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How much you should spend on your next house

The banks will tell you how much you can borrow. But how much should you really borrow? This article describes how to estimate the ideal maximum amount you should borrow and the true maximum affordable repayment. Follow this process so you can avoid over-extending yourself and find a harmony between lifestyle now and your future lifestyle.

These days I rarely read a non-fiction book cover-to-cover, instead I flick through to grab key ‘big ideas’ to evolve my thinking. In the past year one book I delightfully read in full was “Predictably Irrational” by behavioural economist Dan Ariely.

As I immersed myself in the insights there was one in particular, right at the very end that I read as a personal challenge. (page 285, 2009 revised edition, pbk)

Dan Ariely described how when he and his wife Sumi went to buy a house he asked some experts he knew “including a few finance professors from MIT and investment bankers” what seemed to him like a simple question.

It is a question you have probably considered too.

“How much should I spend on a house?”

Ariely describes how everyone told him the same thing – a way to calculate how much he could borrow based on his income and the interest rate. But that’s not the question he asked.

Ariely noted “when I tried to push for an answer, the experts told me that they had no way to help me figure out the ideal amount we should spend and borrow.”
(my emphasis)

Can you see why I read it as a challenge?

Well, I have the answer for you Mr Ariely (I hope one day I can call you Dan).

First, let me share Ariely’s behavioural conclusion from his experience:

“When we can’t figure out the right answer to the question facing us, we often figure out the answer to a slightly different question, and apply this answer to the original problem.”

Hopefully you can see the potential issues in that human decision making.

How much you should spend on your next house

The maximum price you should pay for your next house is the sum of:

  • Your saved deposit
  • Transaction costs
  • The maximum amount you should borrow

The maximum amount you should borrow is a function of:

  • the loan term
  • the average interest rate over the loan term
  • your maximum affordable regular repayment amount.

For definitions of the categories described in the formula below see my ‘Pay Yourself First (in practice)’ model I described in my recent article on better budgeting.

Maximum affordable loan repayment equals your net after-tax income, less allocations for:

  • Regular saving for your financial independence goal
  • Regular saving for pre-retirement essentials
  • Repayment commitments on other existing debts
  • Irregular expenses
  • Regular essential and comforts
  • Impulses and indulgences (presuming you’ll still want the occasional splurge)

Now you have estimated the ideal amount you should spend on repayments rather than some alternate rule-of-thumb like 30% of your income.

To estimate your maximum affordable loan amount you then plug that repayment amount into the free borrowing calculators provided by the lenders. Or you can do it yourself in a spread sheet using the present value (PV) function.

You can download an example calculation here.

Extra tips

By the way, don’t use what the lender says you can afford to repay each period. Their calculation ignores your need to save for eventual retirement and often assumes you can live a lifestyle equivalent to the Henderson Poverty Index (in Australia).

In completing the affordability calculation I recommend you:

  • Choose your loan term to match the amount of years until your financial independence goal. That way your debt will be repaid by ‘retirement’.
  • Add an extra 1% to the lender’s current interest rate to give you a buffer.

When you actually apply for the loan you can apply for the typical home loan term of 30 years and just plan to make extra repayments in line with your calculation. This technique also builds your buffer for if misfortune strikes.

In practice

Life is a balance between doing something that brings us immediate fulfilment and doing something else that is an investment in future fulfilment.

Exercise, healthy eating and study are often investments in future fulfilment.

If the type of home you really want to buy costs more than the above estimate you then need to make an informed trade off.

Are you willing to cut other elements of your current lifestyle? Or are you willing to cut your expectations of future lifestyle like holidays, car upgrades and retirement?

Please share your thoughts

What do you think of my recommended approach to this common dilemma? Please share your reflections in the comments below as I’d really like to know. (You can share under a pseudonym to protect your privacy.)

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Better budgeting

For many people the word “budget” conjures feelings of restriction. (Just like the word “diet”.) However a good budget should be the exact opposite. It should facilitate you having enough money for the things that really matter so you need not feel restricted. In this article I reveal a better budgeting technique using the model “Pay Yourself First (in practice)”

Cue Skyhooks tune…

Budget…is not a…dirty word! Budget…is not a…dirty word!

Once on live TV I was challenged to come up with a better word for a budget. The interviewer felt the word was too creepy.

The reality, as you can probably guess is that it has nothing to do with the word but the meaning we associate with it.

In fact the origin of the word “budget” is in the leather case or wallet that bureaucrats used to carry their financial plans.

Of course the problem is that for many people budget conjures feelings of restriction. (Just like the word “diet”.)

A good budget should be the exact opposite. It should facilitate you having enough money for the things that really matter so you need not feel restricted.

You achieve this this by following the wealth principle I call “saving for the significant and minimising the insignificant.”

Pay Yourself First (in practice)

It’s likely you’ve heard of the principle to pay yourself first.

Back when I was a graduate engineer I thought this principle meant to put a certain percentage of my income away for wealth creation. Then I wondered “what next? How do I manage the remainder?”

Now that I’ve had the benefit of working with lots of people on their cash flow I’ve created this model to help you create an effective budget that sets aside money for the significant things in your life plan.

(Download a PDF version of the model here)

Top-down or bottom-up?

To follow the principle of pay yourself first ideally you work from the top as you allocate your income into pots of savings.

However, if you find that you never have any savings and in fact spend more than you earn the top-down approach won’t feel possible – because it’s not yet. To extricate your butt from the spending fire first you need to get control. You do that by starting at categories 5 and 6 and working upwards as you increase your control.

In short if you are in stages 1 or 2 in the Six Stages of Wealth Creation you would start at the bottom and work upwards to improve your cash flow management. Everyone else can take the planning approach and go top-down.

Your pots of money

1. Financial Independence

The first pot you allocate is how much you need to regularly invest so you accumulate enough net wealth to “retire” – or make work optional – when and how you want it.

In addition you include the additional regular loan repayment s you need to make to ensure you are free of personal (non-investment) debt by your financial independence target date.

2. Pre-retirement Essentials

The second allocation is to all the big things you want and need to do, buy or experience between now and the point you achieve financial independence.

For example: car upgrades, major home maintenance, family holidays, replacing major household items, parental leave. (The list goes on.)

In my experience many people find these items either blow their savings or are funded by debt. Why borrow and pay interest on predictable expenses when instead you could be earning interest? Earning interest in advance actually reduces the true cost of the items and the amount you need to save.

3. Irregular Expenses

In this pot I include all expenses you pay at least every year but less frequently than monthly.

For example: clothing, utilities, insurance, gifts, parties, subscriptions.

Again from my experience it is often the irregular expenses that end up blowing the savings of otherwise consistent savers. The problem for them is that whilst they are saving, usually by automated pay deductions, they are not saving enough. Month-to-month they may have savings but not year-to-year.

Often when clients actually separate their irregular from their regular expenses they are shocked by how high a proportion are irregular expenses. That observation alone is an insight into why they may be spending too much.

The expenses may be out of sight but they should not be out of budget.

4. Existing regular commitments

This category is the allocation for repaying all of your existing debts as per the current minimum required repayment.

For many people this is the first line item they put in when working out their budget.

The reason loan repayments is item 4 is that when you take a planning approach you first allocate items 1 through 3 to work out how much you can afford to borrow.

The way many people actually work out how much to borrow is a combination of:

  • What the lender says they will lend them
  • Their income less the regular spending that comes to their mind (i.e. untracked)

5. Regular Essentials & Comforts

All the regular items you spend at least every month.

When you take the planning approach you get to this point and discover how much you can afford to spend on comforts. And some things you thought were essentials get re-categorised.

It’s at this point many people start prioritising between lifestyle now and future significant goals.

  • Which is more important to me?
  • If I don’t save up for that future goal, but still want it how will I create the money to afford it? (e.g. I’ll only be able to afford X if I get a promotion – so I’d better start investing in professional development.)

6. Impulses and Indulgences

The final category is a little allocation for spontaneity.

How much to allocate to each pot

If everyone were identical in situation and value-system then we could define a nice neat package of percentages to allocate to each pot.

But we’re not.

To create a budget that is meaningful and motivating to you it needs to relate to your goals for your money.

That’s not as hard as it may sound. You already know what you want – it’s in your head, you probably think about it regularly. Just get it out of your head and onto paper and then put a number and time frame next to it.

Automatic wealth creation

Once implemented good budgeting should also be as automatic as possible. That’s the next step of smart cash flow management.

If you’re interested in how to put this all into place talk to me about Cash Flow Coaching.

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Property prices do go down

Do you or someone you know hold beliefs like “property is safe”, “property doesn’t go down”, “you can’t lose money on property” and “property is the best investment”. If so, you may be a victim of our natural tendency to confirmation bias. Read this article to boost your robust decision making.

A couple of weeks ago someone was telling me about their recent investment property purchase. They had borrowed the full property price plus purchase costs. Their strategy was to hold it for about 3 to 4 years and then sell it for a substantial profit.

Alarm bells were already ringing for me – then they came out with “the worst that could happen is we sell it for what we bought it for.”

I do not have a bias for or against any particular type of investment asset, although some may interpret that I do. I favour robust decision making where the outcome is selecting the right strategies and assets for you right now. What is appropriate for you will be fluid and change over time as your situation evolves.

When it comes to residential property too often I encounter beliefs and decision making that is far from robust.

I hear phrases like “property is safe”, “property doesn’t go down”, “you can’t lose money on property” and “property is the best investment”.

Smart people believe weird things because they are skilled at defending beliefs they arrived at for non-smart reasons.”
— Michael Shermer

Naturally deceptive

Confirmation bias is one of our natural tendencies where we selectively focus on and easily recall information that reinforces our existing beliefs. At the same time we selectively ignore and forget information that would challenge that belief.

When people talk to me about residential property they seem to always have a toolkit of anecdotes they can roll-out to prove their point. Often they can’t recall knowing anyone who has lost money, or reading any news about property loses.

I know a lot of people have made good money investing in residential property in the past decade. But I also know people who have lost money, sometimes lots. And I also see the more scientific statistics of movement in real estate indices (and the indices of other asset types.)

“…thinking anecdotally comes naturally, whereas thinking scientifically does not.”
— Michael Shermer

Evidence to help you

In the interests of supporting you in making more robust decisions I am starting to collate and publish evidence to challenge the common misconception that property does not go down. Here is the first:

House prices tipped to slip in year ahead

The Weekend Australian, January 1-2, 2011 reported “…a national fall in house prices with further declines likely over the year ahead.” Read the article here

I live in the “boom town” of Perth where optimism about property investment is astounding. Yet even in Perth property does go down as reported by The Weekend Australian:

“The Rismark-RP Data house price index shows the market is weakest in Perth, where average prices have fallen by 4.9 per cent, or almost $25,000, since May.

Average apartment prices in Perth are down $44,000. Home buyers in Perth have seen no capital appreciation since August 2007.”

(emphasis added by me.)

Wow, two whole years where investors potentially had no capital appreciation to compensate them for negative cash flow (from rent not covering interest).

Selling your property for what you bought it for is certainly not the worst that could happen!

Ensure you are scientific in your research and make robust decisions about what is right for you right now.

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The annual cost of retirement

If you struggle to define your retirement planning target one initial starting point can be to consider how much current retirees spend each year. Here the Westpac ASFA Retirement Standard is helpful, and it has just been updated.

An essential ingredient in successfully creating wealth is your purpose – particularly one that motivates you.

One of the common purposes of wealth creation is to accumulate enough money that you can make work optional (aka “retirement”.) This is your point of financial independence, whether you choose to cease working or not.

In my financial planning experience most people can’t tell me how much money they’d like to be able to spend in retirement. Without a clearly defined target the task of working out how much you need to save each year is quite difficult. And online retirement calculators can’t help you as they require a target input too.

If you struggle to define your retirement planning target one initial starting point can be to consider how much current retirees spend each year. Here the Westpac ASFA Retirement Standard is helpful, and it has just been updated.

Retirement cost of living

As at the end of the June 2010 quarter a couple needed approximately $53,500 per year to live comfortably in retirement (per household). Couples living more modestly survived on approximately $30,400 per year.

A single retiree required approximately $39,000 per year to live comfortably.

The Westpac ASFA Retirement Standard assumes the retirees own their own home. It defines a modest retirement lifestyle as “better than the Age Pension, but still only able to afford fairly basic activities.”

A comfortable retirement lifestyle is defined as: “enabling an older, healthy retiree to be involved in a broad range of leisure and recreational activities and to have a good standard of living through the purchase of such things as; household goods, private health insurance, a reasonable car, good clothes, a range of electronic equipment, and domestic and occasionally international holiday travel.”

You can obtain detailed budget break downs on the ASFA website. The Westpac ASFA Retirement Standard is updated quarterly.

If you are using this information in a retirement calculator remember to increase the amount each year in line with inflation. Some calculators do this automatically.

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Four types of life insurance

Insurance is a tool to help protect your lifestyle and wealth creation if misfortune strikes.

This article provides a brief overview of the four main types of personal risk insurance. Commonly these are referred to under the umbrella term of “life insurance” but they each serve distinct purposes. Think of each type as a different strand in your safety net.

For more detail on each cover please browse through my article archive. The archive includes articles on:

  • Why you would have each cover
  • How to work out how much cover you may need
  • Statistics on the likelihood of events occurring
  • The cost of items and services you may need if you were seriously ill or injured

Life (or Death) Insurance

Pays you a lump sum benefit on your death. Modern, quality policies often include a feature that gives you an advance payment if you are diagnosed with a terminal illness.

In my experience premature death is the life event most considered by people when they think of personal insurance. However it is perhaps the least likely event that can have a serious impact on your wealth creation. Therefore the next three types of life insurance cover are critical to understand.

Income Protection Insurance

I consider income protection insurance to be the most important personal insurance for anyone who is not yet financially independent. So that’s most adults.

Income protection insurance pays you a regularly monthly benefit while you are temporarily unable to work due to injury or illness.

Short term incapacity is one of the most likely events. And since many people would fall behind in loan repayments and bills if they were out of work for just one or two months, the impact of short term incapacity is high.

You can also receive a partial benefit when you are partially disabled and only able to work part time. This is a very crucial point as partial disablement is probably more likely than total disablement. So it is great to get some benefit to top up your part time income.

Income protection insurance generally pays up to 75% of your total remuneration package (including superannuation and non-cash benefits.) You can choose the waiting period before a benefit will be paid. Plus you can choose for how long the benefit will continue to be paid if you are long term disabled. Commonly financial planners recommend a waiting period of 30 days and a benefit payable up to age 65.

One bonus is that premiums for income protection insurance are tax deductible.

Total & Permanent Disablement (TPD)

Many people have some Total & Permanent Disablement insurance within their employer superannuation but it is rarely close to enough cover.

Total & Permanent Disablement insurance pays a lump sum benefit if you (as the name suggests) are totally disabled and are expected to be for the rest of your life. The rest of your life part is as determined by specialist medical practitioners.

Total & Permanent Disablement is a compliment for income protection insurance. Whilst there is some overlap having TPD is not a replacement for having income protection insurance.

When you are long term disabled you have extra expenses compared with being short term unable to work. For example you may require modifications to your car and house. You may also need to pay for a carer and other household services. If your partner becomes your carer then you’ll need to replace their former income instead.

Total & Permanent Disablement insurance can be used to top-up the extra 25% of your income not covered by income protection insurance. Plus you’ll need some money to cover the saving and investment you would have being doing if you worked your whole life. This can be used to meet your expenses from age 65, which is the maximum age for most income protection policies.

Trauma or Critical Illness Insurance

In my experience another life event that occupies people’s mind is ‘what if I get cancer or have a heart attack?’
Trauma insurance pays you a lump sum if you suffer a serious illness.

Importantly it has nothing to do with your ability to work as a result of the illness. As long as the illness is serious enough to meet the minimum medical definition (in your policy) then you can claim a benefit.

The four most common illnesses covered under these polices are cancer, heart attack, stroke and coronary bypass surgery.

Commonly you could use this benefit payment to help you meet the costs of medical treatment including medication.

Also, if faced with a serious illness many people would like to choose to stop working to focus their efforts on beating the illness. If you medically are able to work but choose not to work then income protection insurance won’t pay you a benefit. So you can use your trauma insurance to replace your income for a year or two while you choose not to work. This can also apply to replacing your partner’s income as many partners may like to be able to be by your side to support you.

You can claim on all four types

It is important to note that you can ‘simultaneously’ claim each of income protection, trauma and TPD insurance for the same illness. Here’s an example how:

  • You suffer a serious stroke. It meets the medical definition so you claim your trauma benefit.
  • Immediately you can’t work or do much at all so after 30 days you claim your income protection benefit. This keeps paying you each month while you continue to be disabled.
  • After 6 months (or 12) you have not recovered your ability to return to your occupation and the doctors unfortunately say that you never will. You make a claim for your TPD benefit and receive a lump sum payment. This claim does not wipe out your income protection, which you continue to receive.
  • Many years later you pass away and your partner receives a benefit from your life insurance. (At this point the income protection benefit does stop.)

How much cover?

To assess how much cover you need for each of the four types of personal life insurance you need to consider your personal life choices. These are individual to you so there is no set rule of thumb.

Insurance fills the gap between the wealth you need to find your desired life, and the wealth you currently have. So your required level of cover (sum insured) changes over time.

To get the cover right first you must consider the life choices you would make in each of the circumstances. Next you work out how much it would cost to fund those life choices.

The calculations can be difficult so use a financial planner to guide you through the process.

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Tragedy strikes around 20 percent of working families

Many people overlook personal insurance thinking tragedy will never happen to them. Then a friend or family experiences tragedy and they get a wake-up call. The latest research released yesterday by Lifewise/NATSEM reveals that it can and probably will happen to you at some time during your working life. More than one in five families will be impacted by an insurable event in their working lives.

Over one million working-age parents with dependents will be impacted by death, serious accident or illness.

Many people overlook personal insurance thinking tragedy will never happen to them. Then a friend or family experiences tragedy and they get a wake-up call.

The latest research released yesterday reveals that it can and probably will happen to you at some time during your working life.

Let this research be your wake-up call to review your health, wellbeing and safety nets.
Research by NATSEM for Lifewise revealed that based on 2008 statistics:

  • 18 Australian families lose a working age parent every day.
  • Every year 235,790 working age parents suffer a serious illness or injury
  • Every year over 17,000 working age parents are forced to stop working, either permanently or for an extended period of time.

More than one in five families will be impacted by an insurable event in their working lives.

Yesterday I was given a DVD called “Living with Water” about water safety with children. It’s aimed at preventing the drowning deaths of children under age five – 300 of which have occurred since 2000. That’s just over 30 drowning deaths per year targeted by this significant, government funded initiative.

The death of a child is tragic and I agree with our focus on water safety. Yet consider the massive impact on children and families when family income is slashed by injury, illness of death. And take note that more families per day are affected by that than are affected by the drowning death of a young child.

The financial impact

It should be no surprise that the basic levels of insurance you may automatically receive with your employer superannuation are nowhere near enough.

With typical levels of insurance cover the typical family with dependants will lose around half their income if tragedy strikes, according to the research by Lifewise/NATSEM.

Could you and your family survive on half your income?

When you consider the true likelihood of an insurable event and the financial and lifestyle impact, the cost of insurance cover is very affordable protection for your family.

Contact me to discuss how much insurance cover you may need and how affordable it can be.

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The must read book for aspiring entrepreneurs

Over half the people I speak to professionally list “self-employment” as one of their life goals. If you too dream of going out on your own or starting a business then I strongly recommend that you read “The E-myth Revisited” by Michal E. Gerber before you quit your job. Preferably you need to read The E-myth before you succumb to what Gerber calls ‘the Entrepreneurial Seizure’. Read my full review of this essential book.

Over half the people I speak to professionally list “self-employment” as one of their life goals. This can take many forms including:

  • Tradespeople wanting to go out on their own
  • Professionals wanting to start their own consulting business
  • Those wanting to start a business to pursue their passions (e.g. to open a restaurant)
  • And those who believe that owning their own business is the only way to get rich.

If you too dream of going out on your own or starting a business then I strongly recommend that you read “The E-myth Revisited” by Michal E. Gerber before you quit your job.

Or if you know someone who has the self-employment goal then please do them a huge friendly favour and forward this article to them now.

Preferably you need to read The E-myth before you succumb to what Gerber calls ‘the Entrepreneurial Seizure’. That’s the point where something inside your head resoundingly declares “I could do this for myself’, and from that point on your world is not the same.

The E-myth

The ‘E-myth’ is the myth of the entrepreneur. Gerber describes it best:

At the heart of the e-myth is ‘the fatal assumption’ that if you understand the technical work of a business, you understand a business that does that technical work. And the reason it is fatal is that it just isn’t true.

But the technician who starts a business fails to see this.

The real tragedy is that when the technician falls prey to the Fatal Assumption, the business that was supposed to free him form the limitations of working for somebody else actually enslaves him.

Self-employment enslaves many rather than frees them.

Now it’s not my intention to turn you off going into business. I do agree that many of the wealthiest people achieved their wealth by concentrating their risk and investing in their own business.

I want you to embark on that part of your journey with your eyes as wide open as possible to the realities of being in business. That is what Gerber does in “The E-myth”.

Inside The E-myth Revisited

The E-myth Revisited is written with a blend of traditional non-fiction text and parable. Gerber illustrates his points through the story of his client Sarah and her business “All About Pies.” This is a master stroke in getting the message across as Sarah experiences and expresses many of the emotions and questions that you do as you read the text.

If you’ve come across The E-myth after starting your business then you will likely relate to Sarah’s predicament. No matter how raw it feels stick with it as I promise you that the books also brings hope.

Part One of the book is essential reading for the aspiring self-employed person as you get an overview of the phases of business and some of the essential roles. One important distinction to grasp is the difference between:

  • The Entrepreneur
  • The Manager
  • The Technician

And to realise that everyone who goes into business is actually the three roles in one. But the trap is that you start by operating too much in the technician role and neglect the important functions of the other two roles. Yet without completing the function of all three roles the technician becomes stressed and enslaved as mentioned earlier.

After reading part one pause for reflection and take a good hard look at your situation and motives.

Are you truly willing to do what it will take to be successful?

Your Primary Aim

You may have heard of self-employed people that their business is their life. The truth is that a successful business is not your life, though it can play a significantly important role in your life.

You need to decide what role that will be by considering what Gerber refers to as your primary aim. To me this chapter of the book is gold. In one sense you really should start here. But without having read the earlier sections you may be too dismissive and flippant in your answers.

To discover your primary aim Gerber suggests you ask yourself these questions:

  • What do I value most?
  • What kind of life do I want?
  • What do I want my life to look like, to feel like?
  • Who do I wish to be?

Those who have worked closely with me may not be surprised that I consider this chapter to be gold as it mirrors my approach to financial planning. The whole purpose of a business and of creating wealth is to facilitate the life that you want. So first you must start by defining what is most important to you.

If having reflected on your primary aim you decide your business aspirations are for the right reasons then read further into the book to learn what a successful business needs to look like.

Your Turn-key Operation – The Franchise Prototype

One of the big ideas in “The E-myth” is that every business can aim to be turn-key and operate in a methodical, repeatable way like the successful franchises such as McDonalds. Whilst many entrepreneurs may not ever plan to franchise they can still operate their business as if it were the prototype for a franchise.

The pay-off for creating a turn-key operation includes:

  • Creating a real exit strategy. A well-run business that will continue to operate smoothly and profitably after sale is very attractive to buyers.
  • More time for you in the other roles in your life. Plus your time in the business will be more enjoyable.

Enjoying being in business and then easily selling it for a bucket load of cash seems to be the aim of most aspiring entrepreneurs. So resist the temptation to dismiss this section just because you can’t imagine yourself as a McDonalds.

The essential business eye opener

Self-employment and a business can be extremely rewarding both personally and financially. Sadly for most it is not. Businesses can burn through your hard earned assets and strain your relationships to breaking point. You can end up in a place you never wanted to be and don’t know how to get out of. (Ask Sarah.)

Even if owning your own business is just a speck on the horizon I strongly recommend you promptly buy and read “The E-myth Revisited” by Michal E. Gerber.

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Identifying your passionate career

I am often asked by clients and seminar attendees how I changed careers and how I found my passion for financial education and planning. In this article I share some of my story and recommend two resources for identifying your passion.

This week marks the tenth anniversary of my career crisis. I am often asked by clients and seminar attendees how I changed careers and how I found my passion for financial education and planning.

My career crisis lasted much longer than I week. I had been getting progressively more miserable in my career as a petroleum engineer as I cycled through each placement on my graduate program with BHP Billiton Petroleum.

Then my 25th birthday arrived. This was a birthday that during high school had been one about which I had wondered what I would be doing. My life didn’t much resemble the high school fantasy.

My thoughts turned to one of the other future milestones – age 50 when I would have doubled my lifetime. I realised that I had worked with many people around that age who moaned about a lack of fulfillment and enjoyment in their jobs and careers. It suddenly dawned on me that if I continued my current path I would likely become one of those people at age 50.

Then I realised that if at age 50 I was one of those people and was still working in my first career as an engineer then my 50 year old self would want to go back and kick the butt of the 25 year old for not having the guts to do something about it.

That was my catalytic moment!

Finally I acted on the oft-repeated advice of my mentor at the time, Roger Dingle to read the book “What Colour Is Your Parachute?

The job hunter’s and career changer’s bible

What Color is Your Parachute?: A Practical Manual for Job-Hunters and Career-Changers: 2010What Colour Is Your Parachute?” by Richard Nelson Bolles is a fantastic resource. The first half you read and learn about some fantastic processes for identifying the job of your dreams. The second half of the book is systematic exercises that work through each element of a dream job including industry,  type of work, environment, responsibility, income, geographic location.

To complete the exercises you often start by thinking about what you have enjoyed in your life to date and methodically identify the characteristics that made it enjoyable. It takes time but the investment is worth it.

This is your fulfilling life we are talking about. Invest time now and you reap the rewards over your lifetime.

If you are pondering what career may be your passion then I strongly recommend you buy a copy of this book. Don’t borrow it from the library. Make the investment, write all through it and own the process.

If I had my time over I’d get help

Knowing what I know now I would go much further than the book. I should’ve also enlisted professional help with a career coach or counsellor.

But I was too tight! That ‘s the main reason I didn’t speak to a professional. I was young and didn’t yet appreciate the immense value of professional guidance. The biggest value is intangible but it is there in spades.

The value includes:

  • Enlightenment – discovering what I didn’t realise I needed to consider.
  • Clarity – filtering out the irrelevant and lasering in on what is applicable to my circumstance.
  • Direction – a road map of steps to do next and even resources to access.
  • Timeliness – discovering all of the above much sooner, quicker and easier than if explored on my own. Time is limited for all of us. I love it when others can accelerate my progress to greater success and fulfillment. That reward is immense.

It was tough but the rewards followed

I almost halved my salary when I changed jobs from working as engineer to a paraplanner. Plus I had the extra costs of funding my post-graduate study. Yes, that was hard.

But within two years I was promoted to a role with a salary package that exceed my former engineering package. And I was much happier.

You can do it too

I was able to handle the drop in income because I had been a reasonable saver and had planned ahead. You can do it to.

If you ponder a career change in your future life plan don’t let money be your hand brake. Start planning and saving now to have the financial resources to support you in pursuing your passion and a more fulfilling life.

Pursue your passions and wealth follows.


Discover my other recommended books here and read other book reviews here.

Featured

Solving The Financial Decisions On Your Mind

On Thursday I conducted a webinar in which I addressed the top three types of financial decisions that are on your mind, as submitted in the recent survey.

Almost all respondants said that they think about these things daily or a few times a week. That is a lot of time and energy consumed on money matters instead of spent doing the things you really love. Better to resolve the issues and spend more time with family and friends, or pursuing your hobbies.

Most issues fell into these three broad categories: Planning, Saving and Investing. For example:

“How will I have enough money for…”

“How can I save more money for…”

“Where is the right place to invest my savings?”

For an insight into the process to resolve these issues watch the recording of the webinar below.

The recording is 45 minutes. A small time investment when you consider the time cost of repetitively thinking about financial issues without resolution.

For assistance to make more clear, confident financial decisions call me.


Download video as an MP4 file (126MB)

Featured

To Fix Interest Rates or Not?

With two interest rate rises already under our belts more people are asking me if they should be fixing their rates. Read on to discover the pros and cons and if fixing your interest rates may be right for you.

With two interest rate rises already under our belts more people are asking me if they should be fixing their rates.

You give up flexibility for certainty plus you often pay more.

 The initial attraction to fix rates is often primal – we hate to miss an opportunity to save money. With more rate rises forecast that’s precisely what people think they’ll be doing if they fix rates.

Most get it wrong

The reality is somewhat different for most. Research has shown that over half of people who fix their rates end up worse off financially. They pay more interest and repayments than if they’d left their loans variable.

For a personal illustration of that just ask anyone who fixed their rates two years ago when there was still talk of rates going higher. That crystal ball was clearly broken.

The Rate You’ll Be Paying

One belief is that you can fix your rate at the current variable rate, so as soon as rates go up you’re in front. That is not the case. Fixed rates are set taking into consideration the lender’s forecast of rates during the fixed period.

The following table summarises rates as at 7th November 2009 from the four biggest lenders:


 


Std

Var


Basic Var

1
Year Fixed

2
Year Fixed

3
Year Fixed

5
Year Fixed


ANZ

6.31

5.61

6.50

7.34

7.69

8.04



CommonwealthBank

6.24

5.48

6.64

7.34

7.74

8.04


nab

6.24

5.74

6.59

7.29

7.59

7.89

Westpac

6.31

5.61

6.54

7.19

7.59

7.94

Source: Cannex

Ponder This: If you fix your rates now how high do variable rates need to go before you break even overall?

For and Against

Why Fix

  • You can’t keep food on the table if your repayments go much higher
  • Your mindset is that certainty is a very high priority. (Any control freaks reading this article?)

Downside Trade-offs:

  • You immediately pay a higher interest rate and higher repayments, which impacts your cash flow
  • You are very restricted on the amount of additional repayments you can make, meaning you can’t ahead as quickly as you may like.
  • There can be a break fee if you need to refinance during the fixed term (usually when your fixed rate is higher than the variable rate, like now.)

Things To Consider

What are your life plans over the next three or five years?

Your financial decisions today impact on the options you will have available to you tomorrow, next year and five years from now. If you’re not well informed some decisions you make can shut out important life choices you would like to make in coming years.

For example, let’s say you plan to upgrade your home in the next few years. If you have a fixed rate you may be liable for a large break cost. At the time the cost may be so high that you can’t afford it and end up not being able to move as desired.

Maybe you don’t plan to for certain, but maybe it’s an above fifty percent possibility. If so, wouldn’t you like to keep the option flexibly open to you?

Before fixing your rates write down all the things you think you may like to do in the coming years. Project out as far ahead as the period for which you are planning to fix your rates.

Pay rises

Right now you may not have the cash flow to make high additional repayments but keep in mind the pay rises and bonuses you may receive over the next two to three years. Wouldn’t you love to be able to use them to nail your mortgage?

Cash flow control

Remember that if your cash flow is hyper-sensitive to increased repayments then fixing rates will immediately increase your pressure. Instead, over the next few months redirect that same amount into getting some cash flow coaching. You’ll discover ways to save money that’ll actually decrease your sensitivity to rate rises.

Call or e-mail me now to enquire about my Cash Flow Coaching program.

Still Unsure?

On thing you can do is hedge your bets by splitting your loan into a variable and a fixed portion. It doesn’t need to be an even split.

If you’d like some assistance in making the decision then book a meeting with me. I’m confident you’ll have a clear decision in under an hour.

Please Share This

If you found this article to be useful please forward it to your friends who have mortgages.

Featured

Saving for your children’s education

Research suggests that the cost of raising children can be about a quarter of a million dollars per child over their lifetime. When you add private school fees to the mix (and every associated expense), you can probably increase that by another 50% or more. So it is a wise idea to plan ahead and incorporate future education expenses in your wealth creation plans right from the day the “c” word enters your relationship conversations.

Daddy's Precious Angel (aka Sophie) on my first Father's Day

Our Children: we love them from the depths of our hearts and we dream of the many experiences that we want to give them. I often here parents say “I want to give my children the best start in life that I possibly can.” One of those “best starts” that parents often have in mind is to send their children to private school.

Research suggests that the cost of raising children can be about a quarter of a million dollars per child over their lifetime. When you add private school fees to the mix (and every associated expense), you can probably increase that by another 50% or more. So it is a wise idea to plan ahead and incorporate future education expenses in your wealth creation plans right from the day the “c” word enters your relationship conversations.

How Much Does Education Cost?

Recently The West Australian newspaper released a “Guide to Independent & Catholic Schools, 2006/2007”. They summarise that in fees alone primary school costs ranged from $600 to $8,000 per year, and the secondary school fees ranged from $1,200 to $13,500 per year. In addition you can expect to pay for books, uniforms, laptops, sports, camps and other special tuition, depending on the school.

Looking through the range of fees it appears that a large proportion of the fees for primary school are around $3,000 per year, and around $5,000 per year for secondary school.

I then asked my tutorial students at Curtin University for an idea of university costs and they suggested it costs about $10,000 per year.

A $6,000 per year Savings Plan

Based on those broad averages above if you start saving from the day each child is born you need to save approximately $6,000 per year, for each of their first 21 years. That estimate is in today’s dollars, so each year you need to increase the amount by around 3% to keep up with inflation.

(For those number crunchers reading this there are a bunch of assumptions built into that estimate. I have assumed a balanced portfolio, and that fees increase by 7% p.a. which is the average increase over the last 15 years.)

A Common Savings Plans

It seems that when many people think of education savings plans they think of the formal plans promoted by a couple of prominent groups. Such plans require a regular monthly payment and you only get your money back according to a specific schedule, and under the right circumstances it could be tax free. These plans operate under special provisions in the tax act, and are also known as Education Bonds.

These products have improved in their flexibility in recent years, but they are still not super flexible. For people who are not very disciplined savers (spenders), the rigidity of these plans can be just what the doctor ordered.

An Alternate Approach

If you want the best wealth creation strategy then I suggest you take a broader view. Consider saving for your children’s education in the broader context of your overall lifestyle creation strategy. After all, children’s education is just another lifestyle expense like saving for a big family holiday or a new car.

Other options you could consider include one or a combination of:

  • Saving into a dedicated bank account
  • Saving into a diversified portfolio of managed funds
  • Making extra repayments onto your mortgage, saving loan interest, and then later redrawing from your mortgage to pay school fees or just paying the fees from your income once the loan is repaid
  • Gearing, using a home equity line of credit or a margin loan using instalment gearing

How To Decide

To decide the best strategy for saving for your children’s education you need to find an appropriate balance between such factors as:

  • Your saving/spending discipline and habits
  • If you have any existing lifestyle debts such as mortgages, car loans, personal loans and purchase payment plans
  • Your marginal tax rate
  • Your tolerance of investment risk (also known as your risk profile.)

Your Next Steps

The best way to save for the cost of children is not to do it in isolation. To in fact do it as part of a more comprehensive look at your wealth creation, because in doing so it opens up a broader range of strategies and possibilities to you.

And that all comes down to your goals and dreams.

So the best next steps are:

  • Work out what type of school you want to send your children to
  • Find out how much that will cost
  • Add that to your broader lifestyle dreams
  • Ask a financial planner to help you create a strategy that achieves a balance of them all
Featured

Six tips for choosing the best home loan

To help you choose appropriate finance products I interviewed one of Perth’s top mortgage brokers, Damian Day of Ardent Mortgage Services, and asked him to share his top tips.

To help you choose appropriate finance products I interviewed one of Perth’s top mortgage brokers, Damian Day of Ardent Mortgage Services, and asked him to share his top tips.

Here are Damian’s Six Tips:

Tip 1: Be clear on the purpose of the finance

Gone are the days when there were only a few types of mortgage structures to choose from. Now there are lots of products for all the different ways people use their money. So before speaking to a lender be clear on he purpose of the finance you are seeking. For example, is your purpose buying a new home, building, renovating, car, holiday, investing, or bridging several of the above?

Consider not just your immediate purpose but also what may happen in the foreseeable future (say 3 to 5 years).

Tip 2: Make your finance as flexible as you

Our lives change rapidly these days. We change jobs, get married, start families, move suburbs, cities, states, start businesses, buy investments all within short spaces of time. (Or is that just me?)

Over these lifestyle changes, your cash flow needs change quite a bit too. So it is important to ensure that your finance is structured with the amount of flexibility you require. Consider:

  • Is there a limit to the amount of additional repayments?
  • Can I access my extra repayments if I need to?
  • How easily can I refinance the entire arrangement?
  • Can some of the overall loan be fixed, variable, interest only?

Tip 3: Cheapest is not always the best

Tip 3a: Beware hidden fees

Years ago when the regulations on calculating comparison interest rates were introduced it was a good system. But, the lenders have since worked out how to charge you fees which are not required to be included in the calculation of the comparison rates. This makes the loan look cheaper than it really is.

Some hidden fees to be wary of include:

  • Exit fees on early repayment
  • Restructure fees
  • Lump-sum payment fees

Tip 3b: Consider the non-financial features

The money that is lent to you generally costs all lenders about the same amount. So the only way lenders can offer cheaper deals is by being more efficient or cutting out services.

Your loan may be cheap but come with no branch network, no relationship manager who cares about you, only a 1300 phone number operating on east coast time zones and limited transaction facilities. If any of those services are important to you it may be worth paying for them.

Tip 4: Ask for a package deal

Years ago these were called “Professional Packages”, but lenders have smartened up and now offer package deals based on your income and total amount borrowed. Under such deals you pay an annual package fee of around $295 to $400 and receive:

  • Low (or zero) annual fee credit card
  • Deferred establishment fees
  • No loan ongoing fees
  • You can split the total mortgage often into up to 5 parts to tailor each loan to be as flexible as your life.
  • You receive discounted variable rates, and sometimes also discounted fixed interest rates

You can access such packages with an income of around $60,000 per year and/or total amount borrowed of around $150,000. These days most mortgages are for at least that amount, so almost everyone is eligible. You just have to ask!

Tip 5: Negotiate and shop around

Lenders DO negotiate! Branch staff may tell you that it is “policy” not to negotiate. They also may not even offer you the best product from their own company. That is because, in general, they are not rewarded for winning your business and making you a happy, long-term customer. They are paid mostly (or wholly) as salary.

So be prepared to shop around to get the best deal because in Damian’s experience the lenders do negotiate most often. Well they certainly do when a mortgage broker is involved!

If you’ve enjoyed these tips and need finance you can contact Damian Day of Ardent Mortgage Services on 0409 950 975 or by e-mail at .

Winner of the AMP Advice Competition

I am really chuffed to share with you that last week I was announced as the winner of the AMP Advice Competition.

The competition was open to advisers across all of the AMP licensees and we had to submit our recommended strategies for a set client case study. Following is the feedback I received when the result was announced:

AMP Advice Competition Winner Announcement

A mag about living the life you love

Whilst I write about money my deep belief is that it is all actually about living the life you’d love.

That’s why I love this new magazine published by my mate Bruce Sullivan through his business 1 Life Do It Now. There are three big things I really like about the 1 Life Do It Now mag:

  • It contains insightful articles from experts in a broad range of the aspects of our life
  • The articles are written by actual experts rather than reporters filing a story.
  • The insights are well thought through, practical and relevant.

Below you can read the recently published second edition 2 of the magazine (or follow this link).

Yes, I am one of the article authors but read the rest of the articles – I do and I get lots out of them.

On Track: Your new year review

The start of a new year is a fantastic time when we often look ahead to exciting possibilities. That’s what makes the start of a new year the ideal time for a quick, high level review of your financial plan to ensure you are still on track.

Santa reviewing his new year goals and reflecting that he'd better get some financial adviceThe start of a new year is a fantastic time.

Often we reflect on our experiences and lessons of the past year. I find that to be a useful and healthy check-in on what matters most to me in life.

Typically we also look ahead to exciting possibilities.

That’s what makes the start of a new year the ideal time for a quick, high level review of your financial plan to ensure you are still on track.

One of the key inputs to your financial plan is those life experiences that matter most to you – your life goals.

At the same time as you’re resetting your life goals ask yourself the questions:

  • Have I already incorporated this goal into my budget?
  • If so, is my savings plan on track to having enough money when I need it?
  • If the goal is not in my budget, what less important goals can I reallocate towards achieving this goal? (This article may help.)

By adding a few extra minutes to your new year goal setting you can ensure you remain on track to having enough money for what you really want in life.

A happy place for your superseded gadgets

Got a new gadget or two for Christmas? Maybe a new phone, tablet or digital camera?

If the old, superseded gadget is still working it seems a waste to just throw it in the bin. Give it a second life by recycling it and get some money into your pocket.

Another idea could be to re-purpose your old gadget.

In December I upgraded to a new smartphone when I re-contracted. My young children love playing music and taking crazy self-portraits on my wife’s iPhone but they are pretty rough with it. So, over the holidays I reset my old smartphone and set it up as a music player and digital camera.

Gee, was I the best Dad ever! (Well, I got to bask in glory for a few minutes anyway.)

To protect them and me there is no SIM in the old phone and I haven’t set up the wireless internet access codes.

If they eventually break it then that’s ok – I’ll recycle the broken phone for spare parts and hopefully get a few bucks into my pocket.

Should you prepay private health insurance?

Is your income above $84,000 as a single, or combined income above $168,000 as a couple? Do you also have private health insurance?

Then you should consider this opportunity before 30th June.

Effective 1st July this year (2012) the Federal Government is reducing the private health insurance rebate for singles earning above $84,000 and for couples earning above $168,000 (combined). The new rebate amounts are shown in the below table.

Income thresholds

Private health insurance rebate

Single

Couple

Under 65

65-69

70+

Less than $84,000

Less than $168,000

30%

35%

40%

$84,001 to $97,000

$168,001 to $194,000

20%

25%

30%

$97,001 to $130,000

$194,001 to $260,000

10%

15%

20%

$130,001 and above

$260,001 and above

0%

0%

0%

Many people pay their private health insurance premiums monthly and have the rebate automatically applied by the fund.

If you continue this way then from July 2012 your private health insurance premium will increase (when the rebate decreases).

Pre-pay your health insurance premium and save

However, if you prepay a year’s premium before 30th June then you will still be eligible for the current rebate of 30%.

Estimate your saving now with this spread sheet tool.

An example of what you could save

Let’s say your a young couple with a combined income of $200,000 per year.

You call your private health insurer and they advise your current premium is $3,000 if you pay annually. This is after the current 30% rebate is applied, meaning the Government has already tipped in $1,286. (i.e. the actual total premium is $4,286.)

From 1st July your rebate will drop from 30% to 10%, meaning the Government will now only tip in $428. That means your premium will jump from $3,000 up to $3,858 per year.

If you pre-pay one year’s premium before 30th June 2012 you will only pay the $3,000 and effectively save yourself $858.

That’s a pretty good return.

Crunch your own numbers

I’ve created a spread sheet with the calculation to help you decide if it is worth you prepaying your private health insurance based on your own situation. Download the spread sheet here.

Finer details

What’s the potential downside?

The legislation, as originally written, is imprecise in how the rebate applies when it comes to the timing of premium payment and the period of cover. So, by implementing this strategy you are taking the chance that what matters is when you made the premium payment. This is similar to the current situation with the prepayment of other deductible expenses, for example income protection insurance premiums and interest on investment loans.

Therefore, to manage this potential downside it’s probably a good idea to choose to take the rebate as an offset at the time you make your premium payment. Waiting to claim the rebate at the time you submit your tax return adds an extra level of risk.

Clearly this consequence of the legislation was not intended by the Government. So there is a risk they may decide to amend the laws and back-date the changes (which they can do). If they do that then you may owe them the difference in the rebate.

If the Government does change the law then your downside is the opportunity cost of having prepaid some of your expenses. Keep in mind here that I’ve written this article for those who have already decided they want private health insurance.

As always, remember this free article is general information only and not personal advice. You must work out what is right for you in your situation and take responsibility for the outcomes of that decision.

Is it worth borrowing money to prepay by 30th June?

I know that many people unfortunately don’t have the savings sitting around to suddenly prepay a year’s premium. So the obvious question is “should I borrow?” In this case you may be borrowing by redrawing from your mortgage.

I’ve included a calculation in the spread sheet to help you make this decision for yourself.

If you do choose to borrow then you must redirect your usual monthly insurance premium payment to repaying the borrowed amount within 12 months. Otherwise you’ll eat up savings with the loan interest.

Another benefit

One other hidden benefit of prepaying your premium for a year is that you may also beat the usual annual health insurance premium rise in April 2013.

Please share

If you found this free tip of benefit please e-mail a link to this article to your high earning friends and family who may benefit. Thanks 🙂

 

Freedom to be by their side with Children’s Trauma Insurance

Parents – please resist the natural urge to avoid this article because you don’t want to think about the topic. The tool I share below could save you considerable stress if misfortune strikes your family.

What would you do if your child suddenly and unexpectedly became seriously ill?

If something happened to Sophie or Isaac I would want my wife and I to be able to quit work immediately and be by their side, full–time.

I wouldn’t want one of us to have to work just to ensure the mortgage and bills get paid.

I wouldn’t want to be dependent upon the generosity of family, friends and the community to get by.

I would want to be able to afford top health care.

I would want to stay in our home. The comfort and familiarity will be an essential aid to recovery, for us and the ill child. Moving home is an added stress we won’t want.

But with most families dependent on their income, where will the money come from to provide the freedom to make those choices?

Introducing children’s critical illness (trauma) insurance

Children’s critical illness insurance is also known as children’s trauma insurance.

Child critical illness insurance pays you (the parent or guardian) a lump-sum on the occurrence of one of a number of conditions, similar to how your own critical illness (trauma) policy operates. You choose how to use the lump-sum.

What’s covered?

Most policies cover over 20 different illnesses including the ones you’d commonly think of such as:

  • Cancer
  • Paralysis, including paraplegia and quadriplegia
  • Loss of limbs
  • Blindness, deafness or loss of speech
  • Severe burns
  • Coma
  • Death and terminal illness

As with all insurance if the severity of the illness meets the policy criteria then you will be paid a benefit. With these policies the benefit will be paid as a lump-sum.

How do you get children’s critical illness insurance?

Child critical illness insurance is an optional add-on to the parent’s insurance policy. It can be an option to life, TPD or trauma insurance. So even if you don’t have your own trauma insurance policy you may be able to add child trauma insurance to your death or TPD policy.

Usually the child needs to be at least 2 years of age before you can add them to your policy, though I’ve seen policies with entry ages up to age 5. Even if your child is not yet that old when you buy your policy you can add the child trauma option when they are old enough (which is exactly what I did for my two children.)

Many policies are now offering maximum cover up to $200,000.

How much does it cost?

Premiums range between $200 and $300 per year per child for the sum insured of $200,000. You can choose to insure for a lower amount to fit within your budget.

At around $5 per week per child I consider that value-for-money peace of mind. Much more valuable than my car insurance.

Why you should consider children’s critical illness insurance

It doesn’t matter if you believe the likelihood of serious illness is low. The life and financial consequence to your family would be severe.

It is the severity of the consequence that makes the risk high enough to warrant managing the risk through insurance.

Get the protection then get on with enjoying your family time with peace of mind.

How to make money online

It’s very alluring – the opportunity to make loads of passive income, working from home running an online business that works for you 24 x 7.

Internationally respected business thought leader and entrepreneur, Seth Godin just published an excellent list of 21 points about How to make money online.

It is an essential read for anyone caught up in the wonder of the money made by the handful of people who did make money online.

I recommend that budding entrepreneurs also subscribe to Seth’s blog and regularly read more of his thought leading ideas.

Are credit card surcharges worth the points?

When a retailer charges a surcharge for paying with your credit card do you pause and instead pay using EFTPOS (from your savings account)?

Or do you say “that’s ok” and perhaps think “I want the points”?

In this month’s Mens Health magazine (May issue) I’m quoted in an article on how to make good use of your Qantas frequent flyer points. Several of the tips I’ve covered in my earlier article here.

One tip that didn’t fit into the Mens Health article was that paying a credit card surcharge is often not worth the reward points.

Credit card surcharges

Most credit card surcharges are over 1% of the transaction amount. So for every $100 you pay at least an extra $1.

In fact the average surcharge is much higher than 1 per cent. According to a East & Partners’ survey reported by the RBA, “in December 2010, the average surcharge for MasterCard credit cards was 1.8 per cent, for Visa it was 1.9 per cent, for American Express it was 2.9 per cent, and for Diners Club it was 4 per cent.”

Value of a Qantas Frequent Flyer reward point

As I mentioned in my earlier article each Qantas frequent flyer point is only worth about 0.69 cents. That reward therefore is equivalent to about a 0.69% discount.

Deciding if you will pay the surcharge

If you earn 1 reward point per dollar and the credit card surcharge is 1% then you are paying an extra dollar and only earning 69 cents back. By paying with your credit card you just lost 31 cents.

If you earn 2 reward points per dollar then the surcharge needs to be less than 1.38% to make it worth handing over your credit card.

At many retailers you’ll need to be earning 3 reward points per dollar to make the surcharge palatable. Points are usually only that high for retailers aligned with the credit card issuer.

Often when faced with a credit card surcharge you are better off handing over your EFTPOS card and paying from your savings account. (That’s better for most people’s budgeting too.)

Next time you go shopping carry both cards with you.

Hidden message in the aged care overhaul

The major changes to aged care announced last week by the Government reinforce one thing – if you want choice over where and how you live then be self-funded.

If the Government continues to fund around 85% of the care costs then expect them to dictate the terms. And expect those terms to be strict – a necessity of an ageing population.

Being self-funded will take thinking and acting ahead. For many Gen X’s and Ys improving life expectancy is such that they could spend as long in retirement as they did in the workforce.

Becoming self-funded therefore means diligently setting aside a good portion of wealth for that lengthy retirement.

The alternatives are not pretty: higher taxes, spartan retirement lifestyle and fighting for medical and care services.

The sooner you act the easier it will be. That’s the power of compound interest!

Cost of a self managed superannuation fund

Wanting to get more control of your superannuation and wondering what its costs to have your own self managed superannuation fund (SMSF)?

There are several components to the cost of running an SMSF, including:

  • Investment management fee
  • Accounting fee
  • Audit fee
  • ATO supervision levy
  • Professional fees for advice, administration and anything else you choose to outsource

The Australian Taxation Office (ATO) have just released a statistical overview of SMSFs for 2009-2010 that reveals some average costs based on fund size.

Graph source: ATO Self-managed superannuation funds: A statistical overview 2009-10, Graph 21

You might think your retail superannuation fund is expensive. But most modern off-the-shelf superannuation funds have total expenses (administration and investment) under 2% per annum. In fact most of my clients are in accounts where this fee is around 1% p.a. or less.

As you can see from the ATO’s graph, the average SMSF needs at least $200,000 in funds before the fee drops under 2% per year. And the average operating cost doesn’t drop under 1% p.a. until the balance is over $500,000.

Given that in Australia the average superannuation balance is well under that level you can see that a SMSF is not cost effective for most Australians.

So if you are considering a SMSF you need to have a much better reason than saving money. Read this article for an insight into when a SMSF may be appropriate.

Message to parents of 20-somethings

Do you plan on being the regular, permanent (even full-time) day-time carer of your grandchildren for the first 6 years of their life?

Then don’t stand by while your children hock themselves to the eyeballs for a house and thereby guarantee their need to have two incomes for the next 20 years.

And whatever you do don’t go guarantor because your kids can’t afford the deposit and want to avoid lenders mortgage insurance. Let them live with the consequences of their past financial decisions and learn to live within their means.

Take the time to explain to your kids how tricky it is to balance a job with school hours and 12 weeks of school holidays each year. ( I know kids tend not to listen but it’s essential you try anyway.)

Otherwise you’ll end up being relied upon -doing more care than is fun and more than your ageing body can handle.

Or the grandkids will end up being in before and after school care every day from age 5.

Is that the family life you want for your kids and grandkids? Is that the family life your kids envisage?

If not, do something about it before they over-commit.

Teaching Kids About Money

My daughter Sophie, who is in year one, has been learning about money at school. They’ve made money boxes that sit on their desks and they appear to be earning (plastic) money. I’ve heard talk that this money will be used for a princess ball – but I’m not sure what the class princes and knights will be doing. Minor detail!

Teaching children about money is essential. Recent Federal Governments have recognised this and financial literacy is finally being incorporated into the national curriculum.

Recently a journalist interviewed me about what parents can also do to teach their children about money.

Mini Me

In my view by far and away the most important thing you can do to teach your children about money is to be an excellent role model.

I’m not a parenting expert, but what I’ve learned from such experts is that a lot of the things my children will learn from me will be through imitation – including my bad habits.

In contemplating how to teach your kids about money the place to start is reflecting how competent you are in managing your money.

If you’re not sure how to assess your competence try my free financial health check – it’s quick and online.

What to teach your kids

The most fundamental financial skill is managing your cash flow. The outcomes of good cash flow management include:

  • You consistently spend less than you earn
  • You have money for those things in life that really matter to you
  • You regularly save

Through modelling and mentoring show your children:

  • How to smooth out their lifestyle so that it’s not feast or famine based on what bills are due that month.
  • How to prioritise their wants so they get the biggest and most lasting enjoyment from their purchases.
  • How to save up for things they really want but can’t afford right now.
  • How to think ahead by planning for the predictable. (e.g. school holiday activities with mates, getting their licence, graduation ball, schoolies week.)
  • How bank accounts and interest works so they start to learn how to make their money work hard for them.
  • How to manage true emergencies without stress by having a pool of dedicated savings.

Teach kids to spend less than they earn

Since young children don’t have credit cards it may seem inbuilt and automatic that you are teaching them to spend less than they earn in pocket money.

Not so.

Children do have access to spontaneous, large bonuses, which they typically earn through whining, guilt trips and other weapons in their arsenal.

Whenever we cave in they learn that not having the money is not a problem.

When they eventually do get a credit card it’ll become an extension of their income that is quickly soaked up. So, they’ll get another, then another…

Enter, Mummy & Daddy to save they day so that our kids don’t ruin their credit rating. And the pattern repeats – just on a grander scale.

Saying no now is teaching them a valuable habit.

When my 6 year old daughter, Sophie wants me to top up her saved pocket money so she can buy something I explain that I don’t want to spend my pocket money on that item. I explain that instead I have more important things I want to spend my pocket money on, and try to weave in a recent example. It’s early days but so far she seems to understand.

Teaching kids to save up

To teach children how to save up I suggest you:

  • Start with small amounts
  • Make the items tangible and meaningful to your child
  • Use non-essential, truly discretionary items so you won’t be tempted to give them an unearned bonus.

When we introduced Sophie to pocket money she naturally asked what she could spend it on. She loves having a lunch order at school but our rule is that she can have one per term – usually in the last week. I suggested that she may like to save her pocket money for an extra lunch order per term and then helped her count the weeks she would need to save.

Jars for saving moneyFor older children the important things they really want may cost more and take longer to save for. You can help them learn how to avoid painful disappointment by helping them predict then plan for the predictable.

For high school age students one year is probably a reasonable time frame for them to be able to look ahead. At least every three months do a rolling one year look ahead of the things they really want to do and own. For example:

  • School holiday activities with friends
  • The latest gadget. You may not know what it will be but sure as the sun rises in the east there will be a hot gadget arriving.
  • Graduation ball (think expensive outfit, limousine and after party)
  • Schoolies week
  • First car (make them save for this rather than give it to them. It’s too good an opportunity for a valuable lesson.)

Of course the essential next step is to regularly set aside dedicated amounts to save up for each of the items.

Teaching kids to prioritise their wants

For older kids the one year look ahead will also help them prioritise their wants. Every time they want to spend their money on something more trivial remind them of the items on their one year plan and ask the open question “is this new item more important than these items?”

I believe the same can apply to younger children; you just need to shorten the time frame, which is what we’ve done at home.

Here’s one way I tried

To date Sophie hasn’t saved enough for a bonus lunch order. She keeps spending her pocket money on other items.

One early purchase she blew her money on (IMO) was a junk toy from one of those dispensers they have in shopping centres. (Those things had always been a firm no from Dad no matter the whining, so it was no surprise she indulged when given the chance.)

I think it was a matter of days before the toy was lost or forgotten.

A few weeks later a toy catalogue came home from school and Sophie really want a book she saw that was about a girl named Sophie. The problem was that she didn’t have enough pocket money left to buy the book.

It actually looked like an appropriate book to help her with literacy and I know how she loves to read and re-read her books. But I decided not to cave and give her a spontaneous bonus.

Instead I used the opportunity to remind her of where she had spent her pocket money and explain how that related to not being able to have this new item she really wanted.

Since then there has been a few other learning opportunities and I think (hope) she is catching on.

Involve them in the family budget

If they’re old enough to have a part-time job then I feel they’re old enough to see the whole family budget – warts and all.

Give them the opportunity to discover how much life really costs, including that roof over their head, the fully stocked pantry, funky fashions and their education.

Show them how you’re working out what amounts to set aside for future bills and for unforeseeable emergencies.

Explain to them how you decide what you can afford and what you can’t afford.

All of this is very hard to learn well if you are thrown into the deep end when you move out of home. Mistakes are easy to make and can be costly.

Give your kids a great start in life by giving them the gift of financial literacy while they are still young and at a home.

The best way you can do that is by being a great role model.

 

Three keys to Financial Well-being

No amount of money tips will boost some people’s financial well-being. For them the underlying cause has to be treated. Over the years I have observed there seems to be three major contributors to great financial well-being. Underlying many money problems is a gap in one or more of the three.

No amount of money tips will boost some people’s financial well-being.

For them the underlying cause has to be treated.

The three keys

Over the years I have observed there seems to be three major contributors to great financial well-being.

  • Personal mastery
  • Vocational clarity
  • Relationship strength

Personal mastery

How aware you are of alternate views, approaches and possibilities.

Plus how good you are at implementing that which you already know would improve your well-being.

Vocational clarity

Being engaged in “work” that fulfills you rather than drains you.

Have you noticed that people who like, even love, their jobs tend to get more opportunities and pay?

Relationship strength

Your relationships with your life partner and your offspring are arguably the most important relationships. Being on (close to) the same page as your life partner is critical to your financial well-being.

It also helps you be positive financial role models for your children.

The key cause of money problems

Underlying many money problems is a gap in one or more of the above.

Compounding the problem is that when our well-being is down our human nature is to console ourselves impulsively buying shiny stuff that provides a rush of short term pleasure much like a sugar hit.

When financial advice is not enough

If after investing in financial planning advice you still don’t seem to be making enough progress in resolving financial problems then an investment in either of these three areas is money well spent.

Invest in:

  • Personal development including 1-on-1 life coaching to accelerate your journey.
  • Career coaching to help you become clear on your vocation as well as the career in which you decide to earn your primary income (Ideally the same, but sometimes not possible). Then continuing professional development.
  • Relationship coaching

In fact I’d go so far as to say cut spending on everything else to ensure you have the money to make such an investment. It’ll boost your overall well-being as well as your financial well-being.

 

Sell your old mobile phone and gadgets

Make money when you upgrade your mobile phone and gadgets. In this article I reveal how I just made some money from a 5 year old phone and how you can too.

Recycle your old mobile phoneDuring the post-Christmas sales I walked past a mobile phone shop and noticed a flyer about selling your old mobile phones.

“That’s interesting”, I thought, ” I might write an article about that”.

Then two days later while rummaging through old computer cables I found a 5 year old mobile phone that I’d forgotten I had. Bingo!

I quickly visited the website on the flyer and discovered they were willing to buy it. So instead of dropping it in a mobile phone recycling bin (for free) I could recycle the phone AND make money. Score!

The process was simple and quick.

  1. Find the model of your old phone
  2. Register your details
  3. Print the postage paid label (cool!)
  4. Send the gadget
  5. Get paid (by PayPal or EFT into you bank account)

Through the process I received a couple of e-mails to keep me informed of progress, which I appreciated.

How much can you sell for?

Since my old phone was quite old and only partially working I received $9. That might not sound like much, but it was actually less effort than remembering to take the phone next time I go to a shopping centre.

Better still, when my current phone contract expires in 4 months I’ll be able to sell my current smart phone for $110. That’s helpful if I decide to re-contract and/or upgrade my handset.

There’s no need to have an old phone sitting around creating clutter, especially if it still works.

I used Cash A Phone because that was the flyer I saw and they were willing to buy my 5 year old phone,  but they are not the  only company that buys old phones.

Reduce, Re-use, Recycle

Another important bonus for me is that I have the knowledge that my old phone may be refurbished and re-used in a developing country or recycled. Good news all round!

Mobile Muster LogoIf you can’t sell your old mobile phone then I encourage you to recycle it. Mobile Muster is the official recycling program of the Australian mobile phone industry.

Sell your old gadgets too

One other part that impressed me is that Cash A Phone will also buy or recycle your old gadgets, including:

  • iPods
  • iPads and other tablet computers
  • Laptops
  • Digital cameras
  • Game consoles
  • Sat-Nav (GPS)

So next time you upgrade a gadget act quickly to see how much money you may be able to make from it.