Leverage by Marcus Larcombe

Last month’s article, I shifted the focus towards investments that have always worked. But when we talk about investments, we should also talk about leverage. Now leverage or debt can be both good and bad. It can create order or chaos. I believe debt gets a bad name, but I want to go beyond our common, practical sense of leverage. To expand on what leverage actually means.

The definition of leverage, in a financial context, is to borrow money, hoping that the profits made will be greater than the interest owed (Investopedia 2019). But what about leverage in a real-world sense? Leverage, as defined by the Cambridge Dictionary (2019), is the power to influence people and get the results you want. Now that we have the definitions down pat, let’s discuss both the good and the bad of financial and real-world leverage.

The good of financial leverage is you can borrow money that you don’t have, to purchase an asset. Now, the typical example of this is buying your family home. Let’s say the home is worth $500,000. You should be paying a 20% deposit to avoid paying lenders mortgage insurance, but that’s another article. So, you have $100,000 deposit and you borrow the remaining $400,000 to technically own the home. But really the bank owns the home and you are paying them back via a home loan. If you weren’t allowed to borrow money, many people would not be living in what they believe to be their own home and a lot more families would be renting. But a good way to look at buying your family home, is that it is a forced savings plan. You are required to pay the bank back every month an interest amount on the home loan and then reduce the borrowed amount through principal repayments or they will take the home away from you. So, you are forced to earn money through trading your time (working) to be able to have enough in your bank account to pay down and hopefully off, your home loan.

Now the bad of the financial leverage is borrowing more than you can afford. To put some context into the situation with some numbers, let’s say you have the above loan of $400,000 with an interest rate of 5%. This is a hypothetical as I know interest rates are lower than this at the minute but stay with me. So, the interest amount is $20,000 and you would like to reduce the loan amount (principal) by $10,000 each year. So, $30,000 are your total mortgage repayments over the year or $2,500 per month. Now if you were earning $50,000, you would be in financial stress. Financial stress is defined as “a condition that is the result of financial events that create anxiety, worry, or a sense of scarcity, and is accompanied by a physiological stress response” (Financial Health Institute 2019). In this example, you are paying 60% of your income towards your home loan. That’s stressful and living beyond your means.

The good of real-world leverage is utilising human capital and technology to increase your productivity more than what you could simply working by yourself. As they say, many hands make light work. The more brain and computing power that can be combined, the better. A classic example of this is a group university assignment for me. If I had to do a 4,000-word assignment by myself, it would take me weeks. But dividing that work up between 4 people and only needing to do 1,000 words each can be completed in days. Combine that with the internet and you have yourself a winning match and a good pass mark.

The bad of real-world leverage, however, is relying too much on other people and technology. Continuing with the above example, group assignments could be painful if some of the individuals didn’t pull their weight. It would double the work of someone else, causing additional stress and potential conflict. In regards to technology, we now have a computer in our pocket. We can surf the web anywhere we want to. If we don’t know something, Google certainly does. I’m sure we have all relied on a GPS app like Google maps to get us to a destination, only to find it has taken us the wrong way or a longer way.

In summary, borrow less than you can afford and spend less than you earn (Thornhill 2015, p. 9), and you will be financially wealthy. Live below your means. The less you can live on, the closer you are to making work a choice and having financial independence. If you receive a pay increase, instead of going shopping and buying a new watch or the latest iPhone, save it and invest. Delay your gratification as long as you can. The longer the better, but it takes discipline and a reason why you are saving and investing. Saving for a rainy day is not a good enough purpose to go without and sacrifice now, for enjoyment tomorrow.

References:

Cambridge University Press (2019). Leverage.  Cambridge Dictionary. Retrieved from <https://dictionary.cambridge.org/dictionary/english/leverage>, accessed 17 October, 2019. 

Dotdash (2019). Leverage.  Investopedia. Retrieved from <https://www.investopedia.com/terms/l/leverage.asp>, accessed 17 October 2019.

Financial Health Institute (2019). Financial Health & Stress. Retrieved from <http://www.financialhealthinstitute.com/financial-health-financial-stress-in-human-services/>, accessed 21 October 2019.

Thornhill, P 2015. Motivated Money. 4th edition, Sydney, Australia.

Is Rent Money Really Dead Money? By Steven Nickelson

Those who know me well, have probably, at some stage, had a conversation about the benefits of renting versus owning your own home.

Over the years, I relaxed my previously very strong views. Possibly due in part to the fact Lee and I bought and built a home together (so I certainly appreciate that a man’s home is his Castle), although more likely as a conscious bid not to offend budding homeowners.

A couple of recent events have brought the conversation back to the table. A few of my long-term clients shared this ABC News report from last week with me. I’d encourage you to read it, and even consider reading the more intricate research undertaken by EY.

It got me thinking about my own living situation, as Lee and I sold our home in November 2018 to rent again. Nearly 12 months’ on, let’s dissect the decision:

We sold our home, as per above, which cost us $22,673 per year to occupy (Interest Only on Home Loan plus Outgoings).

If you take the net proceeds ($788,238 after sale costs) and invest in a diversified basket of Dividend producing Australian Industrial companies, below you can see the costs to occupy, minus the Net Dividend Income produced by the portfolio. The cost is $9,681 per annum. When compared with $22,673 per annum to occupy our old home, we are approximately $13,000 per annum better off in cash flow. Further, the estimated value of the Rental Property we occupy is around $1.4M and the house is significantly larger than our old home, better accommodating our growing family (with an extra bedroom, bathroom, living area and a 5th bedroom
we use as kids’ toy room).

If our $13,000 annual cash flow surplus and more spacious and newer living space wasn’t satisfying enough, we also signed a further 12 month lease, without any increase in the weekly rent. You might also be intrigued to know, the more expensive the property, the more compelling the rent versus own comparison will likely be.

So in summary, you may find it is better financially, to rent rather than own, depending on your location.

In order for that to be the case, you absolutely must:
• save (at least) the difference between the rent you are paying and the costs of home ownership
• Invest it in a way that matches your investment time frame (eg. Too much Cash can be
dangerous in the long-term, but using Shares to build short-term wealth is risky too)
• Don’t leverage yourself too heavily, and;
• Here’s the plug, seek professional advice!

The decision to own or rent is not always a financial decision. A lot of the time it’s a lifestyle decision. However, you should keep an open mind and consider both options; you might be surprised at the outcome.

And one last thing, if you chose to rent, I implore you, please don’t think of rent as dead money.

‘Best Doctors’, Better Health!


In Australia, we are very fortunate to have access to well trained quality medical professionals. While there is always room for improvement (as there is across any industry), the few grumbles that you occasionally hear regarding the short comings of Medicare, the PBS or a particular facility or individual are a drop in the ocean when compared against other systems around the globe. Medically, we are quite literally the lucky country. 

Personally, my GP has provided me with fantastic medical support across many decades and life stages. One of the aspects I have always found reassuring is that my GP has never been afraid to outsource, whether that be further testing to investigate a medical issue or a referral to a specialist. If we lived in a perfect world, that might be where this blog would finish. However, despite access to quality medical care, there are occasions when it’s clear a diagnosis and suitable treatment plan is difficult to determine. In such situations, a second opinion can be helpful but knowing who to turn to for that second opinion can be daunting. 

Who will you see? How do you find that person? I have personal experience of this scenario but fortunately for me, I always knew who I was going to turn to for the second opinion. I have access to a service called Best Doctors. Best Doctors is a private company established by Harvard University medical specialists and now operates in 30 countries. Operating since 1989, it uses a global network of over 50,000 leading medical specialists to provide a second opinion. It can be used if you want to be certain a medical diagnosis is correct, if you don’t understand your diagnosis, if you need help deciding upon a suitable treatment plan or if you’re questioning why your symptoms aren’t improving. 

The service isn’t readily accessible in Australia. The two avenues to access the service in Australia are via MLC Insurance and BUPA. I am eligible via both companies but working in the Financial Planning industry I decided to access the service via my MLC Insurance, allowing me to experience what we recommend to our clients first-hand. I am only at the start of this journey but so far so good. I have found the service easy to access, personable and efficient. 

The journey ahead is unknown, for now, however I am very confident that my second opinion will be directed to a suitably qualified medical professional. My GP is also looking forward to the process, as it is a journey we are taking together. I am a believer in insurance – through my working life, I witness the randomness of medical conditions or accidents that can impact a person’s lifestyle and goals. Given the rising cost of living, it is hard to keep the faith and continue to pay for insurance premiums that, let’s face it, you hope you never need to use. 

While I still don’t like having to pay for insurance, it is refreshing to find a valuable “hidden” service available at no additional cost. If you are unsure what features and benefits are available to you via your personal insurance cover, I recommend that you seek the professional opinion of a qualified financial planner. You just never know the impact it might have on both your financial and physical wellbeing. 

Passive vs Active Investing

Hello Income Solutions society,

Last month’s article I shifted the focus towards investments and specifically investing for the long run. I now want to dig a little bit deeper into which investments have always worked. There have been two investments which fit this category of working over the long term. These are property and business (shares). Let’s begin. Before I get into the nitty gritty detail, I want to make a statement about active versus passive investing firstly.

Passive investing is defined as an investment strategy to maximise returns by minimising costs (Investopedia 2019). This is generally seen as the lazy method of investing and we as humans and human nature in general, are lazy. If there is an easier way to do something, we will find it and do it. By contrast, active investing is continuous buying and selling, monitoring performance and trying to garner a suitable return on investment (Investopedia 2019). Whilst trying to maximise returns, costs are also maximised so in this equation, the average return will be met.

Conversely, passive investing will have above average returns as costs are minimised. But more effort equals more return? Not necessarily. Let me explain. I see property, and specifically investing in property to rent out, as an active investment choice. It is a small business operation where you are the CEO. You must choose which property to purchase, what geographic location you buy in, how many rooms, how big of a backyard, what bank you go to, what loan structure you have, what real estate agency you go through and which tenants live in this property. Whoa, that’s a lot of choices and that takes a lot of time.

Then if anything breaks, who do you get in to fix it and at what cost? But in recent decades, with various tax concessions and low interest rates, property prices have boomed. It has the appropriate investment characteristics discussed last week of hopefully increasing capital value and hopefully increasing income, in the form of rent. What the future holds for property investment, I do not know, and no one does. With an increasing population, property prices could continue to increase. However, interest rates could go up, which would increase interest repayments back to the bank. Interest only loans could be phased out and you would have to pay principle and interest. A lot of speculation can occur.

Property investing involves a lot of decisions and more importantly a lot of time and cost. But it is undeniable that property could make you a profitable return. But I prefer being lazy. Investing in business, which is what the share market allows us to do as investors, by buying a small percentage of a business, can be both an active and passive investment approach. Property on the other hand, I believe, can never be a passive investment. It can only ever be an active investment. I somewhat dismissed active investing in the share market with last weeks article, as the amount of information available is so vast, at such a low cost, thanks to the internet, that the share market is generally efficient.

Efficient meaning that the price of a share in a business is relatively equal to what the business itself is intrinsically worth. Whereas pre 1990, information was limited, due to the internet being limited to non-existent on a mass scale, mispricing was rife in the share market and businesses could be purchased at a low cost, which would increase substantially over time. So, with all this information, passive investing is not buying individual stocks and holding for a long period of time as the future is evolving so fast with technology, artificial intelligence and space travel, that we don’t know what businesses will succeed or fail in the future. We can only guesstimate and speculate, which I don’t like doing. By purchasing individual stocks and only having a handful of these, you increase your firm specific risk, which is the risk that the business could go bankrupt and be non-existent.

I will talk about risk next month as I think it is a grossly misunderstood subject. So passive investing, in my mind, is purchasing low cost, globally diversified market index’s, that encapsulate the top 200-500 businesses in the world. This may be managed funds or exchange traded funds (ETF’s), which I will define the differences in later articles, but the point is that you buy and hold the great businesses of this world for the lowest cost possible and DO NOT SELL. Purchase more of these passive investments each month to take advantage of dollar cost averaging but DO NOT SELL.

Rebalance once a year, but DO NOT SELL in a market correction/decline/bear market. BUY MORE. Businesses are available at bargain/sale fire prices. Back up the truck, if you can and load up to fast track your wealth. I can write pages about this subject, as there is so much information about investing, but let’s not forget, the key determinant of wealth is BEHAVIOUR. Spend less than you earn. Borrow less than you can afford. Save and invest the difference in low cost, passive market index, globally diversified funds and you will succeed. If you do this over years and decades and not just weeks or months, you will create real life, long term wealth. Discipline equals freedom. Until next time, send in any questions or requests in. I look forward to hearing from you.

References: Dotdash (2019). Passive Investing. Investopedia. Retrieved from, accessed 22 September, 2019. Dotdash (2019). Active Investing. Investopedia. Retrieved from , accessed 22 September, 2019. JP Morgan (2019). Guide to the Markets. JP Morgan. Retrieved from , accessed 22 September, 2019.

What type of gift giver are you?

Are you aware of your gift giving tendencies? How do you compare to the average Australian? Do you keep track of your gift spending, plan for it, even budget for it? As part of Financial Planning week, the Financial Planning Association commissioned a Gift Giving survey to analyse Australia’s habits with some interesting results.

Australia is a generous nation, spending almost $20 billion on gifts per year. It is no wonder, gift giving is thought to have psychological benefits for the giver including feelings of trust and social connection and lower stress and blood pressure.

Do we realise how much we spend on gifts though? The survey has broken down the average Australian adult spends the following on gifts for loved ones each year:

– $437 for our spouse or partner,

– $361 per child,

– $201 per parent,

– $115 for our pet.

That is a hefty bill each year for a family of four, with four Grandparents and a dog = $2,515!

Another slightly concerning statistic is the proportion of Australians who account for their gift spending in their household budget. I know from my discussions with clients, their recollection of gift spending often comes in well below the averages above, which is represented by the survey indicating 73% of Australians don’t have a budget allocation for the gifts they buy.

So we know gift giving makes us feel good, but poor planning can mean we resort to debt to fund our giving, which brings along the possibility of regret.

A trend for those that do plan their gift giving is to buy multiple gifts of a nonspecific nature, in bulk. Bulk buying has the opportunity to save both time and money when gift giving – 44% of families with young kids employ this strategy.

Another strong trend is collaborating with friends, colleagues or family to buy a gift together, nearly 73% report participating in group gift-giving with younger generations finding this method particularly popular.

Finally, there is an emerging trend for Australians to think about the longevity and legacy of their gifts, also being mindful of the usefulness of a gift in the short term. 81% thinking about how long a gift will last.

Across those surveyed, four distinct gift-giver personalities emerged:

https://fpa.com.au/wp-content/uploads/2019/08/FPA_Gifts-That-Give-Research-Report-2019.pdf

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. 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. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. 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. 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. While it is believed the information is accurate and reliable, this is not guaranteed in any way.

Are you triggered?

Gareth Daniels is an Authorised Representative, GWM Adviser Services Limited, Australian Financial Services Licensee

Language in general and the ways in which specific words are used is fluid and open to change over time. Think of the way that ‘bad’ and ‘wicked’ have become accepted to mean ‘good’ and ‘cool’. One example that has recently started annoying me is the way that my children (and all their mates) say that two teams are ‘versing’ each other. I always thought that it was ‘versus’ as in Hawthorn versus Geelong. Or that the two teams were playing each other. My wife tells me that I am already sounding like an old man and to get over myself!

You may have come across the term ‘trigger warning’ or that a person has been ‘triggered’. This term actually dates to the early post-traumatic stress studies that came out of WWI. It references the idea that reminders of trauma can trigger a debilitating physical, emotional and mental response. Over the last ten to twenty years it has become more and more common and can be seen in use when discussing substantial issues such as discrimination and racism.

Well I am going to give it yet another use here; what reality is going to trigger you in to action in regard to your relationship with money?

Seemingly innocuous transactions through a ‘have it now pay for it later’ system have begun to create a material negative impact on people’s finances such as their ability to get a home loan.

How Afterpay could impact your chance of getting a home loan READ HERE

The article linked above sights cases of people being turned down for a mortgage as they did not meet the banks servicing criteria because they had a live Afterpay account. The eye opening thing for me is that the women featured in the piece didn’t even need to use the Aftepay service as she had enough money to pay for her items outright. A well-meaning (although misguided) friend encouraged her to do so. Beyond the stated idea about the ease of spreading the payments the truth is that the process tacitly encourages us to spend more.

The article linked below goes further, reporting that research shows that people using this modern lay-by equivalent will also buy more expensive items, possibly ones that they can’t truly afford.

Afterpay, Zip Pay and others cause financial strife for ‘young’ shoppers: ASIC READ HERE

None of us want to be told directly what to do, especially if we know deep down that the thing that seems hard or that we can tell ourselves is unfair is in reality true and correct.

I am constantly reminded that I get better behaviours and choices from my kids when they feel they have reached a decision on their own rather than me simply telling them that they must do something.

I am not belittling the important issues that, when discussed, warrant a true trigger warning. I know that I am making an exaggerated point; I am doing so deliberately.

However, we must listen to the facts that are being presented, and if they are coming to us from multiple sources and conveying corroborating information to us then we ought to listen.

Lending criteria is getting tighter. We must be able to prove accurately that we can service loans. Spending less than you earn is an adage. Paying for something on credit, or through a payment system that’s lets you have it right now even if you can’t afford it right now has never been a successful way to manage your spending habits and it will have a consequence as you move through life.

It’s about a reality check. It doesn’t matter if it’s Afterpay or Zip Pay or a misuse of a basic credit card (insert your preferred method of buy now pay later here). It is recognising that it will have an impact on you. It may stop you from getting a home loan or you may get the loan but not at a competitive rate. It is pushing you further into debt and inducing all the stress that this causes. You may miss out on something that is truly to your benefit such as an important life experience or the ability to take a course that will further your career… whatever piece of information it takes to trigger you, lets take some action as you will be the beneficiary!

 

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. 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. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. 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. 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. While it is believed the information is accurate and reliable, this is not guaranteed in any way.

Everything Stays the Same, But for How Long?

Gareth Daniels is an Authorised Representative, GWM Adviser Services Limited, Australian Financial Services Licensee

Interest rates are staying on hold again.

An interesting article on the 9 News finance webpage https://finance.nine.com.au/2018/12/04/12/05/ross-greenwood-analysis-why-interest-rates-have-been-on-hold-for-28-month provides some commentary and thoughts as to why this might be the case.

It suggests that rates will remain on hold, to a greater extent, until the end of 2020 whilst acknowledging that this is an oddity given certain factors including a well performing economy and low(ish) unemployment.

The reason that the article sights for the RBA not raising rates is falling house prices. It also notes that general rising living costs (fuel, power bills etc) means that households are under pressure to juggle all of their outgoings.

Overall the piece links intertwined economic factors to paint a picture that some uncertainty lies ahead.

Ever the optimist I can’t help but see a common-sense opportunity here…

We know that genuinely having an understanding of where your money goes is an incredibly powerful tool to help you feel confident about your current financial position and to enable you to make informed decisions about how to build for your future.

In the past I have pulled my punches a little in encouraging people to put time and effort into a writing a budget and most importantly sticking to it. I’ve possibly even let them off the hook when they don’t engage with the task but most people dread the exercise. Well no more.

Just do it.

You have to do it.

There is no excuse not to do it.

It isn’t even that hard.

Consider two basic approaches. You can use historic information pulled from your bank and credit card statements to understand where the money has been going or you can consider yourself as a business and set a budget for the year ahead.

The first approach can be a little time consuming, daunting and even painful (count the number of times Dan Murphy’s pops up on your statement and you will know what I mean)! It can allow you to take stock and adjust spending habits. It can even vindicate some of the discretionary spending that you have made as perhaps it wasn’t as bad as you feared! You are allowed to enjoy life, budgeting is not about restricting it’s about being honest with yourself and putting yourself in control.

If you take the second approach you need to do some planning. Take a moment, it may only be a couple of hours, to run through some of your non-negotiable costs such as power, phone and other utilities and ensure you are getting the best deal. Also set yourself a goal of where you would like

your debt to be come the end of the year; don’t simply settle for the minimum repayment that will satisfy the banks thirty year timeline. Again, include the fun stuff too so when you do have that dinner out or go to your friends birthday it can be enjoyed guilt free. Just be very clear on how much money is allocated to go where.

The final component regardless of the approach you take is monitoring and tracking. This can be manual through regular engagement with your online banking or via one of the numerous apps that exist to help you do this efficiently and accurately. As I said early though;

Just do it.

You have to do it.

There is no excuse not to do it.

It isn’t even that hard.

It may be that I am an optimist, I like to not think blindly. There are genuine trials and tribulations in life and significant challenges that are thrown at us. It is fair though to think that we might develop the fortitude, and lean on available support where needed, to give us the capacity to step back and find the opportunity that exists within these challenges.

A great client of mine lives with the mantra “everything is temporary”.

I have no doubt that rates will rise again at some point, when and by how much I am not game to say.

I am happy to say though that practical steps including setting a budget, tracking it and therefore sticking to it will go a long way to enabling you to get ahead on the repayments to your single largest barrier to creating meaningful wealth; your mortgage.

Far from being restrictive, understanding your budget will provide you the chance to make the most of this current opportunity.

These low rates, in the greater scheme of things, may well only be temporary. The cash rate has remained the same for “twenty-eight months straight” (a long time as the article intermates). However, put another way that’s just over 2 years or about one twentieth of your thirty-year loan term. To me low rates mean one thing, time to take control and time to get ahead!

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. 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. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. 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. 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. While it is believed the information is accurate and reliable, this is not guaranteed in any way.

Is Rent Money Dead Money?

In the eyes of a 24 year old

Let’s face it; at one stage or another, we have all been advised that rent money is dead money. Sound familiar? Maybe you can relate to one of the following examples:

  • ‘Why would you pay all that money so your landlord can pay off their mortgage?’
  • ‘Why would you waste all that money when you’ll have nothing to show for it?’
  • ‘If you had of been paying a mortgage off instead, you have paid off your most valuable asset.’

Firstly, the definition of an asset is something that pays you.

The definition of a liability is simply something that you are required to pay for.

Let’s take these definitions and apply it to our situation when we own a house.

A house:

  • Asks us to put our hand in our pocket to pay for it
  • Accrues rates & insurances
  • Requires all kinds of maintenance
  • Even the government takes their slice of our property thanks to stamp duty – great!

I now ask you, is your house truly an asset?

Circling back to the age-old question in Australia: Is rent money, dead money?

I’ll counter by asking: is interest payable to the bank dead money?

If you were to borrow $400,000 tomorrow at today’s record-low interest rates, and make principle and interest repayments at 4.5% over 30 years, you would repay $729,130, with your initial weekly liability being $467. Not too bad? $211 of which is the interest portion of your loan. Meaning, over the course of your loan, you would pay an approximate $329,626 in interest to the bank. Thank you very much says the CBA CEO. **

So, assuming a 20% deposit, it is costing you $467 per week, or $24,288 per year, to live in a house with a perceived value of roughly $500,000. But is it? At Income Solutions we reasonably assume annual expenses (rates, maintenance, etc.) to average at least 1.5% of the property’s value each year. Therefore, throw around $7,500 on top of your existing $24,284. Roughly, on average, it will cost you a touch over $31,000 per year to run the house you own.

Let’s say I rent the same house at an assumed rent price of $450 per week. This works out to be around $23,400 per year. And that is where my dwelling expenses stop. As a tenant, I have no obligation to pay any maintenance, rates or property management fees. This is the landlord’s responsibility. I simply pay my rent on time, and because my dwelling expenses are so low, I do not make a fuss when my landlord attempts to increase the rent by $20 a week every few years. As I pay on time and look after the place, the landlord is more than happy to keep re-signing me to 2-year lease agreements, providing me some security. Therefore, I pay $450 per week, compared to the landlords $611[1].

This is where renting becomes interesting. I am paying $161 less than the landlord/homeowner per week, so let’s say I use this, add another $50 to equal the $211 the landlord pays in interest in year 1 of the loan[2] and contribute this to a tax-effective income-producing asset, over the same 30-year period.

Basically, the difference between what I pay in rent per week, and the total amount the landlord/homeowner pays to own the home per week.

Assuming an annual return of a conservative 9.5%, (the Australian Share market has averaged a return of around 12.5% over the past 100 years) the power of compounding becomes your friend here, as my $211 weekly investment for 30 years would grow to a modest $2.9 million dollars. Again, this is a conservative figure, and it also assumes I never contribute more than $211 per week over the course of my working life. I’ll be 54 by this stage, and thanks to the Franking Credit system, this $2.9 million can reasonably produce me a cool, highly franked, beautiful income stream of approximately $178,000. Enough to retire, I think.

At the end of the loan period, the homeowner is hoping the value of their property has grown to at least equal to the total amount spent on the property, which in this scenario is around $945,000. If they were 24 when they bought the home, they have finally paid it off at age 54. However, they have had to find more disposable income on top of their weekly $611, which has been swallowed by their house for 30 years, to contribute to some form of financial asset. They may own their house outright, but we know our house does not produce us any income, it actually asks us for a share of ours to service it. There is a potential that they will be examples of the typical ‘asset rich, income poor’ description we sadly see too often in this country.

By renting and spending the same $611 per week, I can own an asset and not a liability. If I would like to own my dream home, I will simply withdraw the $945,000 from my investment and pay for it in cash, no interest paid to the bank. Furthermore, I’ll still have around $2mil producing me highly Franked income.

Rather than paying interest to the bank, I’d rather get paid by the bank.

 

Now, is rent money dead money?

 

*All figures are present value.

[1] This includes the P and I repayments, and the averaged costs of $7,500, broken down into a weekly figure.

[2] The interest payable will reduce over the loan term, however, the $467 will remain constant.

https://www.yourmortgage.com.au/calculators/home-loan-repayment/result/

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. 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. While it is believed the information is accurate and reliable, this is not guaranteed in any way.  Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. 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. 

Don’t mention the ‘B’ word…

Lee Nickelson is an Authorised Representative, GWM Adviser Services Limited, Australian Financial Services Licensee

 

To quote Peter Thornhill’s two golden rules of wealth creation:

  1. Spend less than you earn
  2. Borrow less than you can afford ¹

Sounds simple, doesn’t it?!  Hardly!  One of the most common hurdles I encounter with clients is gaining a full understanding of their spending – I estimate only around 25% of clients have a clear idea of where their money is being spent as most people dislike the idea of a budget.

At a basic level, we have control over 3 facets of our ability to earn and maintain wealth – how long we work for, whether we invest to educate ourselves to increase our earning (income) potential, and…. this is often the hardest to manage… how much we spend.

The benefits of having an idea of expenses in comparison to earnings are clear.  You will gain confidence when future decisions on spending are made (yes, I can afford this holiday), you will be able to prioritise spending more easily (would I rather upgrade the car or pay the mortgage back 3 years faster) and you will avoid buyers’ remorse (geeze I shouldn’t have bought these shoes, I’m worried I can’t afford them).

Where to start?  Best to define the difference between the ‘B’ word (budget) and spending analysis

  • A budget is forward looking – an estimate of expenses over a specific period
  • Spending analysis is rear looking – it involves tracking what you have spent over a specific period

There are any number of budgeting and spending analysis theories, tools and programs online which can then be overwhelming.  I find a great place to start for my clients is to get them to split their spending between Non-negotiable items and Negotiable items.  What appears in each list may change from client to client (i.e. holidays may become negotiable for some, whilst Foxtel to watch the football may be non-negotiable for others).  Once the Non-negotiable items list is complete, we minus this from net earnings.  This leaves the amount of funds left over to cover the spending items under Negotiable column.

This blue print allows the spending analysis to happen – is there enough left to fund the negotiable column?  Is a rethink required regarding negotiable and non-negotiable items?  Can money be saved on any of the line items (i.e. reviewing your Electricity bill / home insurance provider)?  Am I saving enough off my mortgage to repay it before retirement?

This analysis is also the confronting part – am I borrowing from my future to fund the lifestyle I am living today?
Once the non-negotiable items are agreed and reviewed, it becomes as simple as dividing this figure by your pay cycle and setting aside this amount each period in a separate ‘bills’ account.  Anything left over can be spent with the confidence and knowledge that you will have enough to cover your non-negotiable expenses.

Unsure how to proceed?  I’d be happy to help you review your spending.  Please contact our Melbourne office to set an appointment.

1             Thornhill, P. (2003) Motivated money. Gordon, N.S.W.: Motivated Money.
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. 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. While it is believed the information is accurate and reliable, this is not guaranteed in any way. Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document. Before making a decision to acquire a financial product, you should obtain and read the Product Disclosure Statement (PDS) relating to that product.

What Do We Talk To Our Clients About?

Elise Ryan is an authorised Representative, GWM Adviser Services Limited, Australian Financial Services Licensee

We like to focus on their education, and we run five different seminars each month

  • Common Sense Investing
  • Common Sense Estate Planning
  • Pivot – Your Future Starts Now
  • Kickstart!
  • Income Solutions for Women

We have built a well-researched process for clients when they are

The best investment you will ever make is in yourself, and we believe this investment is not only financially focused. At Income Solutions we encourage our clients to invest in education, health and fitness, career and following your goals.

A big focus when talking to our clients is around their goals, what they want to achieve, and we work with them to build a strategy to help them achieve it. We try and make it easy, we know your goals don’t come to you in meeting with your advisor, for this reason we built the my.solutions application. This enables you to log in 24/7, even when you are on holidays, sipping cocktails by the pool and dreaming of what your future will look like, you can log into my.solutions, pop in your goals, and your advisor will be notified immediately. This allows your advisor to consider strategies before your meeting and help you get the most out of your appointments.

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. 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. While it is believed the information is accurate and reliable, this is not guaranteed in any way.  Opinions constitute our judgement at the time of issue and are subject to change. Neither, the Licensee or any of the National Australia group of companies, nor their employees or directors give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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