When the best policy is actually necessary

In November we decided to replace our second car after the old one was sentenced to death row during a regular service.

In researching new (small) cars I noticed that many of the modern popular features are not available in the base/lower versions of several models. You need to buy the higher version to get those features.

For example:

  • Side and curtain airbags to elevate the model from a 4 to 5 star ANCAP safety rating
  • Bluetooth connectivity (for your phone and/or MP3 player)
  • Rear electric windows
  • Cruise control

I don’t consider such features as luxurious bells and whistles. To me they should be standard based on the way many in the western world are living our lives right now.

So going for the premium version of a model doesn’t just get you sexier exterior and interior trimmings plus a more powerful stereo – things you may not really need. You need to upgrade to the premium version just to get the 5 star safety rating – a really valuable feature to all.

Similarly for personal insurance

I have noticed a similar trend in personal insurance following the recent season of product upgrades.

In the case of car buying our extensive driving experience makes us better equipped to identify and assess the value of the extra features in the premium versions of models.

Not so with personal insurance where many of us have no direct experience.

With personal insurance going for the Premier or Plus version of a policy doesn’t just get you a bunch of lovely ancillary benefits that may aid your comfort when you claim.

Increasingly I am noticing that you need the top version to get the more generous definitions of core policy terms – the terms that will affect whether you can successfully claim at all.

A disability example

For example, the definition of disability will affect whether you are considered sufficiently disabled such that you can claim under your income protection or total & permanent disability (TPD) policy. It is a core policy term and you want a generous definition that increases the scope of situations in which you could receive a benefit. A narrower definition may mean that even though you are unable to earn at full capacity you don’t receive any insurance benefit.

With some income protection and TPD policies I have noticed you need to select the Premier/Plus version to get the market-leading generous policy definition of disability.

Similarly with trauma insurance policies the top versions have the market-leading definitions for core (the most common) illnesses such as cancer, heart attack and stroke.

How do you know?

You’ll only realise this if you take the time to read the Product Disclosure Statement (PDS). You won’t realise this if you are just ringing around getting quotes and making a decision on premium price under the assumption that most products are similar.

What you should do

In the past I’ve often recommended you don’t just choose the cheapest insurer because they usually are cheaper due to being stricter with their policy terms.

Now I am extending that to explicitly recommend you don’t just choose the base/cheapest version of an insurer’s policy. The premium version may offer market leading terms for core features – a bit like the 5 star versus 4 star safety rating in cars.

Take the time to read the Product Disclosure Statement and understand the core differences between basic and premium policy versions.

And if you don’t have the knowledge and/or time to make that thorough comparison then outsource to a qualified, experienced financial planner or insurance broker. Their fee will be worth its weight in gold in ensuring you purchase a good value-for-money policy.

Best place to start a business in 2011

Do you dream of self-employment? Are you contemplating starting your own business next year?

If so check out this report from industry researchers IBISWorld Australia for their predictions of the best and worst industries for start-up businesses in 2011.

…the news is positive for trades and professional services, [but] the picture is not quite as optimistic for service oriented businesses.

Guide for landlords

If you have an investment property then you may be interested in the Landlords Pack from the W.A. Department of Commerce.

The pack contains many useful guides and links to other relevant information to property investors, including:

  • Renting Out Your Property – An Owners Guide
  • Information on new smoke alarm requirements
  • Information on requirements for Residual Current Devices (RCDs)
  • Links for useful forms for things like rent increases, inspections, lease agreements and termination of agreements

Even if you don’t yet have an investment property but are considering one you should visit the site to better inform yourself prior to making your investment decision.

An updated wealth creation rule of thumb

You may have heard the rule of thumb that you should save and invest about 10% of your income. I think it originated from the book “The Richest Man in Babylon” by George S. Clason.

I’m often asked if that is before or after tax saving.

More importantly, is it even close to right?

If it was close to being accurate then in Australia the 9% compulsory employer superannuation contributions should get people close enough. Sadly it is widly accepted that the 9% is nowhere near enough.

Last month the Financial Services Council released research by RiceWarner Actuaries that estimated the average retirement savings gap per person was about $88,000. That is the extra amount they need to have an adequate retirement lifestyle.

How much you need to save

If you are currently in your 20s or 30s RiceWarner estimated you’ll need to save and invest (for retirement) approximately an extra 11% per year of your after-tax income, in addition to the 9% employer superannuation.

If you’re already in your 40s you’ll need to save an extra 12% per year after-tax.

If you’re already in your 50s it’s about 15% extra per year.

So really the rule of thumb should actually be that you need to save a total of at least 20%-25% or more (not 10%) of your after-tax income over your entire working life to come close to an adequate retirement lifestyle.

(Note the actual figures in the research are split by gender and 5 year age brackets. For simplicity I have approximated an average. See table 3 on page 6 of the report if your brain wants greater precision.)

Important assumptions

Definition of an adequate retirement lifestyle

The model assumes that you can have an adequate retirement lifestyle if you receive about 62.5% of your gross pre-retirement income. This is estimated to enable you to have about 75% of your pre-retirement expenses. (Assuming you have no debts left in retirement.)

Most people I meet do not want to decrease their lifestyle in retirement. So if that includes you then you need to consider that you may need to:

  • Save a higher percentage;
  • Invest more aggressively;
  • Do a bit of both

If the prospect of saving that much and/or investing aggressively scares you then meet with a great financial planner who can guide on a smart wealth creation strategy that suits you.

You may live longer

One of the assumptions is that you need the retirement lifestyle under the average life expectancy. The reality is that half of the population live past that point. So if you rely on this updated rule of thumb be prepared to live on just the Age Pension past your life expectancy.

The better way to calculate how much you need to save

Rules of thumb can be nice short cuts but when it comes to money there is no substitute for proper planning and purposeful action.

The best way to work out how much you need to save is to:

  1. Define the lifestyle choices you’d like to have in retirement
  2. Estimate how much those choices would cost right now
  3. Define when you want to make work optional (“retire”)
  4. Define how long you want that lifestyle to last (age 83, 90, 100?)
  5. Calculate what lump-sum wealth you’d need at retirement to fund that lifestyle for that long
  6. Calculate the annual savings you need to make from now until retirement in order to accumulate that wealth

There are some calculators available for free on the internet to help you do this calculation yourself.  View a list here.

But if you are not naturally analytical then I recommend you partner with a financial planner to guide you on how much you need to save and the best way to invest that money.

Trading Contracts for Difference

You’ll often see advertisements for courses teaching you how to make a bucket load of money through trading. Trading in Contracts for Difference (CFDs) are one such investment product that have been regularly advertised in recent years.

These publicly-targeted course always concern me and they also concern the regulator, ASIC. ASIC are so concerned they’ve published a very useful guide to trading CFDs.

I am concerned because I see that our human nature ticks us into focusing on the glamorous headlines of potential returns whilst blinding us to the complexity of the strategies and products. They require a great deal of expertise to make the potential high returns, plus they come with higher risk. Many people don’t fully grasp that.

In publishing the guide ASIC Commissioner, Greg Medcraft, said: “Our research with CFD traders found that many traders don’t know or don’t appreciate key aspects of how CFDs work, despite the fact that they are actively trading them. This guide aims to fill some of these knowledge gaps, especially around the trading risks.”

Key Rule: “First do what you understand”

I agree wholeheartedly with the guideline provided by ASIC that retail investors should consider trading CFDs only if they:

  • have extensive trading experience;
  • are used to trading in volatile market conditions; and
  • can afford to lose all of – or more than – the money they put in.

View the guide on ASIC’s webiste or download a copy of Thinking of trading contracts for difference (CFDs)? here now.

SMSF: corporate or human trustee?

This article is reprinted with permission of the article author LawCentral. The views expressed are entirely their own and within their expertise. Read the article or watch the video here.

Question: My accountant suggested a corporate trustee for my Self Managed Super Fund. I already have a few companies – I know they are more expensive to operate than having individual trustees. Is he only trying to generate more fees from me? I’m not made of money you know.

Answer [by LawCentral]

It is a vexed question whether SMSFs should have corporate trustees. Everyone in the Superannuation game has a different opinion. I change my opinion daily.

But no two SMSFs are the same. So a blanket ‘yes’ or ‘no’ won’t cut it. Your adviser and accountant looks at the following things to formulate their opinion:

  • What is the relationship between the members? Will they change often?
  • What are the type and value of the SMSF assets?
  • Where are the SMSF assets located? Other states or countries?
  • How pedantic are you?
  • Do you need extra asset protection? Is there risk that the SMSF can go insolvent?
  • Are the members happy to pay higher maintenance costs for a company?
  • Contemplating Limited Recourse Borrowing Arrangements (formerly known as instalment warrants)?
  • Do you own more than one property in one state paying land tax?

Corporate Trustees add expense and complication. Your Accountant is best to do the cost/benefit analysis. If your accountant suggests a corporate trustee, they have already answered all of these questions.

Who can be trustee of a SMSF?

  • Humans as Trustees

If you want a human Trustee, all members of the SMSF must also be Trustees. You can’t pick and choose between members – it’s all or nothing. (There are minor exemptions for children and members living overseas.)

  • A company as Trustee (Corporate Trustee)

If you have a Corporate Trustee, all members must be the Directors of the Company. All Directors must be members of the Fund. The Corporate Trustee carries out its role as a Trustee of your superannuation fund just the same as you as individuals do.

If you are the only member of your SMSF, special rules apply. (See the Platinum member only section below.)

When should I have humans as trustees?

  • You want less hassle and the lowest administrative cost

It costs nothing (apart from food and shelter) to keep humans as trustees. There are no annual reports to ASIC or dates to lodge with ASIC.

  • You are unlikely to change the SMSF membership

It can become a nightmare to change the members of your SMSF with human trustees. Firstly, you need to admit (or exit) that person as a member (you have to do this anyway). Then, title to the SMSF assets is transferred to or from the member. This is because SMSF assets are held in the name of the trustees, not in the SMSF itself. For example, the four of you as members hold the SMSF land in your names. That is the law. You die; the property must now be transferred into different names. If you had a company, no transfer is required.

When should I have a corporate trustee?

  • You change the members of your SMSF often

If your members change often, you simply remove (or appoint) them as members and as directors of the corporate trustee. Although the directors change, the actual corporate trustee does not. As the SMSF assets are owned in the name of the corporate trustee, there is no need to jig about with the land titles office.

  • You are secretive and own lots of assets

Don’t want anyone to know what assets you own? A Corporate Trustee holds the assets in the name of the company. If someone does a land titles search using your personal name, they won’t find the real estate held in your SMSF.

  • You want to borrow in your SMSF

If you want to take advantage of Limited Recourse Borrowing Arrangements to borrow to fund SMSF assets, beware. Many lenders only agree to lend you money if you have a corporate trustee.

  • You need to amp up your asset protection

Assets in your SMSF are meant to be conservative – they are there for your retirement – not for speculation. Risky or not, I have had clients that have ended up with negative assets in their SMSF. Insolvency often leads to the SMSF Trustees going down with the sinking ship. Better to lose just a company.

  • You pay land tax

In most states, you pay a higher marginal rate of land tax the more land you have. Therefore, if you and your spouse already have a rental property then owning more land (as Trustee of the SMSF) increases the rate of land tax you pay. At Brett Davies Lawyers, we can usually transfer the land out of your name into the name of your new company – for no transfer (stamp) duty and no Capital Gains Tax.

Ok fine. I think I need a corporate trustee. Can I use one of my other companies as trustee?

Yes you can. But just because you can do something, doesn’t mean you should. Using a company for multiple purposes is fraught with risk. People who are pedantic and never make mistakes should only do it. I am pedantic and never make mistakes; however, I still use one company solely for my SMSF.

Why do you need a separate company? SMSFs are delicate. SMSF auditors are even more so. There can’t be any overlap between SMSF funds and other company funds. Weekly, I get calls from accountants where their clients accidentally used the wrong cheque book (or clicked the wrong internet banking account). Sure it is an accident, but the SIS Acts say this is incredibly illegal. No one can guarantee that they never make mistakes. Best to bite the bullet and set up a separate corporate trustee.

What are the ASIC fees for my corporate trustee company?

It is cheaper to run a company that acts as the trustee of your SMSF. Why? Because ASIC allows you to register this company as a ‘Special Purpose Company’. Your special treatment means that the annual ASIC review fee is only $41 per year (rather than the usual company review fee of $218). (The initial ASIC registration fee is still $412.)

You can build a Special Purpose Superannuation Trustee Company at LawCentral (it takes 8 minutes).

How do I update my SMSF to include a Corporate Trustee?

To change the trustee of your Self Managed Superannuation Fund (SMSF) to a Corporate Trustee, you do two things (in this order):

  1. Set up a company. Use the LawCentral Build a Company document to do this. After you build the company, you register it at ASIC. ASIC charges $412.
  2. Update your SMSF Deed by using the SMSF – Deed Update document available at LawCentral. Select: change your trustee into a Corporate Trustee. Insert: new company name, ACN and address

(Original publication date 18th October 2010 in LawCentral Bulletin 338.)

Protect yourself from identity theft

Two months ago my sister, Julia was the victim of identity fraud. Two thousand dollars quickly disappeared from her bank accounts before she detected it.

This week is National Identity Fraud Awareness Week (NIDFAW), so I encourage you to consider how you may be placing yourself at risk of identity fraud. Then act to prevent it.

NIDFAW spokesperson Peter Campbell noted that “potentially, all it could take is a combination of a few carelessly discarded pieces of information such as name, date of birth and bank account details for the fraudsters to have the information they need to attempt to commit identity fraud.”

How my sister was defrauded

  • Offender contacted her bank and changed her phone banking password.
  • Offender ordered a Visa Debit card linked to her savings account.
  • Offender stole the Visa Debit card and PIN from her letter box.
  • Offender withdrew the max $1,000 from ATM using Visa debit card.
  • Offender used phone banking to make a cash advance from her credit card to her savings account.
  • The next day the offender withdrew another $1,000 using the Visa Debit card.
  • That same day my sister detected the fraud and contacted her bank about the missing $2,000. The card was cancelled.

It could easily happen to you

Often we are very conscious of online identity fraud but paper based fraud is still the most common way for an identity to be stolen.

And 75% of Australians put themselves at risk of paper based identity fraud by throwing away highly sensitive information.

Lock away your mail

Needless to say Julia now has a lock on her letter box, as do we. I recommend that you do too.

In fact, some years ago after mail was stolen from the letter box at our old house we decided to get a post office box. If there is a post office convenient to you then a post office box can be a low cost way to help protect your sensitive mail.

A post office box also helps keep your home safe when you are away on holidays by preventing mail accumulating.

Store safely

Physically

For legal reasons it is a good idea to retain copies of your tax returns and related financial statements for around seven years. These documents contain precisely the sensitive information that could enable your identity to be stolen.

To help protect your identity store these records in a lockable filing cabinet. And of course keep the cabinet locked with the key hidden away.

I know that we have so many locks these days that it can be considered inconvenient to lock things and hide the keys. So I was excited recently to find a very affordable small lockable key cabinet at my local hardware store. Yes it is more of a barrier than truly secure, but it is convenient and thieves do first need to find it. Plus it helps keep my young children out of places I don’t want them.

Electronically

Today many of our statements and records may be received electronically and stored on our computers. This is convenient and low cost. But if your computer is stolen or simply accessed while you aren’t around you could be giving up sensitive information.

Protect yourself by:

  • Password protecting your computer.
  • Storing these sensitive records in an encrypted folder on your computer.
  • Automatically locking your smartphone when not in use.
  • Securely erasing disk drives before discarding of old computers and USB drives. (Ask a geeky friend or relative to point you in the right direction.)
  • Create passwords/PINS that are not easily associated with you and your details such as date of birth, phone number and age.
  • Only allow trusted close friends to EFT money directly into your bank account.

Encryption is easier than you may think. Most modern computer operating systems (e.g. Microsoft Windows) have an inbuilt encryption facility that enables you to selectively encrypt folders.

Many of us now have smartphones and use the apps to store documents and access websites that contain sensitive personal information. For convenience often these apps automatically remember your logins and passwords. So ensure that you lock your smartphone when it is not in use.

Update on 2nd April 2011: New research has shown that “over half of secondhand mobile phones retain important personal data of the original owner”. So ensure you  format the phone’s memory and destroy your SIM card before discarding it.

Share birthday wishes privately not publically on Facebook, Twitter and other social media. Even just saying “happy birthday Matt” on Facebook gives away the day and month of my birth. Adding the personalisation of my age is a nice touch, especially on a milestone birthday, but it gives away my entire date of birth.

Shred before discarding

National Identity Fraud Awareness Week promotional flyerDocuments containing the following sensitive information should be shredded before being placed in the rubbish bin:

  • Account details (of anything where money can change hands)
  • Dates of birth
  • Tax file, Centrelink and Medicare numbers

Personally I like to shred statements and letters referencing any account details for anything. This includes all bank, investment, superannuation and insurance products, plus utility bills.

Protect your identity and the environment

If like me you like to recycle paper then I recommend you buy a compost bin. I discovered recently that putting shredded paper into our composter helps to keep it balanced and healthy. Plus composting saves us money.

Other tips from NIDFAW

The partners in National Identity Fraud Awareness Week suggested these additional tips:

  • Check your account statements regularly and look for any unusual or unauthorised activity.
  • Subscribe to an ID theft protection/monitoring service such as Secure Identity that allows you to proactively monitor your credit file for fraudulent activity and be able to react swiftly should you become a target for ID theft.
  • Contact your credit card company and banking institution before departing for travel, or your travel may prompt a block on your account.

For more information on how to protect yourself from identity fraud, and how to cope if you are a victim of ID fraud, visit the official campaign website www.stopIDtheft.com.au or www.crimestoppers.com.au for more information.

Got your own story or extra tips?

Have you been the victim of identity theft or know someone who has? If so, please share your extra tips for how to prevent what happened to you. You can do so in the comments below. (Share it anonymously if you prefer to protect your identity.)

Article sources include:
* National Identity Fraud Awareness Week (NIDFAW) media release.
* Fellowes (2010), Newspoll Survey, Australia – ID Fraud Awareness, conducted on a national online study with a sample of 1211 people aged 18-64 years.

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.

Is residential property over, under or fair value?

Graphs, graphs and damn statistics!

There is no shortage of articles quoting one “expert” or another about whether or not Australian residential property is currently in a bubble, ripe to boom again or just fair value. Every article seems to be accompanied by a barrage of graphs and statistical quotations to justify the author’s point of view.

If your eyes glaze over at the detailed graphs don’t worry, you’re not alone, often mine do too. I sometimes wonder (suspect) if the detailed graphs are purposeful anaesthesia to make the reader compliant to the author’s conclusions. (Hmm, I think that sentence may have done the same…)

Overvalued or fair value or…?

Who cares?

Really in the scheme of things if property is over or under-valued matters most if you are taking a short term trader’s view – trying to make money within a short time frame from a volatile asset.

What matters more is that new residential property investors are increasingly reliant on a continuing price boom in order to make a reasonable total return on investment (ROI).

With property prices and rents at current levels residential property investors make significant annual net income losses (even after tax returns). That creates a situation where a high capital growth is required to repay the debt, offset income losses and retain a reasonable return on equity.

Yes, my generation and those with an investing memory of about 15 years may say that residential property does generate really high capital growth. But the fact is that all you can say is that over that period it has done.

Can residential property continue to deliver high annualised capital growth over coming decades?

My helicopter view

Value is in the eye of the beholder. People seem to be willing to pay whatever they can to get something they really want. And Australians really want their own home – and a comfortable one at that.

In the last decade the amount of people bidding for property and their ability to pay has rapidly increased for reasons such as:

  • Ability and willingness to borrow higher percentages of income.
  • Ability to borrow higher percentages of the property value, meaning you needed to have saved less before you could compete in the market.
  • Grants to property purchasers.
  • Commencement of lending to a lot of the population previously shunned (e.g. employed yet unmarried females of baby-making age; and those with limited or mixed financial history.).

Consequently in many of our memories we have seen stellar above-average capital growth.

Can that ability and willingness to pay increase as rapidly over the next 40 years and thereby support continuing stellar capital growth?

It would require 40 years of:

  • Above average wages growth
  • Increased percentage disposable income through reduced lifestyle expenses (less kids and more frugal living – yeah right!)
  • Low interest rates
  • Increased willingness to lend by the banks
  • More crazy Government subsidies

I’m not an economist so I don’t even pretend to have a crystal ball. But my rational mind says that in the long term gravity will kick in and force a return to normal long-term growth rates.

Therefore I expect that at some time there may be a sustained period of sideways or even negative growth (i.e. price declines.)

Predicting when that will occur matters most if you are taking a short term trader’s view.

I welcome your thoughts, reaction and responses to my view which you can in the comments section below.

Introducing the new Australian share volatility index

Are you interested in the expected volatility of the share market? Then get some VIX. From tomorrow a new Australian equity volatility benchmark will be published by Standard & Poor’s (S&P) and the Australian Securities Exchange (ASX). The benchmark will be known as the S&P/ASX 200 VIX (ASX code: XVI). Following are some key highlights from the information provided by S&P and the ASX.

Are you interested in the expected volatility of the share market? Then get some VIX.

From tomorrow a new Australian equity volatility benchmark will be published by Standard & Poor’s (S&P) and the Australian Securities Exchange (ASX). The benchmark will be known as the S&P/ASX 200 VIX (ASX code: XVI).

If you are familiar with share market investing you will note the similarity to the VIX index published by the Chicago Board Options Exchange (CBOE). In fact the Australian index will use the same methodology (under licence of course).

You can learn more about the volatility index and download a fact sheet on the ASX website here.

Following are some key highlights from the information provided by S&P and the ASX. If you get lost in all of this it’s ok – you don’t need to know it to successfully create wealth.

What the VIX is

The index measures the expected volatility of the top 200 shares listed on the ASX. Since it is a forward looking index, in a way it is like trying to put science around a crystal ball.

Expected volatility is calculated using the settlement prices of call and put options, which are derived from expected future prices of the underlying share.

Using and interpreting the volatility index

In regards to using the index I like this quote in the media release from Richard Murphy, ASX General Manager, Equity Markets, who said:

“observers of the index will have insight into the degree of uncertainty among investors and their expectations regarding the magnitude of future movements in the local equity market.”

Also from the media release is this tip on how to interpret the index:

“A volatility index at a higher level generally implies a market expectation of large changes in the S&P/ASX 200 over the next 30 days, indicating that investor sentiment is uncertain. Conversely, a lower volatility index value generally implies a market expectation of little change, suggesting greater levels of investor confidence.”

Should you care about the volatility index?

The index looks forward 30 days so it is very short term. That really is only of interest to short term traders and anyone contemplating making a purchase or sale of a direct share during that period. If you are investing for the long term you can probably ignore it and focus on enjoying the other elements of your life.

Further the index is non-directional – volatility is both ways. You don’t know if investors expect the fluctuations to be mostly up or down. So you can’t really interpret from the index that the market will go up or down and therefore you should either buy now or wait, respectively.

So unless you actively trade direct shares you are better off concentrating your energies on other financial elements. (Unless you want to impress people at the next barbecue with comments about how fearful or not investors are.)

Announcing: DIY Wealth Creation Course

Do you want to take more control over the management and investment of your money but are not sure what is right for you? If so, this DIY Wealth Creation course may be on the money for you.

Create your own wealth creation plan

This course will provide you with a detailed overview of the key things you need to know to make smart financial choices that are right for you. As well as discovering what you need to know you’ll also learn how to take action straight away.

As a result of completing the activities during this course you will:

  1. Create a wealth creation plan to achieve your lifestyle goals
  2. Identify how to plug any gaps in your financial foundations
  3. Understand mainstream investment, superannuation and insurance structures
  4. Understand the appropriate next steps you need to take in wisely managing your money

It will be hands on with activities for you to complete each week as you construct your personal financial plan.

I am presenting this seven week course  as part of the regular Adult Community Education courses offered by the Challenger Institute of Technology (formerly called Challenger TAFE). It will be held at their Heathcote campus in Applecross, Perth.

Learn more about the course and how to enrol here.

Why performance based fees for advice won’t work

“About 19 per cent of investors say their preferred model for paying an adviser is performance-based fee,” according to Mark Johnston, principal of research firm Investment Trends. (Reported here today).

Performance based fees will not work for most types of financial advice.

Performance based fees for finance advice may only be appropriate when:

  • The advice service has a narrow focus solely on investment selection; and
  • The value proposition of the adviser is based on beating the investment performance of valid alternatives such as the broader market or what the investor could achieve on their own.

But that scenario is a very small portion of advice. It perhaps only really applies to stockbrokers and some other investment advisers.

Most financial advice provides a far broader service including providing intangible value such as clarity, direction, confidence and peace of mind. Other benefits include saving you time by handling a lot of research and paperwork on your behalf.

The advice fee is therefore relative to the value of such benefits to you. And it is separate from the investment performance.

Certainly performance based fees couldn’t apply to true financial planning.

The value of planning anything in your life is that it gives you greater confidence that you will get the future outcome or experience that you desire, how and when you want it. You get that confidence because planning and purposeful action actually increases the likelihood the desired outcome will occur.

If the financial adviser controlled every element of you achieving that life goal then maybe you could argue for a performance fee based on you getting the desired outcome. But they don’t control most of it – you do!

Traditional percentage based commissions on product sales are absolutely not the way to remunerate an adviser for strategic advice and guidance. But neither are performance fees.

The solution is a move to transparent fees agreed up front for a defined scope of advice. The level of that fee will be based on mutual agreement between you and your adviser to provide mutual reward:

  • The fee needs to be high enough to cover the adviser’s costs plus a reasonable profit margin;
  • Whilst also being low enough to represent value for the tangible and intangible benefits received by you

How I made a 5000% return in 1 month

In January I sold an investment asset that I had bought only one month earlier – and the sale netted me just under a 5000% return on investment. The investment I made was in buying an Internet domain name. It is like virtual property investment. To help you start learning more about investing in Internet domain names I’ve interviewed my domainer mentor, Ed Keay-Smith. Listen to the interview here.

In January I sold an investment asset that I had bought only one month earlier – and the sale netted me just under a 5000% return on investment.

Now I got lucky when a motivated buyer emerged within a month of my purchase. This is uncommon.

But what is common is that level of percentage return on investment, according to my mentor in this investment type Ed Keay-Smith.

The investment I made was in buying an Internet domain name. For example: MattHern.com.au. It is like virtual property investment.

I refer to this type of investment as frontier investing as it reminds me of the days centuries ago when people rode off into the Wild West and pegged some land.

Whilst very high percentage returns are possible, of course just like any investment you need to first learn a lot so that you know how to make a good investment decision. Otherwise you are just speculating. And if you are blindly speculating you are one small step from gambling.

How to invest in domain names

To help you start learning more about investing in Internet domain names I’ve interviewed my domainer mentor, Ed Keay-Smith. Ed is one of Australia’s leading authorities on the subject of domain names and domain investing and his blog and podcast at ozdomainer.com is read and listened to by domain investors across the globe.

In this 40 minute interview you’ll discover:

  • What exactly is an Internet domain name
  • Why you may want to invest in this type of asset
  • Why you may not like to venture into this frontier investment type
  • Several golden tips from Ed on how to generate domain ideas and work out if they may be valuable
  • Where to go next to learn more about investing in domain names

How to easily save 5% on your groceries

Groceries are one of the largest costs in most people’s budget, costing around 17 percent of average household spending. Did you know you could easily and legitimately save five percent on your groceries without changing your shopping habits? That would be over $500 per year for the average family. Both of the two large supermarket chains in Australia provide means to purchase their gift cards at a five percent discount to the card value. In this article I share two ways to get those discounted cards.

Supermarket shopper with trolleyGroceries are one of the largest costs in most people’s budget, costing around 17 percent of average household spending. (Source: Australian Bureau of Statistics Household Expenditure Survey.)

In my experience with clients, families easily spend above $200 per week on groceries –that’s over $10,000 per year.

Did you know you could easily and legitimately save five percent on your groceries without changing your shopping habits? That would be over $500 per year for the average family.

Both of the two large supermarket chains in Australia provide means to purchase their gift cards at a five percent discount to the card value.

At Coles

Across Australia you can purchase a copy of the Entertainment Book that contains hundreds of discount vouchers. In addition to the vouchers you can purchase Coles gift cards through the Entertainment Publications website at a five percent discount.

The way I do it is to buy a quantity of gift cards worth the equivalent of about one months groceries. Since I pay on my credit card which also has a monthly cycle there is no impact on my cash flow from pre-purchasing the cards. Then at the checkout I pay for my groceries using the cards.

In Western Australia the Entertainment Book costs just $65. Given that you can save hundreds of dollars per year on groceries with the discount it is a no brainer to buy a book.

If you want to get a copy of the Entertainment Book investigate your local charity, school P&C, sporting club or work social club as many of them distribute the books as a fundraising activity.

At Woolworths, Big W and Caltex

As a member benefit the RAC of WA provide the ability to purchase Woolworths Essentials gift cards at a five percent discount.

[Updated Nov 2011] You can easily purchase the gift cards in the RAC Online shop. Just login using your member number. RAC post the cards to you for free! The potential for lost mail may concern some but when I asked the RAC about their process in this circumstance I was very reassured. For added security you could use a post office box (like I do) or ensure you have a padlock on your mailbox (which is essential anyway in protecting against ID theft.)

Currently you have to visit a member centre to buy the gift cards and there is a maximum limit of $500 per member per day. Whilst it is not as convenient the savings make it worth the extra effort.

The Woolworths Essentials gift cards can be used at Woolworths supermarkets, Big W and co-branded Caltex Woolworths petrol stations. You could therefore save hundreds of dollars per year especially if you are the regular chauffeur to hungry, growing teenagers.

If you live in Western Australia, regularly shop at any of those three outlets, own a car and yet are not a member of the RAC then join up. At just $87 per year for standard roadside assistance it is a no brainer. You will end up in front.

Know any other sources?

I have heard on the grapevine there are other ways to legitimately purchase Coles and Woolworths gift cards at a discount. If you know of any other way please share your secret in the comments below. (You can be anonymous if you need to.)

Centrelink won’t save you

When I talk to people about the importance of erecting safety nets under their lifestyle I am often countered with “won’t I be able to get Centrelink?”

Centrelink is social security not social comfort nor social choice.

Theoretically social security is to keep you above the poverty line if misfortune strikes. But many who rely on Centrelink may argue they are below the poverty line (e.g. aged pensioners.)

Could you really survive on these amounts?

The current maximum rate of the Disability Support Pension is $644.20 per fortnight for a single person. That’s $16,749 per year.
How are you going to keep food on the table, a roof over your head and meet medical costs on that?

And let’s suppose you not really saving much for eventual retirement. Could you survive on
the current maximum rate of the Age Pension, which for a couple is $1,057 per fortnight (combined)? That’s $27,482 per year.

Erect a safety net

When it comes to the most important things in life there is no substitute for proper prior planning and purposeful action.

The personal impact of misfortune is bad enough without being compounded by financial stress. Take action now to erect a financial safety net to support you if misfortune strikes.