What Should I do with my Lump Sum of Money while Saving for a Home Deposit? w/ Kernel

by Sarah Kelsey

This blog was written by Kernel - Thanks for your support team 

Please see our disclaimer here before reading this post. 

As Kiwis we love investing in property. Plain and simple. It’s what we know and continue to love, despite more and more restrictions being placed in favour of tenants and against endless leveraged property investment. First time home buyers have just been given a leg up, making the Kiwi dream of owning a home less out-of-reach than it was before, sort of. While the new plan to help first-home buyers will help many, there is still a large portion of us who have a fair bit of saving to do before we can consider hunting for our dream home. 

So, while we’re saving up our big lump-sum of money, what do we do with it? Is it better to keep in a bank account earning next to nothing, or should we be putting the money to work in other investments. Keep reading to find out. 

Get the basics sorted before taking the leap

Before we dive into what you could do with the lump sum of money you’ve saved, it’s important to ensure you have a solid foundation to build upon first. By that we mean paying off any outstanding personal debt (“bad debt”), building up an emergency fund (at least 1-3 months of your salary) and getting your budget in check so you know exactly where you’re at financially before starting think about whether you can start investing. 

A lot of us can talk about doing something, like buying our first home, but never actually take the time to sit down and figure out what it’s going to take. By taking stock of our finances first, we’re putting ourselves in a great position to then figure out whether investing in property is achievable and how long it’s going to take to save up the initial deposit. 

Figure out the timeline you’re working with

Once you’ve got the basics sorted, your next step for getting on the property ladder is to figure out how long it is going to take to save up your home deposit. 

Our suggestion for this would be to get an idea of a minimum and maximum timeline for owning a home. By this we mean, what is the point at which you think you would like to start going to open homes? And the (non-negotiable) point at which you want to own a home by? 

If you’re just starting out and building towards a deposit, figure out the area you would like to buy in, the average market value of the house and therefore the rough amount you would need to save. Work backwards from there to figure out how long it would take for you to get to that point. 

Let’s say it worked out that it will take five years to build your lump sum. This is your minimum timeline and starting point. You could then set the maximum timeline that you would absolutely like  to own a house, to be 10 years. So now you have a 5-10 year timeframe that you’re working with to explore the options around what to do with your lump sum of money. 

Bear in mind that there are always going to be things that happen which will impact our timeframe. We’d recommend being flexible and not getting too fixated on when you MUST own a house by. Because the reality is, you never truly know when that day will come around. Figure out your flexible time frame here.

What should you do with your lump sum of money?

There is no one answer for everyone, as we all have different tolerances for risk and objectives we’re working towards. However, a great place to start is by looking at what your options are. 

  • Keep the money in a term deposit
  • Currently, term deposit rates are roughly 1.75% for a five-year term (as at 15 April 2021). Historically they’ve been closer to 10% (just not in our adult lifetime!). 

    The rate of inflation (I.e. the cost of living) sits around 1-3% p.a. This means by leaving your money in a bank account, your purchasing power to buy a house is going backwards...yep, that’s the reality of it. As a result, your lump sum or house deposit is going to be worth less if you are keeping it in a savings account for longer time periods.

    1. Invest the money

    Another option is to invest your money, whether that’s into individual shares, exchange traded funds or index funds. 

    When looking at the numbers, the S&P NZX 20 Index (which Kernel’s NZ20 Fund tracks) has a five-year total return of 14.6% (as at 14 April 2021) and the S&P Global 100 Index (which Kernel’s Global 100 Fund tracks) has a five-year return of 16.7% (as at 13 April 2021). 

    While past performance shouldn’t be relied on for future performance, the difference between investing in Kernel’s funds versus keeping that money in a savings account is A LOT. There can be a large opportunity cost to leaving your money sitting in a bank. 

    The point of investing in the share markets is because we see a better future with growing companies, so this is an option to grow your money and help you get to your goals (like owning your first home), faster. 

    At Kernel, we say for our core funds, like the NZ20 Fund and Global 100 Fund, you typically want to have a time horizon of 5+ years when investing in them. For our more higher risk funds, like our Electric Vehicle Innovation Fund, you’re looking at a minimum time horizon of 7 years. So, if your minimum and/or maximum timelines work with these timeframes, looking at investing some of your lump sum into an index fund could be a great option for you. Find out more about how index funds work here. 

    Before you invest, do your homework

    It’s important to note with investing to do your research and understand completely what you’re investing in. This includes looking at how fees might impact your investment. 

    Getting sucked into an investment scheme offering a quick buck can happen to the best of us, so make sure you’re doing your due diligence and not taking too much risk with your hard-earned cash. You don’t want to go investing your soon-to-be house deposit in a high growth, high risk investment if you have a short time horizon, and will be needing the money soon! 

    Could rent-vesting be the solution you’re looking for?

    Not a phrase that is commonly thrown around in NZ, rent-vesting is the idea of continuing to rent while investing in the share markets, or investing in a property that isn’t the one you live in (likely outside the city). Some people do this as a way to help them get to their goal of buying a first home while others actively choose to do this for long-term, as they would prefer to not have a large mortgage and sacrifice their current lifestyle in the process. 

    What are the pros? 

    There are a lot of benefits to rent-vesting, starting with the fact that you don’t need to save up for a large house deposit if investing in the share markets. Thanks to a low barrier to entry with various investment platforms now available, getting your money working for you to is quick and easy too.

    You also don’t need to sacrifice your current lifestyle by moving suburbs or out of the centre city, depending on where you would otherwise be able to afford buying a home. 

    Further, you can take longer to find your “dream” home, at a potentially higher price point, if you wait a little longer. This is especially important if you’re looking to have kids and likely to upsize homes at some point, getting something more suitable to your needs and timeline could save you a lot of admin and money in the long run!

    And the cons?

    On the other hand, the biggest con to rent-vesting is that you are, well...renting. Whilst some people don’t mind this at all, others crave the security of their own roof over their head – which is completely understandable. 

    The other main challenge is leverage. Borrowing money to buy property gives us the wonderful advantage of leverage - I.e. we can buy an asset using debt that we otherwise would not have been able to afford with cash. This is not quite the same when investing in the share markets, as most people will be investing using their surplus cash flow. 

    Good things take time

    Buying your first home is a great life goal and one many Kiwis want to strive for, especially when investing in property alongside other assets like shares. Everyone’s road to get there looks different and some can take longer than others. 

    More and more Kiwis are looking at how they can get to that deposit, faster (hello property FOMO), with rent-vesting often being the conclusion they land on. Thanks to low-interest rates and inflation, term deposits are now earning you next to nothing. 

    So if you’re working with a timeline of 5+ years before purchasing a property, you may be better placed to explore other options such as investing in index funds. If less than five years, then keeping your money in a savings account may be the best option for you.