It’s fairly well documented that here in New Zealand we have one of the lowest rates of saving in the OECD; in 2023 our net savings rate as a country was 28^th of 33 reporting countries. And latest figures show our savings position is worsening. In the latest figures available from Statistics NZ, and from the Reserve bank, our net savings are negative. What that means is we spend more than we earn, and as a country, save very little. 

This isn’t a new thing. New Zealand’s household savings rate has averaged around zero for around forty years. In other words we’ve pretty much always spent as much as we earn. So it’s fair to say that saving is not really a part of our culture. Couple that with a society that has increasingly offered instant gratification (which we’ve readily embraced), and you’ve got a fairly dicey situation for us as households, and as a country.

The 2024 Canstar Consumer Pulse report showed that 56% of New Zealanders don’t have a month’s worth of income saved in case of emergency. 26% of Kiwi save nothing, and 55% save less than 5% of their income.

The great behavioural economist Rory Sutherland once said that “saving is just consumerism needlessly postponed”. Maybe unsurprising coming from a marketer, but of course he had his tongue firmly in his cheek. Because saving has significant personal and societal benefits.

Saving insulates us from shocks, and we’ve had a few of those in recent years. It reduces the need for debt, creates freedom of choice for many people around what they do for work and leisure. And of course it prepares us for retirement. Having a savings back stop reduces stress and helps mental health, not to mention the psychological benefits of setting and achieving goals. Undoubtedly, having savings is a good thing.

So how do we turn ourselves around, and as a country start to see the collective benefits of saving? There are a number of things that our banks and financial institutions, and even the Government could do to help improve the situation.

Make people want it

Perhaps a good place to start is making people want to save in the first place. 

Plato said that “All motivation is movement towards pleasure or away from pain”.

The stress of living paycheck to paycheck, with no backstop if something goes wrong causes significant pain to a large part of our population. Now, I’m not suggesting that everyone has disposable income to save if they want to. But even saving a small amount each week will add up, with the power of compound interest. Helping people to see a way out of these precarious situations with some small changes can be a great motivator to save.

And on the other side, the pleasure aspects of saving are clear; achieving goals, peace of mind, and general wellbeing. Not to mention getting the things you want.

Creating motivation through these aspirations is a great way to encourage regular savings behaviour. Helping people visualise their goals, making them tangible, and enabling them to see the progress towards them can be a powerful way of driving a change in behaviour. After all, just by writing a goal down, you’re apparently 40% more likely to achieve it.

Make it easy.

The second key element is to make it easy. Reducing friction is a key enabler of behaviour. It reduces barriers. Rory Sutherland once proposed that the world has created millions of opportunities for impulse spending, but no opportunities for impulse saving. He’s right. To counter that, years ago with Westpac we launched an app which was a simple red button you could push any time, and $10 would instantly be transferred from your transaction account to your savings account. A brilliant way of encouraging positive savings behaviour. Sadly, Westpac viewed this as a short term marketing campaign rather than a way of actually helping people to save more over time. And the app disappeared shortly after it won an advertising award. But it’s this sort of thinking that can make a real difference to the financial well being of New Zealanders.

Make it worthwhile.

The lack of competition in our banking industry has led to very poor returns for Kiwi on their savings.  The NZ Minister of Finance, Nicola Willis says it “resembles a cosy pillowfight where profits come first and everyday kiwis come second”. As a result the banks make super profits, partly through paying very low interest rates to people on their savings. The rates for on call savings accounts often barely keep up with inflation. So instead of incentivising people to save, the banks are actually disincentivising us. We’re better off spending our money before it’s value erodes.

By paying New Zealanders a fair rate of interest on their savings we’d be able to make it more worthwhile to save money. That doesn’t seem like a revolutionary thought, and of course it’s not. But all you have to do is look at the bank savings rates to see that it’s not happening. Yet.

Incentivise saving

Further to paying a worthwhile rate of interest, there are many other financial, and non financial incentives we can put in place to motivate people to save more. Paying bonus interest for good savings habits, gamifying savings, surprise and delight rewards for saving, the list goes on but none of these tools are currently being used effectively in New Zealand. Dave Tyrer of Squirrel recently wrote an article on the use of bonus saver accounts by big banks in New Zealand. He made the point that, with the exception of (Squirrel’s commercial partner) BNZ, the rest of the big banks use bonus saver accounts more as a way of paying even lower average interest to their customers, and increasing their own profit margins. That’s because many people don’t qualify for the higher ‘bonus rate’, and therefore get paid a rate even lower than the regular savings rate. For a product billed as promoting healthy savings habits, in many ways it’s doing the opposite.

Finally, the Government in NZ does very little to incentivise saving. Globally there are many examples of Governments giving tax breaks or other forms of incentive to save. In the US for example, you get a tax break for saving towards your childrens’ education, among other things. Active incentives of this type are another way of motivating people to save more. 

It is possible to change the savings behaviour of New Zealanders in a meaningful way. And at Wedge we're passionate about doing just that.

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Inflation is the rate in which the price of goods and services are rising, which said a different way is the rate at which our money is losing value.

While inflation might not be obvious from one day to the next, when you look out over a few years the numbers start to look pretty scary.

Imagine you have $1,000 in a transaction account (earning no interest) and the rate of inflation is 3% per annum. In just 10 years, inflation would have reduced the value of your money by $260. That means, while you’ll still have that same $1,000 in your account, it will only have the purchasing power of $740 today.

That’s a huge loss in value for simply having your money sit in a transaction account.

Smart savers never let their money sit idle

Those that are savvy with money guard against this by never having any more money than is required sitting in a transaction or low-interest account. By regularly ‘sweeping’ money into a higher interest savings option they reduce the impact inflation has on their wealth while also helping remove the temptation to overspend.

But the really smart savers go one step further – setting up a reoccurring payment from their transaction account into their savings on pay day – minimising the time their money is not earning interest. This one act has been proven to be a saving superpower – with several studies showing that automating your saving this way and effectively removing your impulsive or forgetful self from the equation, hugely lifts your chances of reaching your financial goals.

But, sadly, even these clever hacks are unlikely to be enough to get ahead

The smartest savers of all know that their money is never going to earn an interest rate as high as the rate of inflation, once tax is deducted, if it sits in a bank account.

Below is a chart of the annual rate in which money that sits in the average on-call bank savings account in New Zealand loses its value. Of course, the numbers are much worse for money sitting in a transaction account earning no interest.

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So, what are people doing about this?

Sadly, not much, as evidenced by the $126 billion sitting in transaction accounts and the $112 billion sitting in bank savings accounts currently. But those that are trying to stop their wealth from being spat off the back to the inflation treadmill are mostly doing one or more of the following:

Term deposit laddering

Laddering is where you split your money across several term deposits with staggered maturity dates, instead of locking all your savings up for one single term. This approach gives you more regular access of your money than one term deposit does and allows you to achieve a higher interest rate on your money than what’s on offer from a bank savings account.

A downside being this strategy can be time consuming. The more laddered your term deposits the more flexibility you have, but you also have to rollover the deposits more often.

Meaning, to do it properly, you'll also need to keep a close eye on which bank is offering the best rates for various terms and move your money accordingly.

Also, Murphy’s Law may suggest just when you need access to your money, there could be a chance you're between maturities on your term deposits or the next maturity is not enough money for what you need to access.

Investing in Cash Funds

Low risk managed investment funds, often called Cash Funds, are another option that some savers go for when trying to earn a positive return in their money after tax and inflation.

One big benefit over term deposits is that these funds often allow you quick access to your money. They are also usually structured as a Portfolio Investment Entity (PIE). Which can be an easy way to lift your after-tax return as the tax you pay on the interest you earn is capped at 28%.

PIEs are clearly great for those who are in the 30% or higher income tax bracket – which according to Figure.NZ is over half the working population in New Zealand.

However, these funds also have a major drawback. Unlike bank savings accounts, they charge fixed, and often high, fees and deliver uncertain returns. Which is not ideal for most savers or risk averse investors who most demand a stable growing balance.

Digital Savings Accounts

Then there is the growing number of online accounts being offered by financial institutions or fintechs in New Zealand. Many of these accounts carry higher interest rates, offer greater flexibility, and include more innovative features when compared to traditional bank accounts.

Similar to laddering term deposits, one drawback is that many don’t provide the tax benefit of being a PIE. But because these are essentially bank accounts (provided by a partner bank) that sit behind the fintech's digital user-friendly 'shop front' - it is easy to see why these higher earning alternatives are growing in popularity.

It is worth keeping in mind, that the interest rate paid on these accounts is largely determined by the bank sitting behind the fintech. So, while most of the banks involved are currently offering their fintech partners, and therefore the fintech's customers, better interest rates than they offer their own customers (which itself deserves its own article) these rates might not always be this attractive.

But, for now, digital savings accounts are proving to be a positive step in the right direction.

As the launch of the Deposit Compensation Scheme in New Zealand draws near, I’m sensing a growing expectation that it could be a big win for savers. I really hope it is. But I have my doubts.

Described by the Reserve Bank as a way to increase trust and security in the financial system, you’d be forgiven for thinking “Great! We can always use a bit of that.”

But rather than taking this purely at face value, I thought it might be worth a quick look at what the Scheme involves, who will benefit, and who is likely pay for it.

For the benefit of a few…

Once in effect, the Scheme promises to protect deposits up to $100,000 per customer, per deposit taker – which include both banks and non-bank deposit takers (NBDTs).

This means, the Scheme will likely provide a boost to the security of a qualifying deposit held at the riskier credit unions, building societies and finance companies. As to if this will make those institutions more trustworthy overall, that’s up to you to decide.

But what about the other 80% of deposits that sit with one of the ‘Big 4’ Australian-owned banks? Those banks already have good credit quality and low risk of failure. What’s more, they're way too big for the Scheme to backstop anyway - given it is expected to take about 20 years for the size of the Scheme to grow to just 1% of deposits in the system.

Therefore, it stands to reason most New Zealanders will not see much, if any, benefit from the increased trust and security the Scheme promises.

… at the cost of many

To build up the size of the Scheme, participating deposit takers will be charged a levy. Which seems fair, given the Scheme is designed to make deposits safer.

Because of this, it seems logical to expect deposit takers, especially the riskier ones, will be able to lower the interest rates they must pay to attract deposits – as the interest rates they pay on their accounts, in part, reflect the risk associated with lending your money to that institution.

Therefore, the proposition for those considering moving their savings to a NBDT once the Scheme is in place looks to be this: Accept a lower interest rate than is currently offered by that institution in return for the added security the Scheme will likely bring. While those that stick with saving through a ‘Big 4’ bank, for example, will likely see no discernible difference in the safety of their deposit.

But, in just the same way as interest rates on savings accounts at NBDTs will likely fall, those saving through the big banks will almost certainly still have to accept lower interest rates too.

This is because of the lack of competition in our savings market. Which makes it very easy for the ‘Big 4’ to simply pass the cost of the Scheme's levy on to us to protect their own stratospheric levels of profit.

This all leaves me feeling the Deposit Compensation Scheme may, very well, go the way of my new year gym membership –where we end up paying for something we never use.

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The Big 4

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I’ve worked with the big banks as my clients for over 15years. The red one, the yellow one, and both of the blue ones. I’ve helped build brand strategies, customer value propositions, creative campaigns and enduring brand platforms for them. It’s good business; the banks spend bigmoney on marketing. Tens of millions of dollars every year. Why? After all, the conventional wisdom says that banking is the category where marketing is leasteffective. It’s bloody hard to change banks, even if you want to. And mostpeople move their banking not to one they really like, but away fromone they’ve grown to hate.

Here's the real reason: social license.

Its’ very important that the four big Australian banks areliked and trusted in New Zealand. After all, this is the most profitable marketfor them by far. They make some of the highest profit margins in the world here,so they’re very keen to protect it. How do they make those super normal profits?In essence, by charging Kiwis more than they should for borrowing, and payingus far less interest than they should for saving.

The banking sector plays an important role in the New Zealandeconomy. We need banks. But the truth is that the banks we currently rely on,are also taking billions of dollars of excessive profit out of New Zealanderspockets, into their own profits. Why? Because they can.  

When the Commerce Commission asked Antonia Watson (CEO ANZNZ) how she justifies making super profits, she replied:

“[It is] just theamount that shareholders like to get to say, ‘It’s worth me investing hererather than somewhere else’”.

So the CEO of New Zealand’s biggest bank justifies excessiveprofits by saying that’s how much the owners want to make.  In other words it’s OK to rip off NewZealanders as long as the Australian shareholders are happy.

Even our Government openly agrees that Kiwi are being shortchanged by these banks. Nicola Willis, Minister of Finance said:

“The New Zealand banking industry resembles a cosy pillowfight, with profit margins coming first and everyday Kiwis coming second”.

The Commerce Commission, in their final report on thebanking sector agreed with the Government. The Commission said its 14-monthstudy found:

“a stable, highly profitable, two-tier oligopoly with nodisruptive maverick and a lack of obvious or aggressive price competition”.

Commission chair John Small said recent investigations hadreinforced views competition was not working as it should in the sector, andconsumers were missing out as a result.

So you can see why the banks spend all that money on marketing. They need to make us feel good about them while they’re effectively robbing us. Pablo Escobar spent millions in Columbian communities building thousands ofhomes, and funding schools and hospitals. Fundamentally to make people feelgood about him even though he was harming them. The banks spend tens ofmillions on ads that feature an endearing young couple, a cricket mad family anda kid that befriends a monster. And they spend millions more sponsoring sportsteams, festivals, community groups and stadiums. But it’s a drop in the TasmanSea compared to the billions of dollars they’re taking out of Kiwis’ pocketsand into their Australian profits.

These marketing campaigns all have different logos on them.But they’re all for the same thing. Building a strong brand is essentiallyabout reducing elasticity of demand. So when price goes up (or in this casesavings rates go down), demand won’t be affected. The banking industry has beenspending millions to enable them to give us a terrible return on our money formany years, and has been reaping the rewards.

I’m a founder of a business that’s obsessed with bringingfairness to financial services. And you’ll see more like us, because the timehas come for change.

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The sad truth is we’ve all become accustomed to earning shamefully low interest rates on our savings.

The proof is everywhere, with billboards and bus stops advertising rates on this and that savings account of 2 and 3%, like they are something special and worthy of shouting about.

But let’s be clear from the outset. These interest rates are atrociously low and are not what you should expect to earn on your savings.

To demonstrate the point, you only have to look at how much our own government must pay to borrow money.

The New Zealand government regularly issues Treasury Bills, a common way lots of governments around the world borrow for short periods. And even they, a AAA-rated entity, has to pay an interest rate that is close to or at the Official Cash Rate.

Those not familiar with what the Official Cash Rate is, it’s currently 4.25%.

So, if the New Zealand Government has to pay around 4.25% to borrow, there is simply no way our banks should be able to get away with borrowing from us at interest rates that are 1%, 2%, or even 3% below that.

The reality is banks offer us these terrible interest rates because they can.

New Zealand has one of the least competitive savings markets in the world. Dominated by the “Big 4” Australian-owned banks, we get what we are given and as a result lose out on billions of dollars in interest every year.
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Winds of change

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Thankfully, the winds of change are beginning to blow, with avers all around the world from Australia to Singapore, and from the United Kingdom to the United States are now benefiting from rising competition across their savings markets.

Spurred on by innovation and technology, financial services companies are breaking the stronghold banks have over their customers. And with it, they are bringing fairness and choice to traditional banking products.
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Wedge is one of those passionate companies, who is on a mission to get those billions of dollars in missed interest into the rightfully pockets of our fellow New Zealanders.

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Source: https://debtmanagement.treasury.govt.nz/tender/treasury-bill-tender-18032
Source: https://www.rbnz.govt.nz/monetary-policy/about-monetary-policy/the-official-cash-rate
Source: https://www.interest.co.nz/saving/e-saver-online‍

The team at Wedge has watched the line between saving and investing products become increasingly blurred in recent years, and we think savers need to be wary of this.
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We appreciate, on the face of it, the difference might seem trivial. But it’s not and being clear about which one it is you are doing could save you (pun-intended) from making an expensive mistake.

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A goal without a plan is just a dream

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When starting to put money aside, it’s important to be clear with yourself about what the money is going to be used for. Having a specific use for the money can also help with motivation towards the goal.
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But most importantly, it will allow you to set yourself an appropriate timeframe to reach the goal. By doing this, it will make it become pretty clear what the best options are for growing your money.

Remember, saving typically involves putting money aside to achieve short or medium-term financial goals – like next year’s holiday, building an emergency fund, or the family’s Christmas fund. While investing more often involves tucking away money for longer-term purposes – like retirement, your newborn’s university fees or trying to maximise wealth over your lifetime.

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Savers demand stability above all else

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Because saving is mostly about reaching a certain dollar amount in the near future, most people will want to a place to grow their money where there is very little chance it won’t be there when they need it. Even if this means accepting a lower rate of interest on their money while they save.
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The same is true for those who are risk averse or cautious with their money. Regardless of the timeframe these people have set themselves to reach their goal, they will likely want to keep it in a safe place.

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Avoid mixing investment products with savings goals

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Most people who are saving won’t use investment products, like managed funds, to reach their goals. We think this is a wise decision because they don’t behave the way most savers want.
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By this I mean, traditional managed funds charge their investors fixed fees while delivering them variable returns. When savers really need fixed returns and variable, or preferably no, fees.
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Don’t let the blurring of the line between saving and investing products catch you out.

Closely studying the inner workings of the global bond market is not everyone’s cup of tea.
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Ok... it’s really only our cup of tea.

Which is why we thought we’d share some rather shocking news about just how bad the interest rate is that your bank is paying you on your savings.

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Banks issue some bonds that are safer than your deposit

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In New Zealand, money deposited at the bank is generally considered senior ranking to all other unsecured lenders to the bank. That means, in the event of a bank failure, depositors sit very close to the top of the queue to get their money back.
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But what many people don’t know is that New Zealand’s biggest banks also issue bonds (i.e. borrow a different way) that are secured over some of the bank’s best assets. This gives the owners of these bonds added protection should anything go wrong at the bank.

It’s because of this, covered bonds as they are called are assigned the highest (AAA) credit rating of all. While a deposit at one of New Zealand’s “Big 4” banks carries the equivalent of an AA- rating.

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Earning more for less

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Now, you wouldn’t be alone in thinking that surely this extra safety must come at a cost. Which would mean the owner of a covered bond must therefore have to accept a lower rate of return for this added safety.
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Unfortunately, for New Zealand’s savers that’s only half true.
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Yes, covered bonds offer some of the lowest interest rates (or yields) of any bond on the planet. But when compared with banks currently paying an average of just 2.3% interest on their on-call savings accounts in New Zealand, covered bonds look outstanding value at around 4%.

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The snag is accessing these alternatives

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The trouble is most of us don’t have the time, money, knowledge or experience required to access savings alternatives like these. And, of course, the banks know this better than anyone. Which is exactly why they know they can get away with paying us such terrible interest rates on our savings.
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At least, that was until now.

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Sources:

Bloomberg and Reserve Bank of New Zealand https://www.rbnz.govt.nz/statistics/series/exchange-and-interest-rates/new-interest-bearing-call-savings-account-interest-rates
‍The covered bond in this example is the BNZ 0.625% 3 July 2025 maturity bond (ISIN: XS1850289171)

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There are additional differences between the two savings options highlighted in this article, including but not limited to liquidity, interest rate sensitivities, and currency considerations that have not been explored in this article.

As the saying goes “a fine is a tax for doing something wrong while a tax is a fine for doing something right”.

Savers know this better than anyone. First, we’re taxed for working. Then we’re taxed for saving. Which is why it’s so important we don’t pay any more tax than we absolutely need to.

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Overpaying tax is a big problem in New Zealand

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Most of us don’t know it, but we’re paying way too much tax. In doing so, we are losing out on hundreds of millions of dollars each year.

The problem exists because, if you’re anything like me, you’ll do almost anything to avoid thinking about tax. But before you click away thinking you were sucked in by the catchy title, and that this is just some boring tax article, I promise you it’s not.

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Bank savings accounts are unsuitable for most

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The interest you earn on the money you have in a bank savings account is taxed at your personal income tax rate. This tax is called Resident Withholding Tax (RWT) and is deducted by the bank as soon as your interest is earned and paid.

This means, if you earn more than $53,501 per annum you will be paying at least 30% tax on the interest you earn in that account. According to recent data, this is more than half of all New Zealanders currently earning a wage or salary¹.

However, no one should be paying 30% tax on their savings, let alone 33% or even 39% for those in the highest income tax bracket.

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The proven way to save that’s often easily missed

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To ensure you’re not overpaying tax, you should be saving through a Portfolio Investment Entity (PIE).

That’s because, with a PIE, the interest you earn on your savings is taxed at your Prescribed Investor Rate (PIR), which is capped at 28%.

But the benefits of a PIE are not just limited to higher income earners.

Because your PIR is based on your total income over the last two income years, those who have recently moved into a higher income tax bracket can often remain in the lower tax paying bracket for longer through saving with a PIE.

And if you’re not one of those mentioned above, you’re simply no worse off saving through a PIE.

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No accountants or tax experts required

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As well as it being a smart way for most people to lower their taxes, PIE’s also simplify things.

The administrator of each PIE is responsible for paying tax on your behalf and they will only pay this at the end of the tax year. Which means you get to earn interest throughout the year on the tax you owe but haven’t yet paid.

That way, you get to keep more of what’s yours without any extra effort or stress.

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Less tax means greater returns

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You can look at the benefits of saving with a PIE a few different ways.

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The first is by calculating the “effective interest rate” you will receive when savings through a PIE when compared to a standard bank account.
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Or said another way, this is the equivalent annual rate of return you’d need to be paid in a bank account to match the after-tax return you’d get from saving through a PIE.
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As you can see, the effective boost you get from saving through a PIE can be big (a massive 18% more income in the case of a 39% taxpayer).

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Another way to look at things is to put some dollars behind these interest rates – which can really bring the benefits to life.
Sticking with the above example, that same high income earner with $50,000 of savings would save $4,217.06 in tax over a ten-year time period if they saved through a PIE instead of a bank account.
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Time to re-evaluate where your savings are kept?

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1. Figure.NZ Data - Wage and Salary Distributions for the Tax Year Ended 31 March 2024

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