Offset System
Now I’m going to show you our Cents of Worth System, one that promotes and uses the money system we have shown you.
The basis of this system is to use an off-set home loan – really common in Australia, much less common in NZ.
How does it work?
Let’s take the same $450k Home Loan.
$50k Floating Offset Loan
Say 3 x fixed rate loans of $133k each.
Bank Accounts setup
- Spending
- Saving
- Living
- Tax
Now all of these bank accounts off-set the Floating offset loan and you pay interest on the gap between the total of your bank accounts and the value of the loan.
WHY DOES IT WORK?
In essence, it is very similar in how it saves interest on the home loan – it takes your money that you have in the bank, and lowers the interest cost of your home loan by using that.
The key difference is that not all of your money has to sit in one bank account which we know makes money management harder.
You maximise the money you have in your bank accounts
- Instead of earning 1-2% on your savings in the bank, you are saving whatever the floating interest rate is on the home loan.
It doesn’t promote habits of putting all your spending on a credit card (which you can still do here if you are good at it).
It works really well for self-employed people who can put aside their GST and Tax funds into an account that is labelled, and they can utilise those funds while keeping them accessible to pay the IRD as required.
What to be careful of?
- Leaving too much funds on the off-set floating loan that aren’t off-set – which means you are paying the higher floating interest rate.
How do I work out how much to put floating?
- Think about how much you can maintain in your bank accounts now.
- Realistically how much can you save in the next 12 months that will accumulate and be off-setting the home loan
- Are there any expected one-offs (i.e. Selling something or receiving an inheritance)
It is likely you will never get this perfect, but doing something is better than doing nothing.