If you’re anything like me, you have no clue what you’re doing with your savings.

This article is part of our new series Finance Explained, sponsored by BNZ.

Am I meant to be setting aside 20% of my paycheck? How much money should I have available in an emergency? My friends have something called a term deposit – should I know what that is?

Well, I’m here to tell you, don’t worry!! I’ve talked to an expert and by the end of this article I think we’ll all be pros 😎

Making a plan for your money

Frances Ronowicz, head of social impact at BNZ, says the first step to start saving is to make a budget, although she’s not a fan of that word. 

“I don't like the word ‘budget’, I think it sounds nasty,” says Frances.

“I much prefer to talk about having a plan for your money and you being in control, not letting your money tell you what to do.”

Frances says there are three steps you should follow:

1. Understand where your money is going: Take all your transactions from the past three months from all of your accounts and categorise your spending. There are a bunch of online tools that can help you do this, one being sorted.org.nz. Some banks also have tools within their app or internet banking that can help categorise your transactions. 
2. Make a plan for where you want your money to go: Understand your income and work out how much money you have coming in. After that, figure out which of your expenses from step one are non-negotiable (e.g., rent, phone bill). Then work out what are the things you could technically go without, but still want in your life (e.g., takeaways, subscriptions). After that, work out how much money you have left over to save. 
3. Set yourself up for success: Structure your bank account in a way that doesn't tempt you to dip into your savings unnecessarily. Consider opening multiple accounts for different purposes (e.g. one for discretionary spending and another for essential expenses). Only link your debit card to an account that’s set up for daily spending needs. Some people even keep their savings account with a different bank, adding an extra layer of friction to access the funds.

What is “interest”?

According to Frances, a common mistake young people make is keeping their savings in a regular spending account rather than a dedicated savings account.

But if you have the same level of financial literacy as me, you’re probably thinking why does that even matter?

Well, it turns out, if you’re smart with your savings, banks will essentially pay you to hold your money in a savings account.

“This is what we call interest,” says Frances. 

“That is the reward you get back for putting your money in that account and doing nothing to it.”

But with most banks, you only make the most of interest when you don’t touch the money that’s in your savings account.

“If you were to take some money out of that savings account, you might incur a fee or lose what some banks call ‘bonus interest’ which is a portion of interest that goes on top of the base interest rate,” says Frances.

“So rather than getting 4.55% interest, you might only earn 2.55% that month.”

Where should I put my savings?

To make things simple, Frances broke down three options of places you can keep your savings:

1. Short-term savings account: This is for when you’re saving up for something small, like a new pair of sneakers or a concert ticket. It’s an account you can access immediately but don’t intend to touch. 
2. Long-term savings account: If you’re saving up for something big, like a car or a trip overseas, that could be considered a long-term savings plan. This is an account you put small amounts into and don’t withdraw out of. It could be worth considering moving this account to a different bank to avoid temptations.   
3. Term deposit: When you've saved some money and don't need to touch it for a while, a term deposit might offer a higher interest rate than a regular savings account. With a term deposit, you lock your money away for a set period at a fixed interest rate. Since the money is locked in, you generally can't access it unless there are special circumstances.

Setting up an emergency fund

An emergency fund is a pot of money you can use to cover day-to-day living expenses if something goes wrong, such as losing your job or getting sick. 

“You need an emergency fund,” says Frances. 

“The gold standard is making sure that you've got enough in an emergency fund to cover about three months' worth of living expenses. 

“So if anything happens, you can live for three months without having to go and borrow.”

Half of New Zealanders aged 18 to 39 wouldn’t be able to access $5,000 if an emergency were to arise, according to a 2023 report by the Financial Services Council.

“We understand it's going to be unrealistic for a lot of young people to consider reaching three months’ worth of expenses over a short period of time,” says Frances. 

“But saving even a small amount is beneficial.

“When you have a safety net, even if it’s a few hundred dollars in an emergency fund, it can make a real difference to your mental wellbeing.”

This post contains general information only, not professional advice. BNZ is not liable for any losses resulting from this post.

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