Financial capability: budgeting, credit, insurance and consumer rights
What the Financial capability domain tests
Financial capability tests personal and whānau financial decisions: budgeting, saving, credit, insurance, tax and consumer rights. You need to calculate and explain trade-offs, not just list products.
Core rules
- Budgeting. Net income minus fixed and variable expenses gives surplus or deficit. Gross income is before tax; net is take-home pay.
- Compound interest. Interest earns interest: A = P(1 + r)^n. Regular saving and time matter more than a single large deposit.
- Credit. Compare the interest rate, fees and total cost, not the minimum repayment. Buy-now-pay-later and high-interest loans can create a debt spiral.
- Insurance. Transfers risk for a premium; an excess is the first part of a claim you pay. Insurance protects against loss; it is not a saving scheme.
- Tax. PAYE is deducted from wages; GST is charged on most goods and services. Tax avoidance is legal planning; evasion is illegal.
- KiwiSaver. Contributions, employer contributions and government contributions build retirement savings; funds are generally locked until eligibility age.
- Consumer Guarantees Act. Goods must be of acceptable quality and fit purpose; services must be carried out with reasonable care. Remedies include repair, replacement, refund or compensation.
Worked example
Mere saves $1,000 at 5% p.a. compounded annually for two years. Year 1: $1,000 x 1.05 = $1,050. Year 2: $1,050 x 1.05 = $1,102.50. Compound interest is $102.50, compared with $100 simple interest. The extra $2.50 is interest on the first year's interest. If she instead borrows $1,000 at 24% p.a., the same compounding works against her.
Traps
Do not compare a flat interest rate with a reducing-balance rate. Do not call an excess a premium. Do not say KiwiSaver is available at any time. Do not treat gross pay as spendable income.