Your money working or you?

June 29, 2018

Your money working or you? “Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.” – Sam Ewing There are only three places money can come from – you working, your money working or from the Government. We all know that pressure on welfare is growing due to rising life expectancies and nobody expects to work forever. This is why prudent money managers focus on building a portfolio that will keep them in their later years.

Write down the reason

June 22, 2018

Write down the reason. “Success or failure is often determined on the drawing board.” – Robert J. McKain Life is one long learning experience and you are going to make some good and bad investment decisions. Whenever you buy an asset, write out the reasons for buying it on a piece of paper and keep it where you can review it regularly. This will give you invaluable education.

Women have special needs

June 22, 2018

Women have special needs. “Happiness is not in having or being; it is in doing.” – Lilian E. Watson Historically women live longer than men and they have less time in the workforce. The result is that many of them have insufficient money to retire on. This is why it’s vital to invest in a range of assets at as early an age as possible, both to gain experience and to give compound interest time to work its magic.

Will substitutes

June 15, 2018

Will substitutes “Winning starts with beginning.” – Robert H. Schuller There are some assets that are not distributed in terms of your will. These include property held as joint tenants and money in superannuation. So make sure you take these into account when you are reviewing your will.

Wholesale Funds

June 8, 2018

Wholesale Funds “Thinking is one thing no one has ever been able to tax.”  – Charles F. Kettering Everybody likes to save by buying wholesale and you can even do it with managed funds like wholesale share trusts which offer much lower ongoing management fees. The only challenge is that you need to have fairly large chunks of money to participate. Don’t despair if you are only a small investor – you can still access wholesale funds via master trusts and wrap accounts.

Who wants to be a millionaire

June 1, 2018

Who wants to be a millionaire “Success seems to be largely a matter of hanging on after others have let go.” – William Feather Almost everybody wants to be a millionaire but the majority never make the effort to start. If you follow the principles in this book, the magic million status will almost certainly be yours.

What’s the bottom line

May 25, 2018

What’s the bottom line “Effort only releases its reward after a person refuses to quit.” – Napoleon Hill Earn $50 000 and spend $49 000 and you’ve got $1000 left to invest. However, if you increase your earnings to $55 000 and keep your spending at $49 000, you’ve got $6 000 to invest. Yes, an increase in earnings of 10% will increase your bottom line by 600%.

Weighed down by debt

May 18, 2018

Weighed down by debt “Late payment is catching.” – John Hope If your financial situation looks hopeless, seek counselling as soon as possible. In many cases it’s possible to ease the pain by making an arrangement with your creditors and in some cases bankruptcy may also be an option. The main thing is to bite the bullet so you can start to make things better – usually the longer you wait the worse it gets.

Vehicles

May 11, 2018

Vehicles “The whole idea…is to enable you to see mentally the picture at all hours of the day.” – Claude M. Bristol Before you ask “what should I invest in?” you should be asking “what investment vehicle should I use?” The most appropriate one may be superannuation, insurance bonds, growth trusts or possibly even a bank account in your own name. The right vehicle will save you tax and may also protect your estate from creditors in the event of bankruptcy.

Use the right loan

May 4, 2018

Use the right loan “The first payment is what made us think we were prosperous and the other nineteen are what showed us we were broke.” – Will Rogers There are two main types of loans – principal and interest (P&I) where the debt reduces over time, and interest only where you owe the same at the end of the period as when you started. My advice is to use a P&I loan when the interest is not tax deductible and an interest only loan when the purpose of the borrowing is for investment.

Trauma Insurance

April 27, 2018

Trauma Insurance “The toughest thing about success is that you’ve got to keep on being a success.” – Irving Berlin You probably know of many people who have suffered a serious illness such as a heart attack, cancer or stroke. Trauma insurance pays a lump sum when such an illness strikes to take the pressure off the household finances. In most cases the patient recovers, so it is one type of insurance where you, not your heirs, get to spend the proceeds of the policy.

Trading options – fighting in the jungle

April 20, 2018

Trading options – fighting in the jungle “Forecast: a pretence of knowing what would have happened if what does happen hadn’t.” – Ralph Harris When you invest in options, you are effectively gearing into the sharemarket, which is why it’s possible to make very high quick profits. The down side is that it’s also possible to quickly make huge losses. It’s a zero sum game as there’s a loser for every winner so don’t get caught until you are confident that you can beat the experts.

The miracle of compounding

April 13, 2018

The miracle of compounding “Everything in life is a progression of steps.” – Scott Reed They call it a miracle because it starts off so slowly and yet produces results that certainly seem miraculous. Unfortunately, the problem with compounding is that the money grows slowly at first, and many people are tempted to give up in the early stages or worse still, never start. If you stick with it you will be amazed how your money grows over time.

Take out insurance via super

April 6, 2018

Take out insurance via super “It’s what you do with what you’ve got.” – Leroy Van Dyke Make sure you arrange your life insurance through your superannuation fund. Provided you can make contributions via salary sacrifice, it enables you to pay your insurance with pre-tax dollars and in many cases your insurance fund will be able to buy insurance cheaper because it has access to wholesale rates.

Take advice before you act

March 30, 2018

Take advice before you act “An investment in knowledge pays the best interest.” – Benjamin Franklin It can be extremely costly to make changes to the ownership of an asset after you have bought it. These costs could include stamp duty and capital gains tax. This is why you should always seek advice before you sign a contract and not after.

Superannuation – Beware of lack of access

March 23, 2018

Superannuation – Beware of lack of access “Money is of no use to us until it is spent.” – Irving Fisher Even though superannuation is a great vehicle, the lack of access until after you retire (from age 55) makes it unsuitable for most young people as they leave themselves open to rule changes. You can access your superannuation before retirement under the hardship provisions but these are extremely rigorous and very few people are able to use them.

Superannuation

March 16, 2018

Superannuation “He that gets out of debt grows rich.” – George Herbert Most people are confused about superannuation but just think of it as a magnificent vehicle that lets you hold money in a low tax area. The price of this generous gesture by the Government is that you lose access to the money until you retire after age 55.

Stay off the debt treadmill

March 9, 2018

Stay off the debt treadmill “Debt is the worst poverty.” – Thomas Fuller Once you get trapped on the debt treadmill, it’s almost impossible to get off. Therefore, start working to a budget as soon as you get your first job, and don’t borrow for consumer items. You never miss what you don’t have.

Start early

March 2, 2018

Start early “To be successful, you must decide exactly what you want to accomplish, then resolve to pay the price to get it.” – Bunker Hunt The easiest way to become wealthy is to start early. If you start investing at age 20 and earn 10% on your money, all you’ll need to do is invest $95 a month to have a million dollars by 65. However, if you don’t start until you are 45, you’ll need to invest $1300 a month to get to the magic million. It gets scary if you leave it to age 55 because by then, you’ll need to find nearly $5000 a month to reach your goal.

Speculating is not investing

February 23, 2018

Speculating is not investing “Sell in May and go away.” – Anon It’s smart to invest and there’s nothing wrong with having a bet – as long as you know which is which. This is why you should keep your investing portfolio separate from your speculative portfolio. You don’t want to lose your hard earned money in a high risk investment.

Sinking Fund

February 16, 2018

Sinking Fund “I am a great believer in luck and I find the harder I work the more of it I get.” – Stephen Leacock This is a fund you create for the purposes of paying off an investment loan and involves making a regular contribution to an insurance bond plan. You enjoy all the tax breaks through the years and then cash in the bond tax-free (after at least 10 years have passed) when you are ready to pay off the loan.

Shares

February 9, 2018

Shares “Statistics are no substitute for judgement.” – Henry Clay These are one of the best wealth creation devices around. What other investment can give you spectacular returns with tax free income. Of course you can lose all your money if the company goes belly up so make sure you diversify your portfolio and review it regularly.

Sexually transmitted debt

February 2, 2018

Sexually transmitted debt “Dating is a social engagement with a threat of sex at its conclusion.” – P. J. O’Rourke A marriage is just another partnership and in many cases, an innocent partner can be liable for the debts of the other. It can occur where there are joint loan accounts or where guarantees are given or when partners share a credit card. The way to keep yourself free of STD is to stay abreast of the family finances and make sure you see every bank statement and credit card statement when they arrive.

Rule of 72

January 26, 2018

Rule of 72 “Genius is the ability to reduce the complicated to the simple.” – C. W. Ceram The rule of 72 is a money calculator. Simply divide 72 by what you think your portfolio will earn and the answer will be how many years it will take to double in value. For example, if you believe your assets can return 7% per annum, they will double every 10 years.

Rent or buy

January 19, 2018

Rent or buy “Rent is not dead money – it’s the price of shelter.” – Noel Whittaker In most cases, it’s cheaper to rent than buy, but 99% of tenants never invest the money they save by renting. They also miss out on the capital gain when it comes. This is why, for most people, buying a house is a great way to start their wealth-building program.

Remove temptation

January 12, 2018

Remove temptation “A budget tells us what we can’t afford, but it doesn’t keep us from buying it” – William Feather It’s obvious that it’s easier to steer a car clear of a mud hole than to dig it out once it’s bogged. Maybe it’s not so obvious that the best way to avoid falling into the debt trap is to leave your credit cards at home. If you need them for a special occasion such as making an airline booking, you can take them out of the drawer.

Real estate

January 5, 2018

Real estate “Private property began the instant somebody had a mind of their own.” – e.e cummings Over the long term, a well located property bought at the right price should perform well for you. Always think of the BAM formula which means Buy well, Add value and Manage actively. In practice, this means you look for an undervalued property in a good location and which is owned by a seller who is very keen to make a quick sale.

Protect your assets

December 29, 2017

Protect your assets “Sooner or later everyone sits down to a banquet of consequences.” –  Robert Louis Stevenson You never know when somebody is going to sue you so try to have some strategies for asset protection. These include having the family home in the name of your spouse where appropriate, running your business through a company or trust, and holding assets in vehicles such as superannuation and insurance bonds where it is often protected from creditors.

Prenup

December 22, 2017

Prenup “Marriage has many pains but celibacy has no pleasures.” – Samuel Johnson One way to ensure a fair distribution of your assets after a relationship break-up is to have a pre-nuptial agreement in place. Just be aware it is ineffective if it is not drawn up properly so make sure you consult a lawyer who specialises in such matters.

Pre tax vs after tax dollars

December 15, 2017

Pre tax vs after tax dollars “Employees make the best dates. You don’t have to pick them up and they’re always tax-deductible.” – Andy Warhol I always prefer to spend pre-tax dollars because they are half the price of after tax dollars. This is why I’d much rather pay the rates on my investment property than on my own home. As the former is tax deductible, they are made with pre-tax dollars and as the latter are non-deductible, they come from after tax dollars. It is also why I urge investors to keep their investment loans on an interest only basis until their non-deductible loans are paid off.

Pension Planning

December 8, 2017

Pension Planning “Wisdom outweighs any wealth.” – Sophocles Most retired couples make out wills leaving all their assets to each other. This can cause problems when one dies because of the aged pension eligibility rules: the surviving partner often finds themselves over the assets test cut-off point. Thus they lose their pension at the same time as they have lost their loved one. At the regular review of your affairs make sure you understand the implications of death and change your will if appropriate.

Paying loans back

December 1, 2017

Paying loans back “You have to make it happen.” – Joe Greene Once the term of a loan becomes fairly short, you don’t save much interest by speeding up the payments. This is why I recommend you pay your housing loan back at no more than $12 per thousand a month. For example if you have a $200 000 loan, that is $2400 a month. Provided interest rates stay between 6% and 9%, repayments at this level will ensure that the loan term is between nine and 10 years.

Partnerships

November 24, 2017

Partnerships “Don’t get mad – get everything.” – Ivana Ttrump If you are going into business, be extremely wary of partnerships because each partner is 100% liable for all the debts of the partnership. And you can bet that the creditors will always chase the partner with the most money. A partnership is also a bad structure for tax.

Opportunity risk

November 17, 2017

Opportunity risk “Long term investments are usually short term investments that have gone wrong.” – Anon I call this one the creeping cancer because it sneaks up on you. It means the risk of placing your money in an area where it does nothing when a better choice would have seen the money making good returns. A typical example is the person who buys a rental property and experiences no capital gain for the next five years.

No tree grows forever

November 10, 2017

No tree grows forever “The odds are with us if we keep on trying.” – Keith DeGreen People love to chase last year’s winner but never forget that an above average performance in one year is usually followed by a below average performance the next year. This is why smart investors buy in gloom and sell in boom.

No magic tricks (paying loans off)

November 3, 2017

No magic tricks (paying loans off) “How many a man has thrown up his hands at a time when a little more effort, a little more patience would have achieved success?” – Elbert Hubbard. Don’t be conned by those sensational advertisements showing you how to cut years off your home loan without increasing your payments. The ONLY way to pay a loan back faster is to reduce the interest rate or to increase your payments.

Never invest for tax reasons

October 27, 2017

Never invest for tax reasons “The only difference between the tax man and a taxidermist is that the taxidermist leaves the skin.” – Mark Twain Too many people lose huge sums of money because they go into investments solely for the tax benefits. In doing so, they often replace a debt to the tax office by one to the bank. The golden rule is that you always invest on the strength of the investment alone – any tax benefits that go with it should be regarded as the icing on the cake.

Net worth

October 20, 2017

Net worth “Money can’t buy friends but you get a better class of enemies.” – Spike Milligan This is the difference between your financial assets and your debts. Smart money managers will be trying to increase their net worth in two ways: by acquiring more assets and by reducing debts. Don’t put items like motorcars and furniture in your net worth statement as they have no lasting value.

Negative gearing

October 13, 2017

Negative gearing “How much gearing depends on three strengths; the strength of your assets, the strength of your income and the strength of your stomach muscles.” – Noel Whittaker. This means borrowing to a level where the net income from the asset purchased is less than the ongoing costs of ownership. It’s a great way to maximise profits but if you pick a bad investment, you’ll also suffer much higher losses. Use it with care.

Money doesn’t buy happiness

October 6, 2017

Money doesn’t buy happiness “Joy comes from using your potential.” – Will Schultz Certainly money doesn’t buy happiness, but in the areas where money works, nothing can take its place. These include education and healthcare. So take the right attitude to your money and don’t be frightened to indulge yourself. There are no pockets on a shroud.

Mix with winners

September 29, 2017

Mix with winners “Things turn out best for the people who make the best of the way things turn out.” – John Wooden. One of the best ways to keep your financial affairs on track is to mix with people who have similar goals to you. You’ll be able to learn about investment from one another and offer mutual support in the face of any temptation to waste large sums of money on consumer items with no long-term future value.

Market risk

September 22, 2017

Market risk “The market is totally impartial.” – Anon This means the risk that the value of your assets will fall. If you invest in growth assets like shares, you will find that the values bounce around every day. There is nothing you can do about it because that is the nature of shares so accept it as normal. If you don’t invest in growth assets like shares, you leave yourself open to a much bigger risk – living longer than your money.

Managed funds

September 15, 2017

Managed funds “There is no victory of bargain basement prices.” – Dwight D. Eisenhower When you invest in a managed fund you are pooling your money with thousands of other investors and allowing an experienced full time fund manager to make the decisions. In most cases they can do a better job than you can.

Little things add up

September 8, 2017

Little things add up “The fall of dripping water wears away the stone.” – Lucretius One of the tragedies of life is the amount of money and time we fritter away. A couple of cups of coffee a day and lunch at the local café can easily add up to $4000 a year. If you make investment a priority, it will help put a check on the day to day consumer spending that wrecks your budget.

Life expectancy is rising

September 1, 2017

Life expectancy is rising “Capital can do nothing without brains to direct it.” – J. Ogden Armour Do you know that one third of all babies born now are likely to live to over 100? Yes, today’s young people face the very real challenge of working for 40 years and then being retired for 40 years. This is why it’s important to get experience with growth assets, and to start investing, at an early age.

Leverage

August 25, 2017

Leverage “You have to erect a fence and say “OK, scale this.”” – Linda Ronstadt Leverage means borrowing, which involves using other people’s money to control a big chunk of assets. It’s a superb strategy for becoming wealthy as long as you don’t get over committed. You can seldom go wrong borrowing money to acquire quality assets as long as you are the one deciding when to sell and not your bank.

Legislative risk

August 18, 2017

Legislative risk “Take calculated risks. That is quite different from being rash.” – George Patton This is a fancy term that means all investment decisions carry the risk that the Government may change the laws. Remember May 1985 when Paul Keating limited negative gearing. One of the main strategies that is open to legislative risk is superannuation which is why I always advise young people not to place money in superannuation where they may lose access to it for 30 years or more.

Know where you are

August 11, 2017

Know where you are “Make the most of yourself for that is all there is of you.” – Ralph Waldo Emerson If you were lost, the best map in the world would be useless if you didn’t know where you were. It works the same when you are creating wealth. Start off by drawing up a net worth statement, which is simply a listing of your financial assets and your debts. This will be the blueprint for your future strategies.

Joint tenants

August 4, 2017

Joint tenants “There is no wealth but life.” – John Ruskin If you hold assets like property and shares as “joint tenants” with somebody else the asset will go to that person when you die even if your will instructs otherwise. That’s fine provided you are happy with this but if not, talk to your solicitor about changing over to tenants in common. Then your share of the asset will be distributed in terms of your will.

Investing with friends

July 28, 2017

Investing with friends “Failure is success if we learn from it.” – Malcolm S. Forbes There’s a famous saying: “If you are going to invest, your best partner is always the bank. All they ever want is the interest”. Investing with friends might be fun at the start but things can turn ugly when circumstances change and one partner wants out quickly.

Insurance Bonds

July 21, 2017

Insurance Bonds “Wealth is the product of man’s capacity to think.” – Ayn Rand These are a tax paid investment with all profits accruing as bonuses, so there is nothing to include on your tax return each year. After 10 years the bonds may be cashed in tax free or left to continue growing. This makes them ideal for saving for youngsters’ education, or for creating a sinking fund to eventually pay off an investment debt.

Insurance

July 14, 2017

Insurance “How do you insure yourself against insurance premiums.” – Peter Corris Nobody likes paying insurance but it’s the only way to protect yourself from financial calamities such as fire, theft, accident and sickness. There are now cheap insurance options available and in many cases you can save money by incorporating your insurance with your superannuation. Your annual financial check-up should always include a review of your insurance.

Income split to save tax

July 7, 2017

Income split to save tax “We must do the best we can with what we have.” – E.R. Sill Our progressive tax system means that the rate of tax you pay rises as your income does. By diverting income to people, or entities such as companies or trusts, that have a lower income than you do, you can ensure this income is taxed at a lower rate. Always take expert advice before you do it, as the penalties for getting it wrong are high.

Improve your income by improving your skills

June 30, 2017

Improve your income by improving your skills “Wealth, like happiness, is never attained when sought after directly. It comes as a by-product of providing a useful service.” – Henry Ford The way to fast-track the road to wealth is to increase your income and the way to do this is to increase your skills. Then you’ll be more valuable in the market place and will have a much better chance of being the one chosen when the position you want becomes vacant.

Holiday homes

June 23, 2017

Holiday homes “If you want to make money, go where the money is.” – Joseph P. Kennedy Having a holiday home may be a wonderful dream but think it through before you act. If you don’t rent it out, you won’t be able to claim the interest and other costs as a tax deduction but if you do rent it out, it probably won’t be available when you need it. In most cases, you are better to invest your money elsewhere and rent accommodation where and when you need it.

Guarantees always cost

June 16, 2017

Guarantees always cost “You are the only one who has to live your life.” – David Viscott Investors are always looking for the magic bullet and are often attracted to products offering some kind of a guarantee. Make sure your adviser explains the fine print to you because there is always a price to be paid – usually in the form of lower long-term returns or loss of immediate access to your money.

Guarantors

June 9, 2017

Guarantors “It’s too late to seek advice after the documents are signed.” – Noel Whittaker It is bad enough to get into financial strife through your own efforts, but it’s especially devastating when it happens through no fault of your own. These days it’s become all too common for young people to end up in court because they went guarantor for a friend’s personal loan or mobile phone bill. It can be the same in business: every individual in a business partnership is liable for all the partnership debts.

Guaranteed secret of wealth

June 2, 2017

Guaranteed secret of wealth “The last dime that is earned is the first one that is saved.” – John Bates Clark It’s a fact of life that most people get paid, pay their commitments and spend the rest. The guaranteed secret of wealth is to make sure that the first commitment paid is the money you spend each month on investment. Provided you do this and don’t try to muddle through on credit cards, your fortune is assured.

Good debt and bad debt

May 26, 2017

Good debt and bad debt “A small loan makes a debt; a great one an enemy.” – Publius Syrus Debt is like fire – a good servant but a bad master. Borrowing at low rates of interest for assets like quality property and shares will speed you on the way to wealth but borrowing for consumer items like clothes and furniture may well start you on the road to financial ruin.

Going up in smoke

May 19, 2017

Going up in smoke “Habit is either the best of servants or the worst of masters.” – Nathaniel Emmons Do you realise that the simplest way to retire wealthy is to invest the value of a packet of cigarettes a day from age 18? Yes, just doing this will give you enough money at age 65 to buy an indexed life pension of $30 000 a year in today’s dollars. I often wonder if people smoke because they are poor or they are poor because they smoke.

Goals

May 12, 2017

Goals “A man without a purpose is like a ship without a rudder.” – Thomas Carlyle Goals are an essential part of the wealth building process as they force you to concentrate on the task in hand and help you to avoid being distracted. For example, if you have a firm goal to pay your house off in 10 years, you are unlikely to be sidetracked by diversions such as buying a new car or a new outfit.

Go for profits not wages

May 5, 2017

Go for profits not wages “Don’t aim for success if you want it; just do what you love and believe in, and it will come naturally.” – David Frost If you spend your life working for a boss, your income will forever be controlled by what the boss is willing to pay. It’s much better to work towards owning your own business – then you can decide not just how much you earn but also what hours you work.

Get the right business structure

April 28, 2017

Get the right business structure “Order and simplification are the first steps towards the mastery of a subject.” – Thomas Mann These days, we live in a litigious society and anybody who is in business for themselves is always at risk of being sued. The best way to protect your assets is to operate your business through a family company or a family trust. This will not only give you an extra layer of protection against bankruptcy but it will also enable you to save tax through income splitting.

Fundamentals never change

April 21, 2017

Fundamentals never change “The way to make money is to buy when blood is running in the streets.” – John D. Rockefeller Despite the sensational headlines you’ll see in the media when booms and busts occur, the fundamental rules of investing never change. As surely as night follows day, a bust will follow a boom and a boom will follow a bust. This is why smart investors try to buy quality assets when nobody else wants them.

Franked dividends

April 14, 2017

Franked dividends “All through nature you find the same law. First the need, then the means.” – Robert Collier All income is not treated equally for tax purposes. For example, there are no tax concessions for bank interest but income earned through franked dividends is tax free for the majority of taxpayers. This is because you receive a credit from the tax paid by the company. There is only one catch – the only way you can receive franked dividends is to own shares or managed funds that invest in Australian shares.

Financial winners vs financial losers

April 7, 2017

Financial winners vs financial losers “Some people are so fond of ill-luck that they run half-way to meet it.” – Douglas Jerrold There is one major difference between financial winners and financial losers. Financial winners borrow at low rates of interest for quality assets such as property and shares that rise in value, whereas financial losers borrow at high rates of interest for consumer items such as furniture and cars that drop in value. Hence the expression, the rich get richer and the poor get poorer.

Financial Advisers

March 31, 2017

Financial Advisers “Chance favours a prepared mind.”- Louis Pasteur A financial adviser will almost certainly play a major role in your wealth building strategy as most people find the financial world too complex to tackle on their own. Your adviser should be able to help you determine how much of your money should be in each asset class, whether you are better to borrow for investment or use superannuation, and he or she can also assist you with your estate planning. Make sure you choose a member of the Financial Planning Association and have your affairs reviewed at least annually to ensure the strategies are appropriate for your current situation.

Family Trusts

March 24, 2017

Family Trusts “All is fair in love, war and tax evasion.” – Tom Sharpe Family trusts can be useful vehicles for saving tax provided you’re in a position to distribute income to the trust. A trust does not pay tax itself but merely acts as a conduit whereby income can be distributed to various beneficiaries of the trust who then pay tax on the income at their individual tax rates. They are particularly effective if the beneficiaries are over 18 but are on low incomes. They are of minimal value for younger beneficiaries as trust distributions to minors are taxed at punitive rates.

Family home

March 17, 2017

Family home “Home is where you start from.” – Scottish Proverb “A man’s home is his castle” goes the proverb and how true it is. What other asset gives you a great lifestyle, tax free capital gain and also free rent after you pay it off? And people with DIY talents can make tax free money during their leisure hours as they can do up their family home and then sell it tax free. Of course, your own home doesn’t produce income, which is why you need to build up other assets as well.

Enduring power of attorney

March 10, 2017

Enduring power of attorney “So long as some are strong and some are weak, the weak will be driven to the wall.” – Nietzsche One morning I went to my favourite coffee shop and the owner told me that a customer had left a $100 gift voucher for me. I was stunned as this has never happened before and when I rang the customer to thank him, he said “the advice you gave me in a recent column was worth over a million dollars to me – this is my way of showing my appreciation”. It turned out the column was about the importance of having an enduring power of attorney not just an ordinary power of attorney. Have you ever considered who would handle your affairs and attend to such jobs as home maintenance and rearranging investments if you were disabled or absent overseas? A power of attorney document enables you to give somebody else the authority to handle your affairs. The problem with an ordinary power of attorney is that it lapses if you become mentally incapacitated (which is exactly the time when it’s most needed). Therefore, make sure you use an ENDURING power of attorney which continues until death or you revoke it. You can arrange one through a solicitor or by using a simple form which is available at most stationery shops.

Either you spend it or your kids do

March 3, 2017

Either you spend it or your kids do “Men fight for liberty and win it with hard knocks. Their children, brought up easy, let it slip away again, poor fools.” – D.H Lawrence Far too many people deprive themselves of life’s goodies because they have a fixation on leaving a large sum of money to their children. Just remember it’s a simple choice: either the kids spend the money or you do, and personally I don’t see the point of roughing it in two star accommodation so my kids can live it up at five star level. Anyway, with increasing life expectancies, most of today’s children are going to be at least 70 when their parents die. By this stage, they should be self-sufficient.

Don’t pay your home off too quickly

February 24, 2017

Don’t pay your home off too quickly “Poverty keeps together more homes than it breaks up.” – Saki In the “good old days” the conventional wisdom was that you paid your house off as quickly as possible and then considered investing elsewhere. Now, I recommend you aim at paying your home off over 10 years. If you use precious resources to pay off any faster, the interest you save will be minimal and you’ll also be wasting precious time. Suppose You have a loan of $200 000 at 7% interest. To pay it back in 10 years will require $2322 a month and the total interest you will pay will be $79 000. To shorten the term to five years you’ll need to raise your payments to $3960 a month (that’s an extra $377 a week) yet you’ll only save $41 000 of interest. You are far better off to talk to an adviser about borrowing for an investment portfolio and using the extra $377 a week to pay the interest.

Don’t go to cash at age 65

February 17, 2017

Don’t go to cash at age 65 “Prudent men in their dealings incur risk.” – Bacon One of the great fallacies of investing is the idea that people need to convert all their share-based investments to cash on the day they retire in case there is a stockmarket crash. Certainly, it’s prudent to have at least three years’ planned expenditure in the cash type area but today’s retirees may well live for 30 years or more after they stop work. For most of them, the only asset class that will produce the returns they will need is shares. This is why I urge people to start investing in shares at an early age. Then they won’t be panicked by the inevitable down-turns when they retire.

Don’t confuse income with assets

February 10, 2017

Don’t confuse income with assets “There is no one quite as angry as someone who has just lost a lot of money.” – David Williamson Have you ever wondered why many high income earning professionals get themselves into financial strife? It’s because they confuse earning a high income with building an investment portfolio. A salary of $200 000 a year might sound a lot but it’s only $136 000 a year after tax of nearly $64 000 has been deducted. It’s very easy for them to start going backwards if they spend $50 000 a year on overseas holidays and $25 000 a year on school fees. Wise investors live within their means and allocate part of their income for interest on loans used to buy investments like property and shares. Then, when they retire, they’ve got money working for them.

Don’t be misled by home equity

February 3, 2017

Don’t be misled by home equity “Money…enables us to get what we want instead of what other people think we want.” – George Bernard Shaw One way to put the equity in your home to work without selling it is to talk to your lender about a “home equity loan”. This is a loan where you take out a mortgage against your existing property to buy investment assets such as property and shares. It’s a great strategy if you’ve got a secure income and can handle the extra repayments but remember that all the equity in the world is no good to you unless you’ve got the income to match it. An extreme case would be a pensioner couple living on the beach who have seen their home skyrocket in value. They may have millions of dollars of equity but would not have the income to make the repayments on a loan.

Dollar cost averaging

January 27, 2017

Dollar cost averaging “A mind stretched to a new idea never goes back to its original dimensions.” – Oliver Wendell Holmes Would you like to know a foolproof way to make money in all markets? It’s called dollar cost averaging and involves investing a fixed sum every month into the same investment without worrying about which way the market is travelling. History has shown that the market has never failed to rise above its previous high point after a low and dollar cost averaging enables you to buy shares cheap when the market is down. I recommend you only use it for quality share trusts as your money is then spread over a wide range of companies. It would be a disaster to keep pouring money into companies like HIH or OneTel that eventually went broke.

Diversification

January 20, 2017

Diversification “The ultimate risk is not taking a risk.” – Sir James Goldsmith When you go out for a meal, you will normally choose between beef, poultry and fish. It’s the same when you are investing; here the choices are between cash, property and shares. Like a balanced diet, you need to choose some of each because they all have different roles to play in your financial plan. It’s the job of the financial adviser to help each investor decide how much they should have in each category. This is called asset allocation.

Deductible vs non deductible debt

January 13, 2017

Deductible vs non deductible debt “Debt, an ingenious substitute for the chain and whip of the slave driver.” – Ambrose Bierce All loans are not equal. If the purpose of the loan is to produce taxable income, you can claim the interest as a tax deduction, which means the Government may pay nearly half of it. These loans are called deductible loans and are usually used to buy investment properties or shares or a business. However, if the loan is for a private purpose such as buying your own home or upgrading the family car, the interest is not tax deductible. This is why smart money managers keep their investment loans on an interest only basis while they pour all their spare cash into paying off their non-deductible loans. After all, the effective interest rate on these is nearly double what you pay on deductible loans.

Currency – a double whammy

January 6, 2017

Currency – a double whammy “Risk varies inversely with knowledge.” – Irving Fisher When you invest in offshore assets such as international share trusts, you are exposing yourself to an extra risk. If our currency rises in relation to the overseas currency, your investment will drop in value in Australian dollar terms. Of course the opposite is true too – if our dollar weakens, you gain. This is not a reason to avoid investing in overseas assets but you should try to get a feel of where our dollar is heading before you do it. Alternatively, you could talk to your adviser about an international trust that uses hedging strategies that will protect you against adverse currency movements.

Credit risk

December 30, 2016

Credit risk “Debt is an inexhaustible fountain of dishonesty.” – Henry Ward Beecher This is the risk that the organization with whom you invest your hard earned savings goes belly up and is unable to repay you. The famous cases are Cambridge Credit, Estate Mortgage and Wattle – all these companies offered interest rates well above what was being offered elsewhere in the market. Never forget the saying: the higher the return, the higher the risk. If you do wish to invest in interest bearing accounts, don’t rely on extravagant advertisements in the newspapers but go through a financial adviser or stockbroker to gain the benefit of their research.

Credit cards – your worst enemy

December 23, 2016

Credit cards – your worst enemy “A credit card is an anaesthetic, which simply delays the pain.” – Helen Mason Credit cards are certainly convenient – just try to book a rental car or check into a hotel without one. But the problem with credit cards is that they encourage us to overspend. If you have to take a $100 note out of your wallet to pay for an item, you may feel real pain as you hand it over but you’re unlikely to feel too involved when your credit card is swiped through a machine for a $100 purchase. Of course, when the credit card statement arrives at the end of the month, you’d be amazed at how much you’ve spent.

Consolidation loans

December 16, 2016

Consolidation loans “He that goes a borrowing, goes a sorrowing.” – Thomas Fuller If you have a number of personal loans and credit card debts you may be tempted to consolidate them with your housing loan and so enjoy a lower rate of interest and even lower monthly payments. This will work fine if you maintain the same level of total repayments but under no circumstances should you let yourself be trapped into paying consumer loans for items such as cars over a 30 year period. Also if the personal loans came about because of poor money management, all consolidation will do is give you a temporary respite. Unless you change your ways, you could soon find yourself in trouble as the personal loans will start growing again and you will have the added burden of the larger consolidation loan.

Companies

December 9, 2016

Companies “The structure…will automatically provide the pattern for the action which follows.” – Donald Curtis A company can be a useful vehicle for saving tax because the company tax rate is a flat 30% and accumulated profits can be allowed to build up in the company indefinitely. Holding assets in a company can be a method of protecting them from creditors but you do lose the benefit of the 50% CGT concession that is available to individuals. Bear in mind that if you hold your home in a company name, you may pay higher land tax and it is not free of CGT if you sell it.

Children’s tax

December 2, 2016

Children’s tax “Do not despise the bottom rungs in the ascent to greatness.” – Publilius Syrus Most people are aware of the importance of putting money aside for their children’s education. Unfortunately it’s not as easy as it sounds. If you invest money in the child’s name or even as trustee for the child, you risk paying children’s tax of up to 66%. In most cases you are better to use insurance and friendly society bonds where the bonuses do not have to be shown in your tax return every year and where you can claim the proceeds tax free after 10 years.

Change is inevitable

November 25, 2016

Change is inevitable “The only place success comes before work is in the dictionary.” – Vince Lombardi These days the only certainty is change – changing tax laws, changing investment products and changing markets. This is why you should review your entire financial position with your adviser at least once a year. This will enable it to be fine tuned regularly so you continue to make the best use of your hard earned financial resources.

Cash deposits

November 18, 2016

Cash deposits “Send a fool to market, and a fool he’ll return.” – Thomas Fuller Having cash in the bank should be part of every investor’s portfolio but understand that cash gives the worst long-term returns and also gives you no tax benefits. It does, however, represent certainty because the $100 you have in the bank this morning will still be worth $100 if the stockmarket falls during the day. Therefore, keep money for planned expenditure like holidays and buying a car (and of course for emergencies) in cash but try to keep the bulk of your assets in good property and good shares.

Cars – Don’t buy new

November 11, 2016

Cars – Don’t buy new “Fortune is like the market; there are many times, if you can stay a little, the price will fall.” – Francis Bacon If you want to blow money away at a fast rate of knots, buy a brand new motorcar. Most of them lose at least 20% of their value the moment you drive them out of the showroom. You’ll save a lot of money by looking for a carefully maintained one-year-old car which you can often get for just 2/3 of the new price.

Capital gains tax – the best tax

November 4, 2016

Capital gains tax – the best tax “However easy it may be to make money, it is the most difficult thing in the world to keep it.” – P.T Barnum Nobody likes paying taxes but if you do have to pay tax, Capital Gains Tax is the best one to pay. For starters, you don’t pay it until after you dispose of the asset which may be many years down the track and secondly, you receive a 50% discount. It sure beats paying full tax on bank interest.

Buying assets in the right name

October 28, 2016

Buying assets in the right name “The hardest thing to understand in the world is income tax.” – Albert Einstein It’s important to buy the right assets but it’s also important to buy them in the right name. For example, the family home is only free of capital gains tax if it’s bought in the name or names of the personal occupants. If you buy assets in the name of a company, you lose the 50% CGT (Capital Gains Tax) exemption that is available to individuals. This is why I urge people to seek advice before they sign any documents – it’s invariably complex and costly to change ownership once the deed is done.

Buy now – repay quickly

October 21, 2016

Buy now – repay quickly “Luck never gives – it only lends.” – Chinese Proverb Because of the way numbers work, you’ll pay very little interest if you pay a loan back quickly. For example, if you wanted to spend $15 000 on a swimming pool and borrow the whole lot at 10%, you’ll only pay $828 in interest if you pay it back within 12 months. If you waited 12 months, you’d certainly pay more for the pool as costs inevitably rise and you’d also miss out on a summer of swimming. This is a smart use of debt.

Build Buffers

October 14, 2016

Build Buffers “We didn’t actually overspend our budget. The allocation simply fell short of our expenditure.” – Keith Davies We now live in a world of increasing uncertainty and change. This is why smart money managers make building safety buffers a major priority. These include getting way ahead in your loan repayments, reinvesting all dividends and distributions to build equity faster and having adequate insurance.

Budgeting

October 7, 2016

Budgeting “If you think health care is expensive now, wait until you see what it costs when it’s free.” -P.J. O’Rourke Every serious business has a budget to enable them to stay on track and monitor their progress. Yet most employees – and Joe and Joan Average will earn well over a million dollars during their working lives – do not take the time to do a personal budget. All you need to do is spend an hour writing your expected income on one piece of paper and your expected expenses on another. This will become the foundation of your wealth creation process.

Binding nomination

September 30, 2016

Binding nomination “If we command our wealth, we shall be rich and free; if our wealth commands us, we are poor indeed.” – Edmund Burke. Superannuation is probably going to be one of your most valuable assets when you retire but did you know it is an asset that is easily challenged after you die by relations who are after a share of your estate? A binding nomination clause in your superannuation documentation makes it almost impossible to challenge and can protect your superannuation from long drawn out and costly legal action. Discuss it with your adviser as a priority.

Beware the telephone

September 23, 2016

Beware the telephone “The ladder of success is best climbed by stepping on the rungs of opportunity.” – Ayn Rand Beware OF anybody who telephones you offering you special deals on investments. They always sound too good to be true and of course, they are. You can rest assured that anybody who phones you out of the blue is doing it for their benefit and not yours.

Anything worthwhile takes time

September 16, 2016

Anything worthwhile takes time “I’ve got all the money I’ll ever need if I die by four o’clock this afternoon.” – Henry Youngman

Annuities

September 9, 2016

Annuities “The importance of money flows from it being a link between the present and the future.” – John Maynard Keynes

All Returns Aren’t Equal

September 2, 2016

All returns aren’t equal “Wealth flows from energy and ideas.” – William Feather

Add value

August 26, 2016

Add value. “One of the secrets of life is to make stepping stones out of stumbling blocks.” – Jack Penn  

$1 saved = $2 earned

August 19, 2016

$1 saved = $2 earned. “A penny saved is a penny earned.” – English Proverb