Myth #1: Financial Planning is only for ‘Rich’ people

I was recently speaking with long-time friends of mine who are about to have their first child – their Mortgage Broker suggested they consider some Personal Insurances now that it’s not all about them, with the pending birth of their daughter and a Mortgage hanging over their heads – great advice I might add, and he handed them the business card of a Financial Planner he deals with – ‘hang on,’ they said, ‘our close friend is a Financial Planner!’ When we first spoke, they confessed, ‘we thought you only dealt with people with tonnes of money.’ ‘We didn’t know you helped with Income Protection and Life Insurances.’

There are two very valuable lessons here:

1)- Let me be clear that Financial Planning is for everyone; whether you’re single and mortgage free, becoming new parents or buying your first home, planning your wedding (a topical subject at the moment for same sex couples with the Government considering sending Same-Sex Marriage to a referendum after the next election, the CEO of an ASX200 company, or starting to ponder what retirement might look like for you. You might just find it’s not as expensive as you thought, and Income Solutions 4 Step Process (go to: www.incomesolutions.com.au & scroll to Our Process) allows you to check out how we can help you before making any commitment to pay anything whatsoever.

2)- If you’re in an occupation that involves services that are beneficial to your family and friends, don’t assume they know everything you do. The example above drove home this point to me starkly – what if my friends had continued on uninsured and the unthinkable had happened? How would I feel about the situation and the difference I could have made? This is often an uncomfortable conversation, as you don’t want to come across as ‘pushy’ or ‘salesy.’ Thankfully, in today’s environment, a subtle hyperlink like this on a Blog or Social Media post can be a good way to break the ice.

Steven Nickelson, Financial Planner

It’s never too late!

At Income Solutions we constantly talk about the ‘best investment you will ever make’ which is investing in yourself. We refer to the need for education and a focus on career (or business) as well as the time, money and discipline it takes. We encourage each other and our clients to be the best we can be in these areas.

Of equal importance is physical and mental wellbeing. In fact without this, the ability to deliver optimum results in work or elsewhere is diminished. In simplistic terms it could be said that mental health, at least from a stress management perspective, can be improved with physical exercise.

I know I have many times fallen foul of the easy to find excuses to not keep up with regular exercise: busy at work, busy at home with a young family and a few spots of rain starting to fall when I am supposed to go for a run. Put this along-side bad diet habits which are easy to slide into, and before I know it I’m looking in the mirror and wondering, “Who is this person staring back at me?”

Self-motivation is key but having a loved one give us encouragement can help; as can some inspirational external influences. A couple of stories which grabbed my attention this week are those of Steve Way and Doreen Flanders. https://www.theage.com.au/commonwealth-games-glasgow-2014/commonwealth-games-news/from-100kg-kebabeating-smoker-to-elite-marathon-runner-20140728-zxhz2.html

In his early 30’s Steve loved nothing more than a kebab, a few pints, a smoke and a counter meal. After a wakeup call he took to running and has never looked back. At aged 40 Steve just represented England in the marathon at the Glasgow Commonwealth games. He lost 40kg’s and trimmed his waste by 28cm. He is inspirational because he was not just a little bit over weight or with a few bad habits, he was obese with a dangerous lifestyle. Many, myself included, would be in danger of giving up at this point but Steve used his position as the catalyst for improvement.

We can’t all become elite runners, but we can find the thing we are good at to keep ourselves active. Doreen Flanders competed at this year’s Games in bowls as a 79 year old!

I recently had some clients in their mid-60’s join a gym and whilst neither are setting the world on fire (which was never their intent) both are showing fast improvement and feeling better for their efforts. A new study suggests short 6 second bursts of intense effort by those aged 60 and above, building steadily to just one minute of sustained activity twice per week, will show demonstrable benefits. Every little helps. Read more here https://www.mirror.co.uk/news/just-two-minutes-high-intensity-exercise-3920891

The benefits of regular exercise are many and varied; you don’t necessarily need to become an international athlete to reap these rewards, just do justice to yourself and enjoy it. Although, if Steve Way and Doreen Flanders are anything to go by, why not – Rio 2016 here we come!

Gareth_Daniels

By Gareth Daniels

Financial Planner

Is rent money dead money?

The average mid to late twenty year old Australian with a dependable job and long-term partner is increasingly being pushed to live the Australian dream – owning their own home.  These pressures are contributed to by parents, grandparents and friends, not to mention the constant television, social media and newspaper articles pushing this inherited idea.

These days, it is common place to see countless photos circulating on Facebook and Instagram of happy couples placing SOLD stickers on the advertising board of their new home. This in turn creates an overwhelming feeling of being left behind. You sit there and wonder, “How could they afford that? Should I be saving to buy my own 2-bedroom shoe box in a suburb I haven’t heard of, just to keep up with the crowd?”

The answer is no, you don’t! The majority of this demographic has an ingrained fear from an older generation, who has the notion property prices will always grow. Many people believe the sooner you get into the market, the cheaper it will be; and by doing this you will save money in the long run, by not paying someone else’s mortgage. Although this can be very easy to believe, it is in fact not entirely true.

The common phrase you hear when the topic ‘rent vs buy’ is brought up, is that ‘rent money is dead money.’ This seems to be the home buyer’s trump card however, they seem to forget many of the additional expenses and cost associated with buying their dream home.

What most seem to exclude is stamp duty, the likely mortgage insurance cost (mortgage insurance is only payable if the loan amount is above 80% of total value), and the interest amount paid per annum on top of the mortgage repayments. Unless you had the foresight to start saving your pocket money when you were 10 years old, or have won the lottery, it’s highly unlikely you will be able to come up with the entire cost of the property, let alone an amount sufficiently substantial to make it viable.

Let me provide you with an example. You purchase a property in Melbourne and raise the 10% deposit for the purchase of the home. Assuming you don’t win the lottery, you might reasonably aim to pay off the loan over a 30-year period, with an interest rate of 5.5%. To make it fair, you will exclude ongoing costs like house maintenance, land tax and the very high possibility of moving your new, and potentially growing family to a bigger house during that 30 year period.

According to RP Data[1], the median housing price in Melbourne for 2013 was $610,000. The average Melbourne rental costs is $1,560 pm.

The auction has concluded and you have now begun your mission to achieve the great Australian dream. All you have to do now is deposit your hard earned savings into this dream home.  Your new loan has been reduced by $53,800 (10% deposit); therefore the total loan is now $484,200. You may think this is a manageable amount, only $2,824 pm over 30 years. You would be happy to sacrifice $529 pm to live the Australian Dream.

Don’t write the cheque just yet! As I mentioned earlier, there are the formidable, overlooked costs which are mainly stamp duty and mortgage insurance, plus rates and maintenance costs not incurred by renters. If you included these overlooked costs into the loan, it would increase by $35,217 (Stamp Duty $25,727 and Mortgage Insurance $9,490), making the total loan $519,417. This in turn makes your monthly repayment $3,030 (excluding rates and maintenance costs).

After the 30 year period your property will have cost $1,127,129 in interest payments alone, compared to the rental costs of $1,014,054 over the same period. The interest amount is not coming off your mortgage and is, in fact, ‘dead money’.

I will be the first to acknowledge that removing yourself from the monetary figures, there is a strong sense of emotional attachment, security, independence and pride in owning your own home. In saying this, when you purchase your dream home without the required financial comfort, you may not be living the Australian Dream. Instead, you may be stuck in what seems like a never ending mortgage you were pressured into and, essentially, you may be missing out on actually living the real Australian Dream.

Whether you rent or buy, it’s important you do what’s right for your own circumstances and your own financial situation. Basically, don’t panic. Rent if you need to; buy if you can; don’t over commit yourself; and don’t stress about it!
 

Nick O'Hare

By Nick O’Hare
Associate Financial Planner

 

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances.  Please seek personal advice prior to acting on this information.

Our financial advisers and Income Solutions, as Authorised Representatives of GWM Adviser Services Limited, can only give strategic advice in relation to property and are not authorised to provide specific advice on direct property. Any property advice should be directed to a real estate agent or property adviser.

 

Assumptions: CPI 3% , Average Interest rate over 30 years 7% (based on rpdata) .


[1] RP Data is the largest provider of property information, analytics and property-related risk management services in Australia and New Zealand. Mitch Koper from Rpdata and riskmark international, Home Vallue Index Results, Friday, November 1, 2013.

 

The pitfalls of property development for profit

When contemplating wealth creation strategies, my experience tells me a great number of people are attracted to the idea of taking a derelict or unloved property (think ‘renovators delight’) and turning it into a buyers dream with bidders climbing over each other to own your masterpiece.

With the Auctions for the TV Series The Block (Series 9) airing on Channel 9 recently, here are some key lessons the latest series has delivered to anyone considering developing property to make a quick buck:

The Human Cost:

‘Time is money,’ ‘there are not enough hours in the day.’ Ever heard these sayings? Well, juggling your day job and trying to renovate could seriously detract from your performance at work. Focusing on ‘your purple box’ (your Career/Business) is the best investment you can make; if outside influences detract you from performing your role, your boss might not look upon you favourably, or your business might suffer as your mind is busy elsewhere. People also under-estimate the stress this can put on a relationship.

Furthermore, News.com.au (https://www.news.com.au/entertainment/tv/the-block-darren-and-deanne-and-michael-and-carlene-earnt-just-1071-per-hour-for-their-efforts/story-fn8yvfst-1227088489917) took a look at the hourly rate earned by contestants Darren & Deanne and Michael & Carlene and concluded they were paid just $10.71 per hour for the work they put in to their apartments.

The Hidden Costs:

Without a doubt the most frustrating component of The Block, personally, is the lack of transparency around the true costs associated with the Development – the location was mocked up as an old Channel 9 office block, but was in fact the old headquarters of communication technology company Vixtel. The cost of acquiring the site, the interest costs on the loan required to purchase the property, costs for Products and Services provided to The Block by sponsors such as The Good Guys, Mitre 10, Beaumont Tiles and Reece Plumbing, plus Government Taxes and Selling Costs don’t seem to be reflected in the ‘Reserve Prices’ set for the Apartments.

For the average mum and dad looking to add value to a property and turn it over for a profit, these are all very real costs which must be taken into account and factored into your planning.

The Risks:

As seen in The Block finale Auctions, when you have only a few, or even just one (or maybe none!) interested parties to purchase your property, it becomes very difficult to drive the price up to push you into a profit position. As property is a very illiquid asset, if you get yourself into a position where you’re needing to sell quickly you might not be able to wait until you can get a price that better reflects your efforts. Holding costs such as loan interest continue to build up during this time. Furthermore, if you own your own home and are branching out into property development to try to create wealth, you have all your eggs firmly in the one basket; domestic real estate. If there is a market crash, this now impacts both your personal (home) and financial (Investment Property) asset values.

The Experts:

If you’re a professional Property Developer, there is no doubt you can make money in development (much the way a Doctor makes money through advising patients or a Financial Adviser through providing financial advice). If you’re not, chances are you will find the going much tougher. Tradespeople are renowned for upping their prices for mum and dad developers. I’ve also heard countless stories of appliances being stolen from properties just days from settlement. If you intend on taking on this sort of project, factor in costs of bringing in professionals; don’t flatter yourself with huge estimates of cost savings through DIY.

Finally, always seek advice from professionals such as your Financial Adviser when contemplating any investment. To book a consultation with an Income Solutions Adviser contact (03) 9654 0555 or (03) 5229 0577.

Steven_Nickelson

 

By Steven Nickelson

Certified Financial Planner

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances.  Please seek personal advice prior to acting on this information.

 

 

Buy your shares – then leave them alone!

During the five-year period 2009 through 2013, the Standard & Poor’s 500-Stock Index produced an average annual compound rate of total return of 17.91%. For the same time frame, NASDAQ returned an annualized 22.95%. Harvard University’s endowment fund earned 1.3% per year.

The people running Harvard’s money were not to be taken in, as mainstream equities hit the bottom of their greatest crash since 1929-32, by values not seen in our lifetimes, nor by prices that will never be seen again. They were entirely too sophisticated for such Neanderthal thinking.

So, it should come as no surprise that the CEO of Harvard’s endowment fund, who was paid $4.8 million in 2012, announced in June that she is stepping down. (She was the fourth person to hold this job in the last nine years)

We are responsible for helping people accumulate capital over decades, and for husbanding that capital as they withdraw from it for decades more. Thus, we are expected to offer the one thing without which the benighted individual investor must perish: a long-term and even lifetime perspective.

My perspective is that the collective of the economy’s productive enterprises will give their long-term shareholders an income stream which will continue to grow over time.

An example of this is Caterpillar Inc who’s CEO, Doug Oberhelman, recently submitted the following Press Release: ““We are proud of our long dividend history, in which Caterpillar has paid a cash dividend to our stockholders every year since the company was formed in 1925. We are equally proud that during this period, our equipment and services have helped build, grow and power the world.”

Now to capture this value, you just need to own the shares and leave them alone, which seems very easy but proves impossible for most people – even the most highly sophisticated people at Harvard.

David_Ramsay
 

By David Ramsay

 Principal Financial Planner

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

Source: Nick Murray Interactive Volume 14, Issue 8 dated August 2014

Low Deposit Loans

There has been recent discussion in the media around whether or not we are setting ourselves up for a sub-prime mortgage crisis like the one which occurred in the US.  It was this crisis which ultimately caused the Global Financial Crisis.

To what extent this doomsday scenario has validity is up for debate. Certainly the apparent continued ease of available credit relating to home purchases and the increase of more aggressive promotion of low deposit loans is a little worrying.

An article from the Australian Financial Review dated Monday 14 July titled “The $2500 house deposit – high risk mortgages return’ raises some key concerns (although manages to miss others).  It is certainly worth a read. The danger is the appeal of low deposit loans reaches out to those who are least able to afford what they are borrowing.  The voice for the counter argument is far quieter than the megaphone used to tell us all, “‘we must own our own houses!”

For me, the starting point is to think seriously about whether or not you really have to own the accommodation you live in. Although I don’t agree with it, I accept that in Australia the concept of long- term renting is frowned upon. Also, there are key differences to countries like Germany where long term rentals are the norm. With all that said, it is possible to rent comfortable, suitable accommodation over an extended period and make great strides towards your long term financial security.

If you feel there is no alternative to buying, then consider three key points:

1.       Be realistic about what you can afford. 

It doesn’t mean in relation to what you have saved as a lump sum deposit, and certainly not what the lenders are willing to loan you.

Work it out on the basis of what you can reasonably afford to pay each month or each fortnight, with a target of having the loan repaid much faster than the 30 year term, and without sacrificing all aspects of your lifestyle.

It might be reasonable to cut back on a few dinners out or have one less holiday each year, but if it gets right down to counting every last cent then you may have over committed.  The appeal of owning your own bricks and mortar will wear off pretty quickly if you end up feeling trapped indoors all the time because you can’t even enjoy some simple pleasures.

2.       Set your own time lines.

Just because it seems everybody else is doing it doesn’t mean you have to – at least, not as soon as they are.

Constantly being told, “Property always goes up” (which it doesn’t) or feeling like you are being left behind because friends are buying houses; or even having parents tell you, “The sooner you get on the ladder the better,”  is really unhelpful.

We don’t always know the financial ins and outs of our friends or the specifics of our nearest and dearest.  We can all think of some people in our lives who seem to live a fantastic lifestyle, but we question how they can afford it. Typically a lot of ‘bad’ debt has been accrued, which only serves to be a huge barrier to genuine, long-term wealth creation.

Buy when you are able, not when others think you should, and buy something you can see yourself in for the long term.  This is for a simple reason: stamp duty.  People constantly say, ‘”Rent money is dead money.” No, it’s not, particularly if you are able to make sensible use of the difference you pay in rent versus what you would contribute to a mortgage.  True dead money is paying three lots of stamp duty in ten years as you move from an apartment to a small house to a family home or to a new area in which you would rather live ‘now you can afford it’.

3.       Loan Product.

Simply, it is not all about the interest rate.  If you establish a loan purely based on interest rate you will be forever chopping and changing – rate shopping on a frequent basis.

It is far more valuable to get the right loan from the outset which dovetails to your long term investment strategy, and enables you to repay the mortgage as fast as is practicably possible.  You will end up with a far simpler and more cost effective banking structure over all.

Gareth_Daniels

By Gareth Daniels

Financial Planner

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances.  Please seek personal advice prior to acting on this information. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product. Past performance is not a reliable guide to future returns. 

Get your Share

A share is called a share because when you buy it you are buying a share of a particular business.  You become a part-owner of a business.

We are all part-owners of great businesses, if not directly in our own names or within a managed fund, then through our superannuation funds.

Being a part-owner of something is a wonderful thing, particularly in this context as it is so easy.  The business you own doesn’t require you to put any time or effort into it.  The company directors run the ‘shop’ as successfully as they can and you, the business owner, reap the rewards.

Any business owner will tell you cash flow is the key, and whilst turnover is vanity then profit is sanity.  Never lose sight of the fact you, as part-owner of the business, are entitled to share in its success and, most importantly, share in its profits.

When a business such as the Commonwealth Bank of Australia (CBA) posts a first quarter record profit putting it on track to make over $8 billion in one year, remember your part-ownership of the business entitles you to share in the profit – with no time, effort or energy required by you.

Your share in the ownership means you are part of something worth (in the CBA example) $125.7 billion which is nice, but it doesn’t mean much. The company’s worth may fluctuate quite a lot over time. Something you will also share in is the result of human endeavor and innovation, met by consumer need and demand – a healthy profit.

The activity of demanding goods and services and the ability to meet this need, is all that drives the profit.  Therefore, don’t get ‘hung-up’ by the value of your share, get excited about the entitlements it gives you to profits, which is ultimately a truly passive income.

For further information on Common Sense Investing, come to Income Solutions free Information Evening.

Gareth_Daniels

By Gareth Daniels

Financial Planner

Any advice in this publication is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.

 

Will I have enough to retire comfortably?

 

It seems each week an article appears in one newspaper or other attempting to pull the rug from underneath the greying old folk who are thinking about retirement. The sentiment is always gloom and doom, and whilst some long standing rules have recently changed, there are common sense strategies which can be implemented to achieve a well-funded retirement. Ironically, as rules are changing these strategies remain tried and true.

One common sentiment is that Australians will be forced to work longer. For those born after 1957 the retirement age has already increased from 65 to 67 years of age. I think for many people this prospect is not very palatable; however Australia cannot afford to support the baby boomers and future generations who could spend 35 years or more in retirement.[1]  A couple aged 60 years today, have a 50% chance one of them will live past 90 years of age [2] and those born today could well live as long as 125 years.[3]  I think drastic measures are required sooner rather than later.

This then leads to how much income you need in retirement. The Association of Superannuation Funds of Australia (ASFA) estimates a couple will need an annual income of $33,120 to achieve a modest standard of living in retirement. The same couple will need an annual income of $57,195 to achieve a comfortable standard of living in retirement. To meet the level of comfortable income, the couple will need a lump sum of $744,000 if retiring at age 65, with an average life expectancy of 85.[4].

With the age pension currently providing a couple with an annual income of $32,416.80 there appears to be a definite shortfall if you rely solely on the aged pension.[5]   It would seem the notion “I’ve paid taxes all my life and will now live on the age pension” is a thing of the past. Baby boomers may suggest raising taxes as the answer; however I think Gen X and Gen Y, who are already working to an older retirement age, would not agree. So what is the answer?

There are definitely things you can do to take control of your retirement. Here are our tips:

  • Firstly, seek professional advice. If you don’t already have a Financial Planner, find one!
  • Establish current and anticipated future income needs. Doing a family budget is the best place to begin. Don’t forget to add any lump sum expenses such as an overseas holiday or purchase of a new motorcar.
  • Seek professional assistance to understand your tolerance to investment risk; make sure you fully understand the options available; and ensure you understand the advantages or disadvantages of each investment asset class. This is the only way you can make an informed decision about how to invest your savings to suit your individual needs.
  • Develop a well-researched and easy to follow plan and make time to regularly review your plan. Chasing returns from the previous year or following “the next best thing” is no guarantee for success. In fact, this regularly result in negative outcomes. Set in place a plan which works for you and stick to it.
  • Do something now – the sooner you start, the better the outcome.

By Nick Cooper, Senior Financial Planner

The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. Whilst it is believed the information is accurate and reliable, this is not guaranteed in any way.

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances. Please seek personal advice prior to acting on this information.



[1] The Australian Government Productivity Commission research paper “An Ageing Australia: Preparing for the Future” November 2013

[2] Australian Bureau of Statistics 2011

[3] Association of British Insurers

[4] ASIC Moneysmart – https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/super-contributions/how-much-is-enough#how

[5] Rates effective from September 2013 and include the base rate, the age supplement and clean energy supplement.

 

Smart End of Financial Year Strategies 2013-2014

The end of financial year is fast approaching so now is a good time to make smart decisions for your financial future.  You should speak to your financial planner about what strategies are appropriate for you, but here are a few examples to get you thinking and asking the right questions…

 Superannuation

  1. Maximise your contributions – if you have surplus income and have not already maximised the concessional contributions cap you may want to salary sacrifice to make the most of your contributions. Make sure you check what the cap is for your particular age group. This will reduce your taxable income and increase your retirement savings.
  2. Government co-contribution – if you earn less than $48,516 from employment income you may qualify for a government contribution of up to $500 if you make a personal after tax super contribution of up to $1,000. This will help you to increase your retirement savings.
  3. Boost your partner’s super – if you have a spouse who earns less than $13,800pa you could make an after tax super contribution on their behalf. You receive a tax offset of up to $540 and increase your spouse’s retirement savings.

 Insurance

  1. Buy insurance in super tax effectively – you can purchase life and total and permanent disability insurance inside of super. By doing this you can benefit from tax concessions and make the premiums more affordable.
  2. Pre-pay income protection premiums – if you hold your income protection insurance outside of super and are an employee or self-employed, you can pre-pay 12 months premiums to bring forward your tax deduction to pay less income tax in this financial year.

 Investing

  1. Pre-pay your investment loan interest – if you have or are considering starting a geared investment portfolio you could pre-pay 12 months interest on your investment loan. This will bring forward your tax deduction so you pay less income tax in this financial year.
  2. Plan carefully – if you are looking at buying or selling assets you should consider the tax implications whether it be gains or losses and plan carefully to minimise the impact.
  3. Make better use of your tax refund – if you receive a tax refund you may want to firstly pay off non-deductible debts, look at debt recycling or boosting your superannuation. This will enable you to save on interest costs and invest your refund tax effectively.

End of financial year planning is important – it will not only help you in the short term, it will significantly benefit you in the long term.  Smart planning can help you to:

  • Boost your retirement savings
  • Maximise your government entitlements, and
  • Minimise your tax liabilities.

You should sit down with your financial planner and look at what the best strategies are to help you.

By Elise Ryan, Associate Financial Planner

To read the full MLC Flyer ‘Smart End Of Financial Year strategies 2013/14’ click here.

 

Source: https://www.mlc.com.au/resources/eofy/Document/pdf/eofy2014_smart_eofy_strategies_overview.pdf

The information in this document reflects our understanding of existing legislation, proposed legislation, rulings etc as at the date of issue.  In some cases the information has been provided to us by third parties.  Whilst it is believed the information is accurate and reliable, this is not guaranteed in any way.

Please note: The advice in this article is of a general nature only and has not been tailored to your personal circumstances.  Please seek personal advice prior to acting on this information

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