How Do You Score?

September 9th, 2014

A couple of months back the way credit records are looked at changed. It used to be that only negative information was stored by the credit file companies, that is info which showed when you were late with or defaulted on a payment. The positive stuff, where make your loan repayments on time month after month, was ignored up until March this year. It’s good news for those who have been diligent with their credit.

Another change that’s come about recently is to do with credit scores. Previously these numbers were only really known to banks and other lenders, but now you can find out your own score online. Punch your details into getcreditscore.com.au and a minute later you will be given a number between 0 and 1,200. The higher your number is the more creditworthy you are, or so the theory goes.

I scored below 1,000 which is a bit confusing given I’ve never been late with a payment and promptly paid off any debts I’ve had. So, as with anything you get over the net in 60 seconds for free, take it with a grain of salt.

Mining Your Retirement

September 2nd, 2014

With today’s repeal of the Mining Tax by the federal government comes bad news about your superannuation. How does that work? Well when Labor introduced the Mining Tax they attached a bunch of things to it to spend that tax revenue on, and one of those was attached to super increases.

Currently if you are an employee your boss has to whack 9.5% of what you earn into super on your behalf. That was to increase to 12% by 2019, or at least that was the plan before the 2013 election. Originally, Tony Abbott said there would be a two year delay before the next small increase in super (of just 0.25%). But today it has been announced that the delay in the increase will be pushed out until 2021. As I feared, the Abbott government would not stick to their two year delay and I still suspect that the eventual planned increase will not be honoured by them.

What this means for you is that there is a really strong chance that you will have to give more thought to putting more of your money into super. You’re better off doing that sooner rather than later and not relying on an increase that may never come. If you don’t whack more of your money into super, due to today’s repeal you will be worse off in retirement.

One Size Fits All?

July 27th, 2014

If you’ve never looked at your super before there is a pretty good chance that the underlying investments are in what’s known as a balanced fund. This would see about 70% of your super invested in growth assets (property and shares) and the rest invested in defensive assets (like cash and bonds). A balanced fund is the default fund where your employer will whack your money if you don’t tell them what sort of risk you are willing to take with your super, and if you’re like around 80% of Aussies, your super will be sitting in a balanced fund. Is it the best option for someone in generations X and Y? I don’t reckon it is and neither do some super providers.

There are a few different super fund providers around who have a different approach to how your money is invested. They will offer a product where the risk that your super is exposed to (and the return you can expect) changes depending on your age. It means that younger people are exposed to higher returns (higher risks) by having a larger percentage of their super in growth assets. As you age and hit significant birthdays your exposure to growth assets lowers slightly such that by the time you are hitting your 60’s and 70’s your  super is protected by having up to 80% or more in defensive areas.

It makes good sense to ensure in the last few years leading up to retirement that you have a high total of cash and fixed interest in your super and only a small amount of shares. Plenty of people who were thinking of retiring just after the GFC hit realised too late that they were too exposed to shares that plumetted in value and left them without enough time in the workforce to recover their losses. In practice that meant eating more catfood in their twilight years.

But this doesn’t mean that as soon as you retire you should have no money in property or the sharemarket, as the trend towards longer life expectancies means a hell of a lot of us will live for 20, 30 or even 40 years after finishing work. It does mean that you should have enough in cash to see you able to ride out a downturn in the markets, so that would mean having at least three years of living expenses in defensive assets. The rest can be invested to provide the growth that you’ll need to see you through until it’s time to go into a wooden box.

I can sense that you’re thinking “This is too complicated, and I don’t need to worry about this stuff for decades.” Let me simplify it for you.

Give very serious consideration to investing your super in growth assets right up until you are within 7-10 years of retirement, then drop your risk back every year until it’s very low by the time you retire. Shovel away at least three years of living expenses into low risk assets while turning up your exposure to growth assets again on the remainder.

Obviously individual circumstances can play havoc with this type of approach, but to me it makes a lot more sense that the one size fits all approach of a balanced fund for life, or a product that will see you reducing your exposure to growth assets 20 years too soon.

Is The RBA Wrong?

July 15th, 2014

There’s a story doing the rounds today that the Reserve Bank of Australia (RBA) says that it’s an even bet between renting and buying the property you live in. They’ve crunched the numbers to show that, depending on the general rate in the rise of house prices, it would take anything between nine and 30 years to break even on your mortgage compared to your neighbour who’s renting.

I don’t doubt the ability of the RBA to use a calculator, but the way this story has been reported may make younger renters in particular stop saving for a home deposit and think that renting is the better alternative. The truth is that you can be better off financially by renting, but there is a very large condition attached.

If you are renting and save the difference between what you pay in rent and what you would pay in mortgage repayments into growth assets, over the long term you will win. You have to ensure that you have a very disciplined savings plan into property and shares over many years, but if you do, history shows you will be better off than the family next door (except that at the end of your experiment you can’t live in a share portfolio).

Although I have heard of a case or two where people do employ this strategy, I have never come across it personally. I reckon it’s because it requires an enormous amount of discipline, very much like the discipline required to pay off a mortgage. The difference is that if you stop paying off your house, the bank will come knocking before they eventually take away your keys. If you stop contributing to your growth asset portfolio (which, ironically, might contain an investment property or two) nobody cares.

The New Financial Year Made Simple

June 30th, 2014

It’s that time of the year again when many of us turn our thoughts to what we can spend our tax returns on (or how much extra we will have owing to the tax office). As with any new financial year there are a bunch of changes to the system whose impact on you may be positive or negative.

First the bad news. Tax rates are going up for anyone earning over $180,000 to the tune of an extra 2% for every dollar earned above that amount. Yeah, my heart bleeds for the people who have to pay this. This one is called the deficit levy, not the deficit tax ‘cause the Prime Minister promised no new taxes, not no new levies.

The other levy to go up is the Medicare levy. It rises from 1.5% to 2% to pay for the National Disability Insurance Scheme. Personally I am happy to pay an extra 0.5% for the benefit of those in society who need it the most.

The good news is that for Aussies who have simple tax arrangements, doing your tax just got a whole lot easier. If your only income is from wages/salary, bank interest, dividends and/or government payments and your only deductions are things relating to that income (as well as donations and expenses related to doing your tax returns) then you no longer need to do your online tax return via e-tax. E-tax has been a great way for just about everyone to lodge their tax, but it is designed to cater for really complicated tax returns. People with simple returns could easily be confused by all the pages in it that were not necessary for them to complete.

Now there is My Tax – a shorter, simpler alternative that can be done on a smartphone or tablet and which is no more than 10 pages (as compared to e-tax’s 200 pages). For both e-tax and My Tax you do have to create an account at my.gov.au first, but it’s a once off event and you may already have an account if you’ve visited my.gov.au for Centrelink, child support or Medicare purposes. If you are not sure if your tax is simple enough to do via My Tax, check out this Australian Tax Office page.

The main reason that doing your own tax is so easy these days is due to the fact that the tax office knows more about your income than you do. Data matching has meant that most of the figures you go to punch into your computer are already pre-filled by the ATO. Big Brother is watching (not the crap TV show BB, the seriously scary George Orwell one) and he’s got a real good idea what you should be claiming on your tax for someone working in your job. If you want to fudge the figures, prepare yourself for a letter from the ATO that sends chills down your spine.

Be especially wary if you work from home, are a tradesperson or if you claim work related expenses. These are the areas that the tax office is paying special attention to this year and, as you’ve probably just worked out, that’s a huge number of people on their radar.

The Fine Print

June 12th, 2014

When is a $50 gift voucher not a $50 gift voucher? When you don’t read the fine print.

Gift vouchers; they’re pretty handy things (read: acceptable gift for someone who is too hard to buy for, or when you don’t know exactly what they could do with). When friends of ours had a baby recently we decided that a gift voucher to purchase baby related stuff would be a good idea.

We have found that the baby clothes at Target are fairly priced and of a decent quality so we went there and looked at a stand of cards, coming across the one pictured below. It’s a $50 prepaid Target Visa debit gift card and, as it’s a debit card, can be used in any store that accepts Visa. I was close to grabbing it and taking it to the registers for authentication when I read the fine print. Apart from the fact it expires in only eight months, the “card purchase fee” is nearly 12% of the value of the card. I left it on the stand, right below the sign that says: “Target. Get more. Pay less.”

Target Visa debit card

A couple of metres further away was another stand with more cards on it, including standard Target gift cards (valid only in Target stores but expiring a full two years after purchase). For $50 you get $50 worth.

Just goes to show that you should always read the fine print.

 

A Rule I’d Never Follow

April 28th, 2014

I was reading an article today about ridiculous rules for employees set by stupid bosses and came across one I thought was worth sharing:

 

“At my first job, you weren’t allowed to eat at your desk and you couldn’t have lunch before 2:30. Homemade lunches were banned for being “negative” (it was a financial services sales operation, the idea being you were doing so well selling pensions you could afford to buy your lunch everyday) so if you bought in homemade sandwiches, you would have to sneak off somewhere private to eat them, or colleagues would take them off you and you wouldn’t have any lunch.”

 

This speaks volumes about a few things.

Firstly, some bosses must eat big breakfasts to not need lunch before half past two.

Secondly, there are plenty of wankers around who think that “doing well” means things like you buy your lunch and show wealth in obvious ways, when in reality it only gives people the impression that you’ve got cash to splash around. There are so many stories about flashy people who don’t actually own the expensive car they drive and multi-million dollar house they live in, and who in fact have very little in the way of savings.

Thirdly, financial services are way too often about selling a product and showing a façade, and not about looking after customers’ best interests. Or their employees.

Whenever I see someone eating leftovers from last night’s roast, or sandwiches made around breakfast time I think to myself that person is on the right track.

In fact I have just learnt that a co-worker and mate of mine is about to leave the job he has been in for over 20 years to work for himself. When I asked about what sort of buffer he has in place he mentioned that he’d paid off his mortgage quite quickly by saving his arse off, helped, in part, by taking a leaf from my book and bringing in sandwiches for lunch.

I was proud as punch!

The Great Education Rip-off

April 11th, 2014

Claudia graduated university this week. After a long, hard slog involving countless late nights, juggling family life with lectures and tutorials, writing assignments, preparing for exams and giving up so much for those coveted letters after her name, she was able to finally receive her degree. It’s the same crap that everyone who’s been to uni will be able to relate to, but with a couple of differences.

 

Claudia studied while having children. Combine all the above with a screaming toddler while you’re pregnant with number two and it’s amazing she was able to graduate at all. The other thing that sets Claudia’s years of study apart from the average student is that she only recently became an Aussie. That means she was ineligible for FEE-HELP (HECS).

 

Although she was not a full fee paying student like many at Australian universities are, not being eligible for FEE-HELP meant that we had to pay each semester’s fees up front in full. Where Aussie students get a discount for up front payment, overseas citizens who are permanent residents on non-student visas don’t. So it was a costly experience for us as well.

 

The costs of getting a degree these days seem to be ever on the increase, and many young people start their careers with a sizable FEE-HELP debt. Especially those who decide on postgraduate qualifications. In fact, the costs of getting a university education are so high that many people are put off from thinking they can ever attend uni while others prepare for the costs years in advance. Some parents start saving well before the argument over what the baby’s name will be has started.

 

One place people decide to pour their cash into is Australian Scholarships Group. Before you sign up to many years of monthly payments with ASG, I strongly urge you to seek out the experiences of people who have gone before you. Even the quickest look at ASG’s Facebook page will show you how angry many of their clients are and how they wished they’d never put their money with ASG in the first place. Google “Australian Scholarships Group complaints” and it goes downhill from there.

 

It is kind of ironic that in an age when information delivered formally is so expensive, the entirety of human knowledge is accessible via the internet virtually for free. That’s how you can find out about groups like ASG. It’s also how you can find out about alternative was of investing for a university education, like a bank account, index funds or, probably the best savings vehicle for parents with young kids – an investment bond.

 

Don’t Eat The Marshmallow

April 8th, 2014

Back when I wrote the Kids And Money chapter, I searched high and low to find an appropriate book to have as a resource for readers to get further information from. I quickly discovered there is bugger all around written to show Aussie parents how to raise financially smart kids. Sure, there is unspecific crap written by ordinary authors like Robert Kiyosaki (the guy who wrote Rich Dad, Poor Dad) and plenty of material aimed at adults who want to know how to handle their own money. But as far as stuff written for mums and dads go it’s pretty thin on the ground.

This was all before I had heard of Victorian dad Robert Bihar. I’ve just read Bihar’s book Don’t Eat the Marshmallow which contains gems like “Don’t complain about your job in front of your kids” (Bihar argues that parents who pass on the message of not liking their job inadvertently also pass on a negative message about money to their kids if the children understand that money comes from work), “Do not teach that your kids that money is the only way to measure success – teach them that what they do with their money is more important”, and a tip that could be straight out of a Captain Financior video – “If your kids saw you pack a healthy lunch to take to work every day they might do the same. You could even make the sandwiches together and get them to choose what goes in them. In modelling your behaviour, your kids would spend less at the school canteen, but more importantly they will learn the value of healthy eating.”

If you thought Bihar and I were singing from the same song sheet, you’d be spot on.

Despite what my wife may sarcastically say to me, I don’t have all the answers (for the record, I don’t pretend to and I also accept that Claudia is right more often than I am, even when she’s not), but I do have a good idea where to find them. Don’t Eat The Marshmallow is another place to find more of those answers.

Bihar has self-published his book so you may struggle to find it in a library, but if you have $20 you can buy one via his website.

Ps As with every book, website or business I recommend, there is no kickback of any kind that Claudia or myself receive from recommending this book.

Inflation: Explained So Simply Even A Carny Would Understand.

February 22nd, 2014

This morning Claudia, the girls and I went to the show. If there is one thing that 95% of the Australian population have in common, it’s gotta be the experience of going to the show. No matter how large or small your local show is, whether it has the word ‘royal’ in the title or if it is held at the dustbowl that is your town’s showground, they all have a number of things in common. They are family events, catering for the needs of the very young with the petting zoos right up to the knitting displays for nana and her friends.

 

Every kid remembers going to the show when they were young only to be stopped from going on certain rides with minimum height allowances, or not being able to go in the dodgem cars without an adult sitting beside them. Then the next year comes around and you’ve grown enough to experience rides with g-forces that would challenge a NASA astronaut.

 

Looking back to my childhood, I can recall the rides in sideshow alley costing about 50 cents, and I remember being quite shocked when one year they were all $2 a go. This morning the cheapest rides were for children aged up to about six years and cost $5. These were for things like the jumping castle and teacups, while the big rides (you know, the ones that make you want to chunder just by looking at them) cost up to $15. It’s a great example of inflation. It’s complicated by the fact that the fanciest ride when I was a kid was the comparatively lame Cha Cha and the insurance premiums for the owners of these rides would be much more now that everybody knows about their right to sue. But I know these rides are not rising in price due to the operators suddenly increasing their spending on items like soap and toothbrushes. Because the show only comes around once a year, the effect of inflation on the rides is much more noticeable than it is for stuff you purchase more often.

 

So how do you counter the general increase in prices over time? You must ensure your income rises at least in line with the inflation rate, preferably by a little more than inflation so that by the time your income is taxed you can still keep up with those increased costs. For employees this means negotiating an annual increase in your pay. For those who are self-employed you will have to either increase the cost of your goods/services or find ways to be more efficient in producing them.

 

Inflation also needs to be considered when it comes to your savings and investments. If you keep savings stashed away under your mattress or in a jar in the cupboard, inflation will slowly erode the purchasing power of this money. The same thing will happen if you whack those savings in a bank account that pays little or no interest. With inflation currently at 2.7%, you want to make sure any return your money is earning is keeping ahead of this amount.

 

Growth assets like property and shares will produce returns well above inflation over the long term, but the ups and downs of the property and share markets can be so large as to make a vomit inducing roller coaster look as lame as the kids’ teacups ride.