Assumptions
Here are the key assumptions we have made in our Should I pay off debt or save in KiwiSaver? case studies.
Option 1 - Join KiwiSaver and pay off debt at the same time
You join KiwiSaver and contribute from day one. You pay your mortgage and credit card with the normal fixed repayment amounts.
When the credit card debt has been repaid, the payments towards that smaller debt are added to the repayments for the bigger mortgage debt. When the mortgage debt has been repaid, increase your KiwiSaver contributions by the amount you were repaying on your mortgage.
Option 2 - Join KiwiSaver after paying off debt
Delay joining KiwiSaver and increase your mortgage repayments by the amount you would've been contributing to KiwiSaver.
Pay the credit card with the normal fixed repayment amounts. When the credit card debt has been repaid, the payments towards that smaller debt are added to the repayments for the bigger mortgage debt. When the mortgage debt has been repaid, join KiwiSaver and combine your standard contributions with the amount you were repaying on your mortgage.
Another option
There is a third option – join KiwiSaver and pay off debt at the normal fixed amounts, then after one year take a contributions holiday and add the amount of your KiwiSaver contributions to your mortgage repayments. Then once your credit card is paid add those repayments to your mortgage. Then once the mortgage is paid, put the increased mortgage repayment amount into KiwiSaver.
This option will pay off your debt faster but won’t give you as high a KiwiSaver balance as doing both at the same time without taking the contributions holiday.
Notes
- Results are in nominal dollars.
- Cashflows are the same for each option – for example, if Hine can afford to pay $200 each month to KiwiSaver, that’s also the amount she has available to add to her debt repayments.
- Credit card interest rate - 19.00%, mortgage interest rate – 6.50%
- KiwiSaver totals include the one-off $1000 kick-start, 2% employer contributions and $1042.86 tax credits (only paid when contributing to KiwiSaver)
- The one-off government kick-start contribution of $1,000 is received 3 months after the first contribution is deducted.
- Tax credits (for a maximum of $1,042.86) are added to savings each year.
- All contributions are invested in a balanced fund earning a net real return of 3.0% or 3.5% per annum, depending in the PIE tax rate. The fund is a PIE (Portfolio Investment Entity) with income taxed at either 19.5% or 30%, depending on the income tax bracket.
