What are you really saving for?

When I think about personal finance, I always come back to one of the corner stones, savings. But what are we really saving for? Sometimes, it is much easier to kick start a savings plan and keep it going if the motivation of it is strong. I have my top 5 reasons for savings.

1. An emergency fund - This has to be the number one reason for starting to save. The emergency fund is used for servicing the unexpected, some would view the emergency fund as an insurance policy funded and managed by you. An emergency could be as simple as having to do an unexpected major house repair work or medical bills for your kid's broken leg. It is harder to decide when the emergency fund has enough money in it so that we can start to concentrate on saving for other things. However, the emergency fund is one that requires regular review to ensure that it's level is adequate as your situation changes.
2. Retirement - You are only able to work for so long until your body or mind gives up on being income bearing, so you will need to save for the day when you stop working. For many of us that would be in our 60s, some may be fortunate enough to retire in their 50s. Saving for your retirement could be as simple as contributing extra into your Superannuation. Relying on the government pension for your retirement is probably not a good idea if you wish to sustain a similar level of lifestyle as you have now. Saving for your retirement is going to be one of your longer saving plans, and would be easy to just set and forget. This would be a mistake. As this plan is long term, the compounding effect of various investments could be exploited. For me, retirement is not viewed as retirement for myself, retirement is setting up for me and my wife, and also to lessen the financial burden of the parents on their kids.
   
3. Your kids - Your kids are totally dependent on you for their future. It makes sense to give them every opportunity and the best opportunity possible. Without a decent saving plan for your kids, it makes it difficult to provide them with these opportunities. I wrote a review of the book "How to give your kids $1 million each" that specifically deals with this topic.
   
4. Family - Among other obvious disadvantages, it is not a good living for your family if you don't give them confidence that you can provide for them. By showing that you are able to save, it provides them with a sense of security and a solid foundation to build a family. This is very different to saving for your kids. Saving for your family would also include your extended family such as your siblings, parents and in-laws.
   
5. Good character building - To establish a regular saving habit takes strong discipline, and once this good habit has been acquired, it will have a positive affect on your whole character. It shows that you can follow a plan through, exercise good control of your will. The other side effect is that your kids will follow your example of saving money and pick this habit as well.

These are strong motivation for starting and maintaining a savings plan. What are some of yours?

Carnival of Personal Finance #104 - minimalist list

The 104th edition of the carnival is up over at Getting Green. Our fantastic host has gone for a minimalist approach and listed all the fantastic articles up for reading as one big list.

I was lucky enough to include my article about land transfer duty among the other fine articles.

There are more than 50 great personal finance articles on the list, there is definitely something everybody. My 3 most favourites articles are

1. Beacon Financial Tips has an article on the fastest way to pay off a debt with some simple but effective advice.
   
2. The Writers Wallet has an article on the philosophy of giving, to emphasize why is it that we want to save money.
   
3. My money and my life has a break even challenge for those to start their way onto financial security.

Get in the carnival spirit and head over to Getting Green and check out the festival.

Giving yourself a 50% discount

I was reading the usenet newsgroup misc.consumers.frugal-living the other day and came across a post that suggest that we can increase our saving by cutting our spending by half. Hmm, I thought that is an intriguing concept and how it would work in real life.

Among other things, the post suggest that instead of buying $40 pair of jeans, go for the $20 pair; instead of doing the $7 lunch, buy the $3.50 instead.

In someways, this is giving yourself a 50% discount on your purchases.

I experimented with this idea over the last few days and came upon the three major drawbacks.

1. Not for everything. This 50% rule is not applicable for all things that you purchased. It is usually only applicable for items that provide many choices across a wide price range.
   
2. Don't really like the options. Sometimes, I just don't like 50% cheaper option, usually for personal reasons. For example, my lunch usually cost me about $5. The $2.50 option is a couple of potato cakes and a drink. This just does not feel me up, and I end up purchasing my later on in the afternoon. At the end of the day, I end up spending the same amount for lunch.
3. Big ticker items. For items that would cost large amount of money such as insurance, housing, holidays, you are not going to get a 50% discount for the same product no matter how hard you look or how long you spend looking. I tried to use this strategy for some of the items that need to purchase in our house migration adventures.
   

Perhaps, aiming to give yourself a 50% discount may not that achievable. Perhaps, a 20% - 25% discount may be more realistic.

By using this strategy to save money, it creates a different mindset when purchasing items. Typically, I would draw up a list of item's characteristics, then I would shop around to get the best deal for it. With this strategy, you have to determine how much you have to spend initially, then pick an item to fit that that budget. This strategy would mostly work for incidental items.

Where's the deposit?

As we go through the process of buying our next house, I realised that some may have a lot of their cash tied up in their current home. In today's low housing affordability climate, it would not be that difficult to spent up to 50% of your monthly salary on your mortgage. I follow my thoughts with my current bank and found that they have a product for such a situation. However, it appears on three out of the big four banks have similar products. I was not able to find any similar on Westpac's website.

• ANZ - Deposit Bond
• NAB - Deposit Guarantee
• CBA - Deposit Guarantee
  

Be sure to double check the terms and conditions of these products as they are significantly different. Typical conditions are a time limit of 3 months and a value limit of 10% of the property value.

Is this better than a bridging finance? Well, a deposit bond or guarantee is used in a slightly situation. The folks at the ANZ gives a good explanation of the differences

Bridging finance is a loan that lets you bridge the gap between the sale of one property and the purchase of another. Bridging finance is often used when the sale proceeds are insufficient to cover the purchase price of the new property, or when there is a time gap between the purchase of the new property and the sale of the old one. This form of finance is short term and is generally cleared from the sale proceeds of the existing property.

A deposit bond is a convenient and inexpensive way to place a deposit on a new home. The deposit bond represents all or part of the deposit on your home or investment property, saving you having to arrange your own funds in time to sign contracts.

Bridging finance also has higher premiums. The ANZ FAQ on deposit bonds has some figures. I am not really sure why the ANZ consider this as insurance.

What other ways of they to raise a deposit for a house if you are asset rich but cash poor?

My other articles on our house migration adventure are here.

Carnival of personal finance, #103

Guess what, the Carnival of Personal Finance is up at Cleverdude. There are plenty of personal finance resources and articles to read and think about.

Some of my favourites are

1. Our Family's Money Savers. - Some relevant tips for a young family, actually for any family that is serious about saving money.
   
2. The cost of not doing yard work. - This goes deeper than just having to worry about the creepy creatures in an unkept yard.
   
3. The Joint Account - Some relevant advice on when to open a joint account with your significant other
4. Lessons from “Think Like a Kid, Make Millions...” has some good advice on grabbing an opportunity and running with it.
   

Mike is kind enough to also include my entry on discount fuel vouchers. Get over to there and check out the 103rd edition of the Carnival, there is an enormous amount of personal financial information there, and the story is also quite a good read as well.

Good work, Mike!

One asshole rule

This is a book that was brought to my attention while reading Guy Kawasaki's Blog , a few months ago. I think that Guy got a copy of the book before it was released as a pre-preview. His review gives it a positive feeling.

Having sighted it at the bookshop the other day, I purchased a copy of the book to perhaps better myself and drive the asshole out of me, and perhaps influence other to do the same.

The book is written by Robert Sutton, a Professor of Management Science and Engineering at Stanford University. I have only read the book over the last few days, in between my other things, and have come across quite a interesting ideas from Robert.

The best one, so far, is the idea of a token asshole. Robert's book mainly deals with workplace situation, but the concepts that he writes about are just as applicable in other situations. Robert's suggests that having a token asshole in the environment will help shape up the ship. It appears that it uses the fright emotion in us. Robert calls this the "one asshole rule". It uses the token asshole to reminder us that we will become one of them if we don't actively stop our asshole behaviours.

Robert says

Because people follow rules and norms better when there are rare or occasional examples of bad behaviour, no asshole rules might be most closely followed in organisations that permit one or two token jerks to hang around. These "reverse role models" remind everyone else of the wrong behaviour.

It scares me to think that it takes something like the "one asshole rule" to keep a workplace nice and enjoyable to work in. I wonder if this is an American centric behaviour?

I shall post more insights from this book as I read more of it.

By the way, the book is "No Asshole Rules", published by Warner Business Books. Its ISBN 978-0446526562

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.