Today a 3-year term deposit will earn you just 3% on average. That is less than half what you would have earned on a similar term deposit just 10 years back. Of further concern is that today the outlook favours further cuts to the interest rates. That will invariably lead to even lower returns from your term deposits.

Looking back in history, it is times like these (low-return investment environments) that the incidence of investment scams tick up in volume and craftiness. The fact is that there is always a risk return trade off.

It’s up to you to be smart about where you invest your hard earned money. Thankfully, there are a number of tell-tale signs to identify such rip-offs. The fact that the medium for propagating scams is broadening from cold calls and emails to social media messaging and ads, the red-flags are still the same.

Here are just a few:

Exclusive or By Invitation only

Someone is trying to sell you an investment product that they purport is open only to a select few. Think again, what makes you special enough to be invited as one of those select few? Investment proposals that are by invitation only should be a red flag right away. It is very likely that they don’t want to advertise it in public in fear of being exposed.

Time Bound

Especially strangers or new acquaintances trying to sell you an investment that needs you to make a decision today or tomorrow. Don’t be pressured into an investment that you are not familiar with. At the least, take the time to discuss it with at least one other confidant. Which leads to the next red flag.

Confidential and private

You are likely being taken for a ride if the individual selling you the product insists that you keep it to yourself. If the success of the product is predicated on you keeping it a secret, it is probably a dud anyway.

Cold Calling

If you receive an email or a phone call from strangers about investment products, be super cautious. It doesn’t matter they direct you to a website. Or, if they identify themselves and the company they represent. It doesn’t matter they talk about how successful other investors have been. Creating sham websites is easy. Names of individuals and businesses can be made-up and success stories of other investors are simply that – stories. It is illegal in New Zealand to sell financial products through cold calling, or if you haven’t requested information about it.

Other less-obvious red flags

There are a number of other red flags, but probably not as obvious as any one or all of the above. Higher returns tend to come from putting your money in higher risk investments. So, be wary of high return investment products that allegedly have very low risk. Typically, the two don’t go hand in hand.

This observation is harder to pick up as a red flag. The reason being that you need to have at least some very basic knowledge about what level of risk supports the promised level of return. Regardless, if someone makes it out that they have caught on to the next big investment trend ask yourself why they are sharing it with you. If it is that good, surely they would pursue it themselves and not share it with you.

Remember, before you invest your money, dig a bit deeper than the ‘returns’ promised and keep the red flags in mind. You can always report it to the authorities if you feel you are have been, or is being, pressured into investing your money.

The post Are you being scammed? appeared first on PocketWise.

What set it off?

In early May the Reserve Bank of New Zealand (RBNZ) reduced the headline interest rate (called the overnight cash rate, or OCR) to an historic low of 1.5%. This is the first interest rate cut the central bank has initiated since November 2016.

Consequently banks have slashed their term deposit rates across a swathe of products.

What does this essentially mean for your savings and investments? We will cover off the impact of this event one product at a time.

What is the OCR?

The simplest way to think of the OCR is that it’s the interest rate that banks have to pay to borrow money. When the OCR moves up, the banks pay a higher interest rate. When the OCR moves down they pay a lower interest rate.

Banks may borrow from a number of sources. The OCR is the rate at which they can borrow from other banks.

How term deposits work

When you invest in a term deposit you are essentially putting your money at the bank’s disposal. In return the bank agrees to pay you back a fixed amount, over a certain period of time.

For e.g., consider a 5 year term deposit of 3.5%. The money you invest in that term deposit is at the full disposal for the bank’s use for a period of 5 years. During that time the bank promises to compensate you for the use of that money at a rate of 3.5% p.a.

The bank now has your money at its disposal to deploy on its own terms as explained above. The bank makes a profit if it is able to deploy that money and earn more than the 3.5% it owes you. Banks often penalise you if you withdraw your term deposit prior to that term maturing. Essentially they are charging your for making the money unavailable for the remaining period of the term.

The impact of falling rates

At its peak, the OCR was 8.25%, which was in the 2007/2008 period.

Today the OCR stands at 1.5%. That’s a reduction of 6.75% over a decade. When the rate you can earn on term deposits fall, the income you derive from these type of products get slashed as well.

This can be particularly painful for those with large holdings of term deposits in their portfolio. Typically, retirees would rely on these types of income based products. Relatively, riskier assets like shares are often better suited to grow in value over time, rather than generate income.

A cut of 6.75% over a 5 year term translates to a fall in income earned of $33,750! 10 years ago you could have locked in a term deposit that would have earned you $33,750 more than what you could possibly earn from a similar term deposit product today.

If you rely on your investment portfolio for income, you would be well placed to consider other options in a falling interest rate scenario.

In the meantime, check up on our easy-to-use comparison tool for your best option for term deposits here.

The post Coping with lower term deposit rates appeared first on PocketWise.

What is the OCR?

The Reserve Bank of New Zealand (RBNZ) has the unenviable task of managing the country’s monetary policy and basically ensuring the economy doesn’t turn to custard. This responsibility includes setting the OCR, an interest rate that helps the country as a whole hit inflation targets (ideally around 2 per cent).

In August, the RBNZ reduced the OCR by 25 basis points to 2 per cent. A number of factors went into this decision, including weak global economic conditions, projected domestic growth, house price inflation and more.

Why should I care?

Financial mumbo jumbo aside, the OCR can have a very noticeable effect on your day to day life. How? Well, every bank in New Zealand is influenced to some extent by the RBNZ’s decisions, and will typically pass on OCR changes to customers. For example, if you have a floating rate home loan and the OCR goes up, it’s highly likely that your interest rates (and your repayments) will increase, too. Conversely, if the OCR drops, your repayments will probably go down.

It is important to note, however, that not all lenders will necessarily reflect OCR chances in their home loan rates. With this in mind, before committing to a loan it’s critical to compare mortgage rates in New Zealand to ensure you’re getting the home loan that not only best suits you as a buyer, but also makes the most of current market conditions.

Happy learning and comparing,

The PocketWise Team

The post What is the Official Cash Rate and why should I care? appeared first on PocketWise.