Friendly Advice

May 19th, 2012

Last Saturday, Claudia and I took our little chicken to a local baby market (note for the fellas – baby markets are not where you buy babies, although after her third tantrum I was considering putting a $5 sticker on our chicken). There are so many pregnant women at these things if you want to make a buck, set up a table selling epidurals.

 

It was really busy but we managed to run into an old school friend of mine, Angie. We hadn’t seen her since the last baby market we had attended and she looked a great deal less frazzled than we felt. Angie’s a real pro at these things, leaving her boy in the care of dad at home while she goes bargain hunting. She says she arrived half an hour before it opened to avoid the crowds but I’m sure she pitched a tent the day before and braved the Canberra winter (Canberra’s winter starts in April and ends in September). I talked to her for too long because as I said goodbye I looked around to suddenly realise Claudia had walked off. Without her mobile phone. “No worries,” I thought, remembering what Claudia was wearing, “I’ll just look for the woman in the stripey top.

 

Apparently stripes are in this season, ‘cause every woman there was wearing bloody stripes. Now I know how a tiger feels when he’s hunting zebra. Fair dinkum, if anyone had a barcode scanner there, it would’ve shut itself down.

 

After I eventually found her (or more accurately she saw me and yelled out), I ended up in a line in front of a man with what seemed like two female friends, and couldn’t help but overhear their conversation. After all, they were talking about money and that always makes my ears prick.

 

One of the women was talking about loans and the guy was telling her about rates of tax. He was talking with a degree of confidence that would undoubtedly have made the two women confident he knew his stuff. Problem was, he didn’t. Every single figure he was telling them was wrong.

 

I realised that these women were financially savvy enough to be at a market that sells secondhand baby and children’s clothing, toys and books, but naïve because they were lapping up what their friend was saying. One thing was very obvious to me – this guy was no professional. This is a very important thing to take note of – unless the friend or family member who gives you money advice is an expert in the area of finance, talk to someone who is.

 

Don’t take advice from family and friends about money. Guidance is one thing, like “don’t take my word for it, speak to my accountant” or “read what Paul Clitheroe says about this stuff in his book”. Advice like “you should get an interest only loan on your property” is something altogether different.

 

Family or friends who have been successful in a certain area are likely to steer you towards those same places to try to help you – and it does come from the best intentions. But their situation is different to yours, therefore the best financial tools for you will be different from the tools for the person giving you unqualified advice. Of course I am assuming that the person giving the advice is not your identical twin who is married to the identical twin of your spouse, who you live with and who shares the same job as you. I know, big assumption, and if you are actually in precisely the same situation as the advice giver it will probably work really well. If not, seek out an expert.

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The Fine Print of Debt Consolidation

May 5th, 2012

I received some junk mail the other day (sorry, unaddressed advertising material, I’d hate to offend anyone) from GE Money. They were selling a glossy, happy, brightly decorated lifestyle change under the guise of a debt consolidation loan. Using terms like “surprisingly affordable”, “life could be a lot easier if you rolled all your debt into a GE Money Debt Consolidation Loan”, “fits your lifestyle” and “enjoy the certainty of fixed repayments” you could be forgiven for thinking these guys were a charity (debt consolidation loans of $2 and more are very rarely tax deductable).

 

Before you consider rolling all your credit card, car loan and personal loan debts into a debt consolidation loan, please make sure you read the fine print. For a full list of all the conditions you would need to go through the loan paperwork, but the info on the back of the junk mail pamphlet gives you some insight. Using their figures (but not their online inflexible loan calculator, I had to visit a reputable site to crunch the numbers) the minimum loan amount of $3,000 paid off over the maximum 5 years would cost over $1,280 in interest and $850 in fees. So your initial 3 grand loan ends up costing you over $5,130. That’s a lot of money and an awful lot of fees, particularly when one of the selling points they use relates to avoiding multiple fees as a benefit of taking on one of their loans.

 

GE Money says – “You’ll be surprised how little it could cost you each week!” which, when you read the figures above is another way of saying “You’ll be shocked how much debt consolidation costs you over the life of the loan.”

The interest rate is fixed at a massive 14.99% so you can “enjoy the stability of a fixed interest rate”, but I don’t think you would enjoy it much when you see the Reserve Bank lower official rates.

 

So if you have looked at consolidating your debts and are now sitting there scratching your head, what is the best thing to do? Start by making extra repayments onto your highest interest rate debt. Pay every spare cent that you have into this loan while making the minimum repayment on all your other loans. When the highest rate debt is paid off, put the money that was going onto it into paying off your second highest interest rate debt (as well as the minimum payment that you had already been making on debt number 2). Keep going until all the debts have been extinguished, then chuck a party to celebrate (nothing too big, you don’t want to end up in debt again!)

 

If you really knuckle down and make a huge effort to get rid of your debts, you will notice a couple of things. Firstly, the hardest part is the first extra repayment on that first loan. Every subsequent debt will be paid off with increasing speed, probably a lot faster than you thought possible and certainly a lot faster than with a debt consolidation loan. The amount of money you pay in interest gets smaller and smaller, and as time goes on your confidence with your financial situation grows.

 

And you end up realising just how crazy those debt consolidation loans really are.

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The Negative of Gearing

April 29th, 2012

Negative gearing is great – just ask anyone who knows anything about money, or anyone who thinks they know. Negative gearing is also not properly understood by the general public.

Basically it’s a situation with investing where you borrow money to purchase an asset (like a house) and have to pay more to the bank in interest than the money you are receiving in income (like rent from your tenants). Australian tax laws allow you to effectively claim a tax deduction for the difference, and as every Aussie knows, tax deduction = good. But what’s good for an individual might not be good for society.

Leaving aside the fact that negative gearing can totally ruin you financially if you don’t have the right income to support it, negative gearing has been blamed for helping to push up the cost of housing and creating a larger gap between rich and poor. One reason for this is because there is no limit to the amount an individual can negatively gear. Why not?

I reckon if the federal government had the balls, they would take a look at the negative gearing sacred cow and change it, gradually, over a number of years to make the system fairer. Currently there is no limit to the number of properties you can have negatively geared and claiming tax deductions on in your annual tax return. I reckon there should be a maximum introduced of, say, 18 properties (yeah, a few individuals have an enormous number of properties under their belt). The next year the number should drop by one and keep falling by one per year over 15 years so the maximum number of properties that can be negatively geared by anyone is three.

I’m not saying you should not be allowed to own more than three investment properties, just that you can’t claim tax deductions on the interest of the loans of more than three. Introducing a change over a long time period would not adversely affect the property market or the average Joe. The super rich would hate it, especially if the system was widened to take into account negative gearing on shares and managed funds as well.

If the average Aussie property is deemed to be worth $475,000, that’s a good place to start for the equivalent amount of shares or managed funds that can be negatively geared (multiplied by 18 for the first year, 17 for the second, etc.). Lowering the amount that really wealthy high income earners can claim on their tax makes the whole tax system fairer for all of us.

Another way of bringing house prices down to more sustainable levels is to increase supply by encouraging new houses to be built. Allowing negative gearing only on new houses, or properties which have been vacant for 12 months or more, would see more properties available for renters without pushing up the prices of existing dwellings. But introducing a sudden shock like that into the tax system would spell the end of the political party that did it.

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It’s The Fashion

April 22nd, 2012

With three more Australian fashion designers hitting the headlines this week paying their workers half the minimum wage for making designer clothing, my mind has been turned to fashion, and in particular how bloody expensive it can be. It’s not gonna shock you to know that the label on many products costs more than the article itself, but it might shock you how much more it costs, particularly if you’re like me and don’t generally go anywhere near brand names.

My $15 Target sunnies snapped the other day. Up until the point where they went wonky on my head they actually looked pretty good and, more importantly, they protected my eyes from UV rays and harsh sunlight. When you think about it, that’s all your sunglasses need to do – stop you from squinting, cut out the UV and not make you look like a knob. Australian standards mean that you get UV protection and the mirror on the sunnies stand is there to protect you against looking like an idiot. In theory.

Because it had been about 2 decades since I’d entered a Sunglass Hut shop, I had a look at their collection yesterday and noticed that their entire range was behind glass, you know, like all the gold stuff at a jewelers. At first I thought this was the case so that you had to ask a staff member to give you the ones you wanted to try on, then they had to stand next to you and lie about how good they look on your face. Similar to that fibbing experience when I try on clothing and there is no mirror in the change rooms – “Oh that shirt looks great on you!” is what I hear from the female shop attendant when I’m thinking “Yeah, this shirt, designed for the clubbing teenager, really matches my bald spot.”

But as I got closer to the locked display cabinets I realized that the number 430 on the tag stuck to the arm of the sunnies was not the first three numbers of the barcode. It was at that point I remembered our superglue and left the store to apply some to my 15 buck specials.

When I got home I needed to sit down in the smallest room in the house, and picked up my wife’s baby magazine (normally I read the money section of the newspaper at such times, but I’d finished it at a previous visit). In it there was a picture of Victoria Beckham carrying her baby daughter, both of them dressed for the Logies. Surrounding the photo were a bunch of lookalike products you could buy so that you too could look just like Posh and her kid (minus the ski jump nose – I reckon that’d be extra). The price for the dress and boots came to $205. For the toddler.

Lucky I was sitting where I was, ‘cause I was somewhat shocked. It’s pretty sad that that this particular magazine is targeting new mums who are probably not looking the same as they did pre-kids. Add to that the fact that having kids tightens the purse strings and you have the perfect storm for insecurity.

Something the fashion industry thrives on I guess.

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Finally, Good Advice*

April 8th, 2012

For many years financial planning has been seen as an industry with professional and ethical standards right up there with used car salespeople and Today Tonight journalists. Many surveys and shadow shopping exercises done on financial planners over the years have reinforced this negative image and the industry itself has been unable to clean up its act.

Lawmakers have also struggled to pass legislation to enable consumers to be given advice that puts their interests ahead of the interests of the planner, or the wealth management team who get their hands on the consumers’ money. There have been many changes over many years aimed at cleaning up the industry and thus far all have fallen short.

The federal government is just about to introduce laws that will see the biggest changes to financial planning to date. Yet, even as the financial planning world screams murder over the changes that they reckon are doomed to have such a negative impact that the sky will fall in, the new laws again fall short.

Firstly, the good news: The laws mean that the planner will have a duty to put the clients’ interests ahead of their own. They will no longer be able to charge commissions on the money of new clients in managed funds or superannuation.

Now, the bad news: Existing clients who pay commissions from their funds will continue to pay them. The new legislation, which was to take effect from 1 July 2012 will only start from July 2013. Planners will still be able to charge clients asset based fees, which are similar to commissions. Commissions will still be allowed on life insurance products (commissions make up to 30% of the premium on some insurance products, meaning a ban on them would’ve seen life insurance significantly more affordable).

The most recent ASIC survey of financial plans found only 3% of them were good. The rest were adequate (58%) or poor (39%). It’s a trend on par with every similar survey I’ve seen done on planners over the past 10+ years. The worrying thing is that when the clients of those planners were asked to rate the advice, 86% of them reckoned they’d received good advice and 81% said they trusted it “a lot”. Clearly what people think is good and what the regulator thinks is good are very different. What it boils down to is people being ripped off, and not realising it. And when the rip off concerns your life savings, it’s serious stuff.

That leaves only one line of defence – legislation. These new laws are an improvement on the old ones but they leave a gaping hole between crap laws and good ones. In the end, the federal government has shown great courage to go against the wishes of an industry to introduce this legislation which will be better for consumers, but there is the very real possibility that the new laws will be in effect for the months between July 2013 and next year’s federal election. Because if the opposition gets the thumbs up from the electorate, they have promised to throw the new laws out the window.

Then consumers are back to square one.

*From July 2013. For new clients only. Not when you pay asset based fees. Possibly for a limited time only.

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Super Suggestions

April 1st, 2012

Warning: don’t read the following blog before bedtime. Don’t even read it out loud, especially if you are sitting in the passenger seat of a car and the driver doesn’t have ready access to Red Bull. The following blog contains some mild and conscience-changing language which is likely to send children into a boredom related stupor. Keep reading if you reckon you can handle some superannuation suggestions.

The super co-contribution is one of those rare things where you get something for nothing. If your income is below $31,920 and you make a $1,000 contribution to your super, the government will match it. That $1,000 isn’t part of the money your employer puts in or any you salary sacrifice. Once your income goes above $31,920 the amount the government chips in decreases until it cuts out entirely at $61,920. In theory it’s a good scheme, but in practice I don’t know many low income earners who have a lazy grand sitting around. From 1 July this year you will only be eligible for a maximum of $500 from the government for your own $1,000 contribution.

That’s the bad news. The good news is that if your income is below $37,000, from 1 July you will no longer have tax taken out of your employer contributions. Currently everyone’s employer contributions are taxed 15% as they go into your super account, but for low income earners that tax is being abolished. And the amount your employer has to put into your super will start to go up. Currently your boss has to put 9% of whatever you earn into super, but from mid this year it will go up to 9.25%, rising every year until it reaches 12% in 2019.

If you have a spouse earning less than $13,800 and you make a contribution to their super fund of $3,000 you can claim a rebate of $540, which is not much, but better than a poke in the eye with a rough stick. These contributions are not the ones that are eligible for super splitting. Most people are able to split the money paid into their super to their spouse’s fund (unless it’s a contribution they’re claiming a tax deduction or rebate from, like a spouse contribution. Yes, it all starts to get a bit complicated doesn’t it?)

Don’t forget that all money that goes into super these days stays there ‘til you hit retirement age. So don’t go whacking the money you had set aside for the when next credit card is due into your super, ‘cause you’ll need that bill paid before you are old and grey. The only time the tax office will let you get your hands on your super early is when you are about to die or you are completely financially stuffed. And I do mean completely stuffed. Super money is designed for retirement and the tax office makes it very hard to spend before you get there.

If you are self-employed, please please please don’t forget to pay yourself superannuation. You might see it as an unnecessary extra expense now but I can assure you that you won’t think of it that way in the years to come.

I hope you are still awake.

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Never Too Late

March 25th, 2012

I was on the phone yesterday talking to my 17-year-old nephew about the super fund I am helping him to set up, and a colleague in his late 40’s was overhearing the conversation. When I got off the phone he asked who I was talking to and I replied it was my 14-month-old daughter. When I fessed up, I explained that I was aiming to teach my nephew the power of compound interest at a young age. The colleague replied that he wished someone had sat down with him and explained the basics at such a young age and I could hear the regret in his voice. Most people learn their financial skills from the family they grew up in, and in the case of my colleague, they hadn’t experienced nurturing from someone with good financial skills.

I learned about money from my parents, my father learned about money from his. On that side of the family nobody was rich but they wouldn’t see themselves as poor either, and they passed that knowledge down through the generations (I posted a blog about the lessons I learned about money from Grandma Haggarty just after she passed away last year).

My mother, on the other hand, must have got her financial skills from outside her family. Her parents, my Gran and Pa, rented their home in Sydney under a scheme that saw rents kept low after the Second World War. For years they lived in the suburb of Willoughby (quite close to the CBD), ignoring the advice of my dad to save for a home of their own (dad reckoned the cheap rent wouldn’t last forever). One day in the early 1980’s the inevitable happened – the scheme ended and Gran and Pa were forced to move out. They couldn’t afford the rent anywhere in Sydney, let alone in Willoughby, and were facing the prospect of having to leave the city they had lived in most of their lives.

Then my parents stepped in and bought a house for Gran and Pa to live in. The only place mum and dad could afford was as far north as you could go and still be in Sydney. My parents did it tough to pay that place off, and my grandparents were very grateful for the assistance they had from them.

Years later, after Pa had died, Gran realised she could no longer live in the house and decided to move out. With the help of my aunt and uncle, some savings of her own and the First Home Owner Grant, Gran bought her first home. Aged 87. We reckon she must’ve been one of the oldest recipients of the grant. The new place was a simple unit in a retirement village, 30 kms south of Newcastle, and she absolutely loved it. Gran loved what it represented – she loved the fact that it was hers.

When Gran passed away I was reminded at her funeral just how proud I was of her when she bought her unit – a place, after so many years of renting, that she could finally say was her own.

Next time you think that you are too old to start saving for your first home or sorting out your finances, unless you’re in your 90s, think again.

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Paint The Town Red

March 17th, 2012

We’ve finished! Regular readers would know that Claudia and I have been renovating lately, including painting the interior of the house, but the brushes have fallen silent because we have finished painting. We spent a bloody long time doing it and learnt a lot along the way. All that time spent staring at the ceiling and walls sent me a little mad, but it did make me think how similar painting your house is to paying off a mortgage.

Sure, there are heaps of differences between painting a house and paying it off, like the fact you can’t pay a house off in 2 months and, try as you might, you normally can’t get someone else to do the job for you. But the similarities are worth exploring.

Firstly, if you’re renting, it’s somebody else’s problem. It may well end up being something you tackle later, but for the time being it’s not your top priority.

Before you start on your endeavor there is a part of you that says “This can’t be too hard, heaps of people do this”, and another part of you that can see the enormity of the task ahead. Every stroke of the brush is the equivalent of another dollar paid towards the mortgage. Fair dinkum, there would have to be many tens of thousands of brush strokes in the job we’ve just done.

To really get stuck into it you have to wear old tatty clothes, you say to yourself how much easier it would be without kids, and dream about it at night. You lose the motivation to comb your hair on the weekends, and, as you’re not going out anywhere special, it doesn’t really matter anyway.

Doing it by yourself is a tough slog. Yeah it’s possible, but any help you can get will speed things up. Two people working together are twice as productive and family often contribute towards a room or two.

It seems to take forever before you can actually start to see some progress. Ages of fixing holes, sanding, sugarsoaping and taping is the equivalent of the early repayments when you can hardly notice a dent in the loan. Getting to the point of using a roller is like a bonus of money – that pay rise, the tax refund you were counting on, an inheritance, or winning the lucrative contract – large amounts of the task get done in seemingly record time and it gives you real encouragement to keep going.

There are always things that crop up to slow you down – illness, unexpected repairs, a whoops pregnancy and concentrating your efforts on other things.

The final stages flash by as you are able to look back at all you’ve achieved and can imagine what it will be like when it’s done. When you finally reach that end point it’s a bloody fantastic feeling, made all the better by celebrating (but not with champagne ‘cause the last thing you want to do is risk the cork dinting the pristine ceiling).

And when you look back on it there is a stupid, stupid part of you that says “That wasn’t so bad, we can do that again one day….”

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The Right Information

March 10th, 2012

There are bucket loads of places to get information on money. Websites and books galore, newspapers, magazines, finance professionals and, of course, family and friends. But how do you know where to find the right information for you?

With apologies to anyone reading this from overseas, the best information for us Aussies is homegrown. Admittedly, there is plenty of good stuff in books and websites written overseas, but it will inevitably be surrounded by info specific to the country the author is based in. I haven’t got a clue what Britain’s tax system is like, how the yank’s 401K plans operate or what the go is with NZ’s student loans. Read sources from overseas and you’ll be reading a lot of irrelevant stuff that will just confuse you.

That’s not to say that all stuff sourced overseas is gonna turn your head to mush, or that everything written by Aussie authors is good. There are a number of good books that look at the generalities of money without going into things specifically for readers in the country it was written in, and plenty of homegrown crap.

With any source, be it website, magazine of face-to-face advice, you need to know if there are any conflicts of interest or biases. Anything that comes from someone with something to sell, be it shares from a stockbroker, property from a real estate agent or loans from a bank, is not going to be conflict free. And if the source receives their income from advertising revenue you have to be assured that the advertisers are not tainting them.

Turning to family and friends for advice means you must remember that they will be swayed by their own experiences, good and bad. Unless the person giving you that guidance is knowledgeable across all areas of money, they will steer you towards the places that made them successful and away from things that burnt them. And when it comes to going halves with a friend on an investment property, for the thing to work you want to ensure that you are both the same age, earn the same income, have the same number of kids who are the same age, share the same tolerance to investment risk, have the same health and life expectancy and the share the same timeframe you want to hold the property for. Yeah, right. Once you throw a few differences into the mix you risk ending up in the situation where one person is needing to sell to access their money and the other person is not wanting to or not in a position to be able to.

So, where to go for the right info. Any federal government websites (.gov.au) will be free of bias and generally contain really good stuff. Books written by guys like Paul Clitheroe, Noel Whittaker and Scott Pape are great – Pape’s Barefoot Investor is a ripper, I’m not a big a fan of his website though. And, of course, I reckon my website ticks all the right boxes, but then I would say that, wouldn’t I!

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Our Insect Nightmare

March 2nd, 2012

So many Aussies have been hit by floods over recent weeks, and due to the nature of insurance companies, if you live in a flood prone area you have bugger all chance of getting cover.  In the ideal world you would have yourself insured up to the eyeballs to cover every foreseeable event, but there are a few things that you just can’t cover yourself for. We discovered one of those things recently.

A couple of months after buying our house, Claudia and I got a kitchen company in to replace the baby blue monstrosity, that I’m sure was never in fashion, with a new kitchen. Claudia was so excited that on the morning work started she couldn’t even eat breakfast. Just after the old kitchen had been gutted and the new cabinets were brought inside, Greg the kitchen man was trying to find a stud in the wall to attach them to. Five minutes later he informed us that we had termites.

Strangely enough Claudia’s appetite didn’t suddenly come back and I tried to find a word in my head that didn’t start with the letter f.

Greg started work on the wall opposite. Moments later he told us we had lots of termites, no good studs and that he had to down tools.

Our new house was being eaten by termites not detected by 2 pest inspectors in the previous 9 months, and we had no kitchen a fortnight before we were due to host Christmas for my family. The stress over the following weeks was pretty extreme as we watched thousands of flying termites swarm out of the wall, worried that the roof would come crashing down at any second and tried to work out what we were going to do.

Two and a half months and several thousand dollars later we have had the house treated and badly damaged areas repaired.

Like floods for people in flood prone areas, termites are not something you can insure against. When they strike, you are left to fend for yourself, and if you don’t have emergency funds available you’re screwed. Without money for emergencies you either have to beg, borrow or go under.

How much money you should have set aside will vary depending on your individual circumstances and whose advice you listen to. Some money people will say you should have 6 months of living expenses saved to draw upon at a moment’s notice but it’s a pretty tough target to make. I reckon you need to have about $2,000 per family member as a bare minimum so that you don’t need to give the credit card a big hit when the shit hits the fan.

“She’ll be ‘right!” is an easy alternative to having emergency funds at the ready. But it’s not what you will say when you discover a small white insect and 10 million of it’s closest relatives have found the timber in your house is rather yummy.

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