Happy New Year

Happy New Year!

Today is the new day of the new financial year in Australia. For most of Australian businesses and general public, the financial year ends on the 30June, and the new one starts on the 1July.

So what can be expected for this financial year, from my perspective, I can't see as many positives as I can see the negatives. Lets start with the negatives.

• The interest rates are expected to rise. My prediction is that mortgage rates will hit 10% by the end of the year. Recent reports of the slowing down in the economy such as spending in retail and housing will probably stop the interest rate from going much further than 10%.
  
• The petrol prices will continue to increase. Even though there was a recent conference among the oil producers to help reduce the cost of oil, I feel that the days of seeing the pricing at around $1.20/ltr are long gone. I expect to see the price of unleaded petrol to hit $2/ltr by the end of the year.
• Australian manufacturing industry to slow down dramatically. The current Australian economy is really riding on what the land can provide, more correctly, what the underground can provide in mining. Another industry such as manufacturing, services and farming will probably suffer due to environmental reasons and economic reasons. Personally, I would like to see the manufacturing industry enjoying the same economic boom as the mining industry, I don't think it will happen in the near future.
• Due to the on-going drought and increasing fuel pricing, the groceries prices will be increasing.
• Our superannuation fund is on its way to give one of the worst return ever. We can blame the US subprime problems for this.
  

Feel free to shoot me down in flames with these predictions, and I hope that I very wrong with some of these predictions.

A couple of the positives are

• The personal tax rates have changed, which means that you should be getting a little bit more in your pocket each payday.
• With the increase of petrol, focus on alternative energy are being looked at in a serious way. So hopefully, a commercially viable solution is not too far in the future.

With those predictions, let's try make the best of the new 08/09 financial year by viewing the negatives as problems which solutions are to be created for, especially on a personal finance level.

superannuation revisited

I have just received my annual statement for my superannuation fund and it has triggered some rethink on my superannuation strategy. The downturn in the stock market this year have probably put many superannuation funds in a similar position. Lets start by looking at some of the figures that has caused me to do the rethink.

Account balance change: 7.12% on the opening balance
Return on Investment: -2.58% of closing balance
Management Fee: 16% of contribution

Looking at each of these figures in turn.

Account balance change: This represents the raw change in my account balance. A positive figure here is an absolute must as it indicates that I haven't lost all of the my contributions to the falling investments, fees etc.

Return on investment: I was expecting this figure to be a negative value. We can look across the Pacific Ocean towards the American economy. I actually thought this figure would be a lot worse, I expected it to be around -5% to -7.5%. I was quite relieve to see this figure of -2.58%.

Management Fee: This is how much I am paying my super fund to management my account. Now 16% of my contribution goes off my superannuation's wallet. When I did the calculation and realised what I am paying, I was pretty upset. This figure is what actually drove me to investigate other superannuation fund and how I can maximise the investment.

At end of my calculation, it came down to the following strategy.

1. Lowest fee structure. Two reasons here, firstly minimising fees is one of the very few items about the superannuation fund that can be influence so make it as effective as possible, secondly, I want to maximise the magic of compounding interest.
2. Online access. My current superannuation fund does not allow online access. So its performance can not be analysed in a timely manner.
3. Good insurance policy. Most superannuation has an insurance component, we need to ensure that the policy is suitable and covers all the family members.

What are some of yours?

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Don't Panic

Lowest taxable income in metropolitan Melbourne

The Australian Tax Office has just released some tax statistics for the 2005-2006. Although the data is a few years old, it makes for interesting reading, in particular the data on personal tax.

One of the statistics that I noticed was that Frankston North has one of the lowest mean taxable income at $33,638 for each taxable resident.

We lived in Frankston North for about two years, just before we shifted to our current location. I must say that during our time in Frankston North, we can sense that the place is not a wealthy suburb, but from talking to our neighbour and the other Frankston North residents, the ambiance certainly does not give it that sense.

Living in such a low income area does have its concerns. We saw a lot of the typical events that you would expect to see. For example, we witnessed a police car chase in a residential street, regular thieving and stealing at the local shopping centres, and the occasional violence. We were always on our toes, trying to keep as safe and secure as possible.

Having said that, I am totally convinced that the majority of Frankston North residents are everyday people trying to make ends meet. I wonder if how long before Frankston North begin to move up the scale, if it ever will?

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Educational opportunities, class mobility and nomadic chinese
What to tell the kids if your family is in financial hardship?

Don't Panic!

The current financial crisis that we are experiencing is quite nerve racking. Today, the All Ords feel by about 7% and all the gains, if not more, made over the last 12 months. Today, it closed at 5222 points, down by 408 points. As reported by The Age, this is the one day biggest drop in the share market in the 18 years, and the longest losing streak since January 1982.

Luckily, it does not really impact me significantly as we only own a small parcel of Telstra shares, which was purchased during the T2 offering. However, the real impact to us would be how our superannuation will be performing. Like many other Australians, some part of our superannuation are invested in the local Australian share market. With the investment mix of my superannuation, about 10%-15% is expose to movements of the sharemarkets. The way I view it, superannuation is a long term investment and is not due to mature for another 30 years for me. So I have decided not to panic and leave the investment mix alone to ride the down slide out.

My friend calls this the sleep factor. If the situation is affecting you to an extend that it is disturbing your sleep at night, it is probably time to be less aggressive with the investment mix.

The market did slide down quite significantly when the dot com bubble busted just after the turn of the century and my superannuation net worth actually went down, but it recovered in spectacular fashion.

For some people whom superannuation are about to be accessible in the next few years, these are certainly nervous times. I would say to them to get some profession advice.

What to do with $20K from a car trade-in?

We are currently revisiting the issued of getting a replacement car for our Toyota Prado. We have had it since 2001 and had traveled about 135,000 kilometers in it. For a 4WD, it has hardly reach middle age. What caused us to revisit it is the price of fuel and the maintenance cost of it. The car runs on diesel and it is currently approaching $1.50 per litre, plus the fuel economy on it is about 17litres per 100KM.

I had another chat with my HR manager about novated leasing and the following point was made.

The novated lease is only valid for the true value of the car, not the amount needed to change over the car.

In my situation, I will be looking to finance about $40K (value of the car) instead of $20K (change over cost of the cars). This will be OK if all you are considering is the out of pocket expenses at the time of purchase, but if you are looking at it over the term of the lease, it could make a major difference to your wallet.

So what are the options to help lessen the financial hit. I have only able to come up with two possible options.

1. With the $20K cash that we will get for the trade in, we could invest it a high interest bank account that pays monthly. The interest will offset the novated lease repayments. So if the novated leased is financed at 9% and the high interest bank account is at 6.75%, the net effect is the new car is being financed at 2.25%.
2. Take a overall perspective, and use the $20K cash to reduce the current mortgage, and any other high interest bearing debts like credit cards bills. This should cut a large chunk of interest off, especially the mortgage.

What would you do?

Advice from trusted sources

Yesterday I wrote about an article on where my father-in-law get his advice from. So if the advice he gives is a bit suspect, who should you be getting your financial advice from. This may be quite a basic question to answer, but it is a critical question which has many different answers. The correct answer will be dependent on what you are looking for. I was thinking about this over the last few days.

The source of the advice can be divided in to several groups. I shall discuss advice from trusted sources. In the next two posts, I shall discuss advice from friends and random advice.

Trusted Sources

This group is qualified to provide you with financial advice. They are qualified in the sense that they have had recognised training. For the financial planners in Australia that are qualified, they are part of an association such as the Financial Planing Association of Australia. This is certainly true as well if you are seeking an accountant, ensure that the accountant is qualified in the area that you want advice in. I mean, it is not much good to go to an tax accountant if you want some advice on book keeping.

But how do you trust the financial planner or the accountant that you have just chosen. If you can get a recommendation from someone that you truly trust, that would be ideal . You could be introduced to them.

If you are not able to get a recommendation, you may have to get advice from a number of financial planners. By getting advice from a number of financial planners, you will be exposed to a number of options and strategies. If a number of these options and strategies are similar, then perhaps the advice is sound.

Some of the other signs to look for are:

1. Ask for full disclosure - typically, the financial adviser will be recommending a financial product. Is he recommending this product because he is getting a commission from it? Full disclosure also includes how he is getting paid.
   
2. Consistent advice - The advice that you receive should be consistent over a period of time. If it is inconsistent, it is a sign that adviser may not have clear understanding of your situation and what you are aiming for.
3. Value for money - the fees that your adviser is charging you needs to be reasonable. What is reasonable? It really depends on your situation and how valuable the advise is. If the advice you receive can generate high level of wealth, the fees may be a lot higher.
4. Availability - How available is your adviser to you questions? Depending upon your situation, you may want to obtain financial advice quickly. Maybe, you may only talk to your adviser during certain time of the year such as the end of the financial year, but make sure that he is available when you need him, maybe not immediate availability, but at least within a day or two.
   

The number 1 question that you have to ask yourself about any advice is "does this advice make sense for someone in my situation? If it doesn't, what do I need to know for it to make sense." This is something that your adviser could explain to you as well.

I shall be discussing advice that comes from friends and random advices in the next two articles.

Add some comments if you have other ways of finding trusted advice.

Taking a chance on good advice

I had an interesting conversation with my father-in-law today. It really made me think about how I should assess advice that I receive in the future. I have always be wary of any advice that I receive from anyone, except from my wife which I accept faithfully. However, my father-in-law is someone that are willing to accept advice from an un-authoritative source, and is happy if he got the advice from a single source as well. He is also happy to pass on these advice as gospel.

He is retired from his work and has been for a number of years. My mother-in-law is retired as well, and is collecting the old age pension from the government. During the conversation, he gave us the following advice,

If I win tattslotto, you shall get an equal share among your family and you will not have to pay any tax on it because I have registered all my lottery tickets to the family.

Essentially, he is saying that if he wins any money, he will share the money among the family members, and because the family has bought the ticket, the winnings are not subjected to tax. He said that if family did not buy the ticket, the shared winnings would be subjected to gift tax as the family members would received the tattslotto winnings as a gift.

I heard this, and proceed to ask him where he got his advice from. Apparently, he got this advice from this financial planner and some of his friends.I get the feeling that my parents-in-law's situation is totally different from ours and could actually be applicable to them.

Looking at the advice on the surface, it does not sound right. The winnings itself is not taxable, as this advice from the ATO states. Also if he does win, and then distribute the winnings among the family members, the ATO is also clear on it not being taxable as the family members would receive it as gift. Gift is only usually taxable if it is received within your work environment. For example, you receive a bottle of scotch from your client because you did an excellent job on the project. I believe that the bottle of scotch is subjected to fridge benefit tax.

This conversation made me think about the source of information which we receive on a day-to-day basis, especially on the financial matters. It is really essential that the advice that we received are supported from several sources, possibly sources with some authority in the matter.

This goes from the information that I write about on this blog. I am probably the one person whose authority on finance is next to zero, so do not depend on it. I am only exploring financial ideas and methods. If you gained some positive insight of your situation from my articles, then I am really happy for you. However, before acting on these ideas and methods, please seek independent advice from a few people who know what they doing.

Good advice is the one thing you don't want to be a lottery.

photo by Uffe Nielsen

PPR concession on our new home

A few weeks ago, I wrote an article about how the land transfer duty, and possible ways of reducing it. I came across one today.

We are still going through the paperwork on our new house purchase and came across a concession from the Victorian's SRO. It is called the PPR concession or the Principle Place of Residence concession. The SRO has a site outlining what is a PPR concession is and how it is calculated.

In a nutshell, for the price range that our house falls into, we will enjoy a 1% discount in the duty calculation, saving us about $1600 dollars.

The concession is capped to a maximum value of $2850.

I have to thank our currently Victorian government for this concession as it become effectively from the start of 2007. Hooray for Steve Bracks and his team!!

novated leasing a car

With price of petrol hitting the $1.35 per litre, I starting looking at various options for reducing out running cost on a car. We currently drive a 4WD, and its fuel economy is not very friendly to our wallets. Its weight, constant all wheel drive, and lack of any aerodynamic in its design are the enemies of any good fuel economy. One of the options considered is novated leasing a car, in particular a smaller, more fuel  efficient car.

The guys at privatefleet has a good explanation on what a novated lease is. The two main benefits that I saw was

1. Financing of the vehicle is paid with pre-tax dollars.
2. The vehicle may be leased for 100% private use.

Why are these good points, bearing in mind that we are essentially borrowing money to buy a car, and all the running cost of the car is the same? Well, the above two points says that you are using the money for your own purposes before tax calculated for the tax office. The resulting effect is that your taxable income will be lower, in some cases, it may be lowered to the next tax bracket.

Before we leap into a novated lease agreement, the following questions need to be answered.

1. Do we really need another car?
   
2. What kind of car do we need?
   
3. How much do we need to borrow?

The bottom line is the we will be spending more money on a car as the money will be coming out of our own pocket, the main difference is that it is pre-tax dollars instead of post-tax dollars. If the car is not needed, would it the money have better spend else where.

In the coming months, these questions will hopefully be answered.

3 simple but great ideas for your super

I recently received a brochure from my Superannuation fund, run by Zurich Australia Superannuation, on what it reckons are the top 3 ideas that would boost your retirement fund. I read it, and although the 3 ideas are very obvious, they are sometimes easy to forget. The top 3 ideas suggested are actually very good ideas and it is worthwhile sharing them.

1. Co-contribution - The ATO has some great information on this. Essentially, for every $1 that you personally contribute to your super fund, the government will give you $1.50, up to a limited $1500 if your income is $28K or less. For those earning more than $28K, there is a sliding scale on how much you will get from them. Check out this table on the payment. Hey, why not accept free money? If you partner is not generating an income, consider contribution $1000 in your partner's Superannuation fund as the government will contribute the maximum.
   
2. Salary Sacrifice - With salary sacrifice, money is taken out of you pay packet for your Superannuation personal contribution before tax is applied. This means that your taxable income is lower. Doing this has some tax effects on your money. The sacrificed salary is subjected to 15% superannuation contribution tax instead of the up to 46.5% marginal tax rate. It may also drop you down to the next marginal tax bracket, and because your taxable income is lower, the amount of free money (co-contribution) from government may also increased. This page shows the amount of tax you will be paying.
   
3. Consolidation - With the current Australian population quite job mobile, the number of Superannuation fund starts to grow. This is especially true if you are switching between industries. All these Superannuation funds could charge fees. By consolidating all your Superannuation funds, you are only subjected fees from one Superannuation fund. I think that Zurich mentioned this to get more people to consolidate all their accounts into Zurich's account.
   

Your superannuation is a very important saving plan for your retirement, and the strategy that you put in place to make it grow is critical to how you will be living when you are in retirement.

Remember that as of 1 July 2007, any Superannuation withdraw for your retirement is tax free if you are 60 years or older. So make the most of it.

The curse of land transfer duty

We are now actively looking for our next house to purchase and to live in. As we haven't been in the market for a house for a while, we are not too sure what to expect. The area that we are interested in parts of Carrum Downs and Skye because of its handy location to my office.

Our first port of call was to visit realestate.com.au as most, if not all, the real estate agents list their properties here. Most of the houses that fit our criteria are in the region of $330K. My initial reaction is that "Wow, this is a lot of money". Analysing it further, we need to add more items such as legal fees, bank fees, insurance and, the most dreaded of all, stamp duty. (btw, domain.com.au has a nice calculator to work some of these out).

Stamp duty is the old term for duty payable for the transfer of a property, and is payable to your state government, and as such, the conditions will vary from state to state. The Victorian State Revenue Office (SRO) has a good explanation of what land transfer duty is.

For the state of Victoria, its SRO has a handy calculator to work out the amount you are liable for. Bear in mind that the duty rate is depending on whether the property is a principal place of residence or an investment property.

On the $330K property,

• Residence - $13,310, or about 4.0%
• Investment - $15,460 or about 4.6%
  

The percentages are calculate based on the property value.

Apart from the actual property, the land transfer duty is one of the larger component of the total cost. With the house affordability of Australia sky rocketing, this stamp duty does not help at all.

What can you do the avoid the large stamp duty. Let's see....

1. Build the house - The duty is only payable on the transfer of property. For something to be transferred, it needs to be exist to begin with. So building a house does not attract a land transfer duty. The duty is only applicable on the land purchase.
   
2. First home purchase - If this is your first home purchases, then the state government has some concessions to help you out. Depending upon your circumstances, you may be able to get up to $12K.
3. Use the house as a residence instead of an investment - You will need to do the maths to determine if it is worthwhile as the reasons on purchasing a house for investment are totally different to a house for residence. However, as the calculation shows above, it does save you some money.
   

Until the state government abolishes stamp duty, it is an unavoidable evil. So just be sure to include it as part of your house purchasing budget.

The house is on the market

My wife just rang me to say that the "For Sale" sign is on the fence and is there for all the see and admire. Hell, that means that our house is really on the market.

Before the sign went up, we were negotiating with our chosen real estate agent what commission they will be getting for the sale of the house. This is an interesting aspect of the house selling process and could make quite a different to the money that goes into your bank account.

Some of the ideas are:

1. Offer the agent a commission only sale. This means that all you would pay the agent is the commission. You don't pay for any advertising or the preparation of conveyancing or any other cost associated with the sale.
2. Offer the agent a structured commission. Say you are wish to sell the house for $250K, but would be happy if the agent manage to sell it for $225K. Offer the agent the full commission if it is sold at $250K, a smaller commission for less than $250K, and even smaller for $225K or lower. This would give the agent an incentive to try harder for your price.
   
3. Negotiate with the agent for a non-exclusive contact. Most agents will want you to exclusively market your property through them. If you are able to advertise the property with the other agencies, the size of your potential buyers would increase. I feel that this idea may not bear much fruit as most astute buyers would try to look at properties from many different agencies, but may be a strategy worth trying if there are a lot real estate agencies in your area.
4. Get the agent to pay for the GST. The commission quoted usually does not include the GST, so be very careful on the figure quoted as the GST could end up coming out of your pocket.
   

My other posts on house selling are here.

I have found the following around the net on this topic.

1. In Queensland, it seems that the real estate commission is regulated. Check it out at the REIQ.
2. An interesting article for agents on how to handle a commission discounting exercise by the vendors.
   

HELP is on its way.

OK, you have just graduated from University after four hard years! What do you get at the end of it? Unless you are very lucky, as well as a degree, you will accumulate quite a large debt, courtesy of the Australian Government.

This is now known as Higher Education Loan Programme (HELP). When I graduated from RMIT, it was known as Higher Education Contribution Scheme (HECS). I guess many of today's graduates are in no doubt that the money is a loan and is to be repaid!

When I graduated from RMIT, I was lucky and HECS only kicked in at the second of my four year engineering degree. So I only had 3 years worth of HECS fees to repay. In those days, my debt was in the region of $7,500, which is quite a sizable chunk of money. These days, I have heard of a HELP debt of $20,000 or more for an engineering course.

So what can you do to reduce that debt. Here are some tips.

1. Repay some of the debt on a voluntary basis. The ATO has a good explanation. Essentially, you get a 10% discount of the repayment that you made. So the more you repay, the bigger the discount.
2. Get your employee to contribute to the debt. If you are an excellent graduate and many companies are chasing after your skills, you may be able to negotiate it as part of your salary package, such as salary sacrificing. The ATO also has a note on this. Salary sacrificing also reduces your taxable income.
   
3. Pay it off as fast as possible. Your HELP debt will be subject to CPI, so every year of outstanding debt, it will increased according to inflation. For the year 2007, it was indexed by 3.4%.

The ATO has also many other advice in regards to HELP. Check it out here.

However, if you study hard and start your career with a solid groundings, that is what you should be aiming for. Repaying the debt will be well within your reach.

Around the net, I also found some other items that may help you save some money as well.

• How to save money while in college - This has a on-link to 118 Ways to Save Money in College. As some of the comments, some of these tips are rather suspect.
  
• Uni of QLD has a few tips.

Money Magazine, May07 edition

The money magazine is always a good source of ideas for saving money. Having just received the May07 issue, I quickly browsed through it. This month, the reader's tips theme is "saving on the cost of kids".

Unfortunately, the closest I found to a link to these tips is here, but it is basically a reprint of the table of contents of the magazine. So to spread the ideas around, I have picked the top 5 ideas that the readers have submitted.

1. Teach the kids about money - they should know about savings and buying their own things from a very young age.
   
2. Set up an account for your child from day one. For $10 deposit a week you can present your child with almost $10,000 on their 18th birthday.
3. Most museums are free or don't cost much. Libraries have many great activities such as craft and story time.
   
4. Visit a Lifeline Book Fair to buy books - they are usually held twice a year in each capital city. The books can be as cheap as 50c and you are helping out those in need.
5. Check the lost property boxes at school. It's amazing how often things are lost at school.
   

Thanks for Lynda (QLD), Kelly (NSW), Kimberly (email), Samantha (ACT) and Annette (QLD) for submitting those tips to the Money Magazine.

By the way, if you buy the Money magazine, be sure to save receipts as its purchase may be tax deductible.