rates of 4.4% also. So, not only will you be free from temptation of withdrawing money, you will also be earning a very large interest of money for just having the money in the account. If you don’t withdraw any money, you earn rewards such as: interest on every dollar, bonus interest when you make a single deposit of at least $20 or more during your account’s monthly key-date cycle and not make any withdrawals and go into the draw to win every month – top prize of $10,000 plus 90 prizes of $1,000 to be won. You get one entry into the draw for every dollar your balance increases, so, there more you save each month the more chances you have of winning. This will encourage this young person who is not tempted to spend their moeny to keep their money in the bank which in tern earns you interest and this is yet another incentive to save the money. You have access to your account all the time to withdraw, deposit, transfer money or make enquiries although the incentive to spend is stopped by the consequences that come with withdrawing money. You can use ATM and eftpos machines. You can only make one free withdrawal in your account’s cycle. All the others cost $5 to withdraw any amount and this will help the young person to save because there is a consequence of withdrawing money. If you don’t save at least one instance of $20 each month, you won’t get into the draw to win or get any bonus interest and this too encourages the young person to keep depositing money and to not withdraw any. We choose this savings account over a different account such as the RaboDirect term saver because of many different very important factors. Scenario #2: You intend to go to university when you leave school and would like to save money NOW to reduce the size of any loan that you may need. Lets assume that I need $10,000p.a. for 3 years. This means that I need to save $30,000 over the next 60 months or approximately $500 per month.
I think that the best account to use to save for this money is a Kiwiank notice saver account. This account is quite similar to a term deposit account because you earn a high stable interest rate of 4.3%, it’s available online, you can make transfers via Internet banking and you get the ability to pay out monthly income. This bank account is also very similar to a online call account. They are similar because you can add money at any time, withdraw money at any time, the return isn’t fixed, you can make transactions via Internet banking and the account is available online and you have the ability to pay out monthly income. But this account is very special because it is the mix between these two accounts, so you get the best of both worlds. If you needed money you can choose to either give 90 days or 32 days notice and withdraw that money. You earn very high interest compared to say a term deposit account. In this a term deposit account you earn quite high interest but only if you have over $5000 and will have money in the account for over 1 year whereas with the Notice Saver, you do not have a set term. In a term deposit account you need to pay early termination fees whereas in a Notice Saver account you do not and you also don’t have to pay transaction, entry or management fees. For an online call account the interest rate is only 3.15% compared to the 4.3% for Notice Saver if you choose a 90 day notification fee or 4.1% interest rate for a 32 day notification fee. The only disadavantage for this savings account is that if you do not keep depositing money into the account you will not get a compound interest rate. A compound interest rate is very good because if you didn’t have a compound interest rate and for example, you had $2000 in the account at 4.3%, you would only earn $86 compared to much higher interest rate you would get from compound interest because it keeps piling up. Here are 3 new scenarios where you must choose the BEST method of BORROWING. For each scenario, you must give at least 2 reasons why this method is better than other methods. Scenario #1: You want to buy a new iPhone 4s. At first, it seems that the best way to borrow to get an iPhone 4s is through hire purchase. If you bought the phone through Telecom, you would make a payment of $120 per month (including air time and textings) for a 24 month term. This means in total you would pay $2880 for the iPhone which is over double the amount that it's worth ($1029). If you took out an overdraft you would end up with a much better deal. If you took our an overdraft with a bank such as ASB and provide security (such as your car), you can buy the phone straight away and the interest is only 15%p.a. This means that if you pay it off in 1 year, the approximate total you will pay is $1183.34. This is $1696.65 less than if you used a hire purchase.
In conclusion, the best way to borrow for this situation is by taking out an overdraft. Scenario #2: Your car breaks down and you need $1000 to fix it. Scenario #3: Your parents have offered to help you buy an apartment, but you still not to find $60,000. I think that the best way of borrowing for this situation would be to get a mortgage. This is because a bank won’t just lend you such a large amount of money so if you get a loan it will turn into a mortgage anyway. The best type of mortgage to get is an ASB table mortgage. The reason this is the best type of account to get is because you can tailor it to fit your needs and the more money you put into it, the less interest you have to pay. A table mortgage works like this: The initial payments will be mainly made up of interest. As you pay back more of the principal, the interest owing each time decreases. The interest rates are very competitive (and this can make the rates come down), that being 5.75%p.s. initially. I am going to make the assumption that you earn the New Zealand average of $3,333.34. So, you have no money to start with and every month if you deposit $1,153.01 (or $539.11 fortnightly), in 5 years the mortgage will be paid off. Table mortgages are also good because they have low interest rates, low fees and you can change the loan type if there is a change of circumstances. Another type of loan you could use is a chattel mortgage. This is only possible if you have possessions valuable enough for the bank to take as chattel. In this case, I am making the assumption that you don’t. In conclusion, the best type of borrowing for this scenario is an ASB table mortgage. Mr Mr. I said that borrowing was the best way of purchasing a car. - $20,000 with 19% interest. Advantages:
•You will not have to pay it off all in one go.
•You can get the car straightaway.
•Your savings can stay in the account for longer which means that you can earn a little interest
•Repayments are fixed (e.g. $50 per week) this means that borrowers can budget their expanses and make a financial plan.
•You don’t have to wait a long time to save up the money
•You have more time to pay the money back
•While you pay, every month you can put your excess money in a high interest savings account and receive compound interest.
•Occasionally, interest free car loan deals come up because the car dealer wants to get cars off their property to make way for new stock. Disadvantages:
•If you pay cash sometimes you can get cash discounts e.g. if the car costs $20000 then if you paid with cash you could be offered a discount whereas this wouldn’t be possible by paying with credit. For example, you could get a cash discount of $1000 but because you paid with credit, this would not be an option for you.
•There would be 19% interest which over 5 years would put the amount you paid for the car at $39000. That is almost how much you paid for the car in the first place which means that buying with credit costs you a lot of extra money than paying with cash.
•Paying on credit has lots of added expenses such as administration fees, set up fees, commission fees etc.
•By paying on credit, you restrict your ability to do what you want with your future income. You also give up the ability to sell your assets (chattels) that you listed as security. For example, borrowing the money now will restrict Mr. I for if a better deal comes along next month he will not be able to buy it because he will be paying off his car loan. This means he spends extra money.
•If you have saved up cash rather than credit, you not only get cash discount and avoid paying interest; you also get to earn interest on your savings. This means that buy using credit you are missing out on the opportunity to earn money.
•If you buy lots of things on credit you could get over committed. If you end up not being able to pay your repayments then you could be declared legally bankrupt which could then make it very difficult to get future loans.
•Loan default fee- late fee penalty
•If you don’t have money (loose your job etc) you have the car repossessed and you have to pay large excess fees (towing etc.)
•You may not be qualified to borrow money. Make an overall decision whether Mr. I is right or wrong. Explain your answer. Our overall decision is that Mr I is wrong. I think that unless it is abosolutely necessary, borrowing is not the best option when it comes to buying cars because it means you have committed to pay it back and you may not have the financial security to do so. Also because the number of disadvantages outweigh the advantages. If you pay with cash, you avoid interest, lost discounts (such as cash discounts), fees and expenses, other hidden costs, foregone interest from savings, loss of freedom and overcommitment. Also, if you pay with cash you are spending your own money and by the time you have saved, in this instance $20,000, the value of the car will have depreciated which means you could either get a better car, save the money, or spend it on something else. Mr I hasn’t thought through the consequences of borrowing money because all he can think about is that he wants the car immediately, and he hasn't thought about the advantages of paying out of a personal account. If Mr I was patient and waited until he had enough money, he wouldn’t have the added commitment that comes with taking out a loan. It is only better to take out a loan because you will not have to pay it all off in one go, you can get the goods straightaway and if you have any savings, they will stay in an account so you earn interest on that – but this doesn’t cover the huge amount you would lose if you paid by borrowing money. There are circumstances when borrowing is necessary such as if you find interest free deals, you are financially secure so you have enough savings money to put a high interest savings account or if you need time to pay it back but you need the car now. In conclusion, unless absolutely essential, borrowing money isn't the way to go. I have assumed that there is not enough money in my personal account to cover this expense. I have investigated two ways of borrowing from the bank to repair the car. The first was a personal loan, the second was getting an overdraft and the third through a Mastercard. A personal loan has a lower interest rate but the lowest amount you could borrow was $2,000, such as at ASB, which is more than we needed so this was not an option. There was also a $250 establishing fee by the end, if you had borrowed $2,000 you would have had to pay back a minimum of $2549. Borrowing it through a credit card such as an ASB Matercard was an option but there was a 19.45% p.a. interest charge, plus a $25 establishing fee, also not the best option. An overdraft was good however because it is an easy way to borrow a small sum of money that can be paid over a short-term and the interest was reasonably low, 15% if secured and 19% if unsecured. .
I am assuming that you are earning an income of $3,333.34 per month (average New Zealand income). I think that the best way to pay for a car repair of $1,000 would be to get an overdraft because if you are earning an average of $3,333.34 per month, you can expect to be able to pay back $200 per month. I have assumed that there is not enough money in my personal account to cover this expense. I have investigated two ways of borrowing from the bank to repair the car. The first was a personal loan, the second was getting an overdraft and the third through a MasterCard. A personal loan has a lower interest rate but the lowest amount you could borrow was $2,000, such as at ASB, which is more than we needed so this was not an option. There was also a $250 establishing fee by the end, if you had borrowed $2,000 you would have had to pay back a minimum of $2549. Borrowing it through a credit card such as an ASB MaterCard was an option but there was a 19.45% p.a. interest charge, plus a $25 establishing fee, also not the best option. An overdraft was good however because it is an easy way to borrow a small sum of money that can be paid over a short-term and the interest was reasonably low, 15% if secured and 19% if unsecured. .
I am assuming that you are earning an income of $3,333.34 per month (average New Zealand income). I think that the best way to pay for a car repair of $1,000 would be to get an overdraft because if you are earning an average of $3,333.34 per month, you can expect to be able to pay back $200 per month. Therefore, the best way to borrow money for this situation is by taking out an overdraft. At the moment, savings accounts have a very high interest rate so it is very good to save with a savings account whereas a term deposit account always have reasonably high interest rates but not as high and the savings rates are at the moment. A savings account has no minimum deposit amount required. If you used a term deposit, and for instance you saved for three weeks, you would only earn $46.20 interest. If you used a savings account, you earn compound interest. This means that the total interest you get would compile into much more than a term deposit account. So, at face value you might think you are getting a higher rate with a term saver, but it’s untrue. With a savings account the money is available at any time and this is good for emergencies but there are will still be huge consequences for withdrawing money whereas with a term deposit account the money cannot be accessed. You can also make extra deposits at any time with a savings account but with a term deposit you can only deposit money once and then you can’t touch it after that. It is good that you can access your money with a savings account in case of emergency because if you used a term deposit account, you would get a huge penalty for withdrawing money.
This graph shows the difference in interest rates from an ANZ term deposit account, Rabo Direct accounts and the market average in a one year term. It shows that the ANZ Serious Saver is always above the market average of rates and therefore, this is the best account to choose.