Cash in your frequent flyer award points

In September 2001 I lost over 100,000 frequent flyer points when Ansett Australia collapsed. I had been accumulating reward points with the intent of funding an overseas flight. To that end I’d even paid for a domestic flight rather than use some of my points.

What a waste!

Back then it was a common complaint that reward seats were scarce and never when most people wanted to fly. Ten years on reward flights are easier to come by and you can even use points to partially fund a flight.

And there has been one other excellent development.

You can now cash in your frequent flyer points!

Woolworths $100 gift cardThe Qantas Frequent Flyer Store currently includes 214 gift vouchers. The vouchers that excite me the most are the ones for everyday essentials like groceries, fuel and clothes.

Myer Gift Card from the Qantas Frequent Flyer StoreThe best value gift voucher I have found is just 13,500 points for a $100 voucher. This rate applies for many of the retail stores, such as Big W, Myer and Adairs, and also for car hire, hotels and Qantas Holidays.

Most other gift vouchers for Woolworths Group stores cost 14,500 points for a $100 voucher. That means your points are worth about 0.69 cents each. (Yes, less than one cent per point.)

Flights or gift cards?

Yes, redeeming your points for a flight award may offer slightly better value depending on when you fly. However if you usually fly only on cheap fares and specials then you’ll probably find, as I have, that the savings are about the same.

By redeeming your points for vouchers you can reduce the impact of rising costs. And, if you’re on the ball, you should therefore be able to boost your cash savings.

Even better, if you direct those savings into additional mortgage repayments you will be able to own your home sooner. Awesome!

When weighing up whether to accrue your points for flights or redeem them for cash keep this in mind – you don’t earn interest on your frequent flyer points.

In fact it seems that even though flight prices haven’t increased much the amount of points required has increased. So the value of your award points is actually decreasing.

Getting started is easy

With just 3,750 points you can redeem a $25 gift card. So log on right now and start redeeming.

Automate it

Qantas Frequent Flyer has recently introduced Auto Rewards. You can elect to automatically redeem your points for a Woolworths gift card every three months.

The current maximum amount is a $20 gift card costing 3,000 points. (That’s a value of 0.66 cents per point.)

Worried about security?

Yes gift cards are cash-like so you are right to give some thought to security.

At the very least you should have a decent padlock on your mail box to help protect yourself from identity theft. That will also help against theft of your gift cards.

Alternatively use a post office box – either your own or where you work.

Take the pressure down this Christmas

There are gift vouchers that will cover most items that will hit your budget this Christmas, including gifts. From general retail stores to travel, auto, hardware, electronics, food and liquor.

You may even decide to just give the voucher to someone as a gift. Hmm, that gives me an idea. I might redeem some points for a Bunnings voucher for my father-in-law.

Retirement lifestyle costs quick estimator

The ASFA Retirement Standard for the September 2011 quarter has just been released and reveals that “in general, a couple looking to achieve a comfortable retirement needs to spend $55,316 a year, while those seeking a ‘modest’ retirement lifestyle need to spend $31,767 a year.”

One of the most useful elements of this quarter’s update is the release of an online quick estimator of your retirement lifestyle cost.

To estimate how much you need to save in order to make work optional (“retire”) on your terms you need to define your retirement lifestyle target. If you have no idea of how much to set for your retirement lifestyle target then use the quick estimator to get a feeling of what current retirees are spending. I recommend you shoot for the “comfortable” lifestyle target.

Buying a house with friends or family

This article was originally published in the LawCentral Bulletin 390 on 7th November 2011 and is republished with permission of the author, Brett Davies.

Question
Hi Brett. I’m a recent university graduate. I’ve been lucky enough to land a graduate job earning a decent wage. The problem is, with rents so high and house prices even worse I can’t seem to get a foothold in the market. I have a bunch of friends that are in a similar boat. Can we all chip in to buy a house without getting into legal fights later on?

Answer
You are not alone. My graduate lawyers constantly ask for a pay rise so they can buy a house. However, it seems with the cost of renting and house prices – some people feel trapped.

Option 1: Buy a house with friends agreement

The ‘buy a house with friends agreement’ is a great way to get a foothold in the property market. You and your Gen-Y mates can pool your resources to buy a house together.

Sounds simple. But, why do you need it when you can just do that without an agreement?

The Buy A House With Friends Agreement clearly sets out the nature of the relationship between all your friends. We call the relationship a syndicate. It just sounds better than calling it a collective of mates.

But, everyone gets along fine. Why do we need legal documents?

Those are famous last words of many people who do business with friends. Just because everyone gets along well now, doesn’t mean that you always will. The buy a house with friends agreement defines:

  1. Each party’s investment contribution;
  2. What the property is that the syndicate owns;
  3. How the property is owned;
  4. Each party’s share of the capital and income of the venture;
  5. Whether the parties can borrow against the property;
  6. How the parties can end the agreement;
  7. How the parties can transfer their share of the syndicate;
  8. Whether the parties can force the sale of the property; and
  9. How the parties can exit the syndicate.

By establishing all of the above details at the beginning – everyone knows where they stand.

We even include a mutual promise that each party is to promptly meet their individual finance obligations. What does that mean? Put simply, everyone agrees to pay their mortgage repayments on time.

Although my litigators hate me for this it saves you more on legal fees to have the agreement in place now. We see disputes over property going to court and in the end both parties spend their share of the property in legal fees. It is such a waste of your time and effort.

Option 2: Investing through a Unit Trust

A unit trust is another great way for a group of people to pool their resources to invest somewhere. In this case, invest in property. The key players in a unit trust are:

  • Trustee; and
  • Unit Holders.

The unit trust is a ‘relationship’ between the trustee and the unit holders whereby the trustee owns property for the sole benefit of the unit holders. The trustee can either be each unit holder (acting in their personal capacity) jointly or you can set up a corporate trustee.

The unit trust offers greater flexibility for the unit holders. The unit holders are able to freely transfer their unit holdings amongst each other and subject to the terms of the trust, can transfer their units to third parties too. The units are much the same as shares in a company in that respect.

Are you thinking ‘if this all goes well we might buy another place later’?

If your answer to the above question is yes, then a unit trust may be the way to go for you. The unit trust offers the flexibility of acquiring new trust assets without requiring a new agreement. That is because the unit trust lives for at least 80 years.

Once you have set up the structure, it is practically with you for life.

Who do you appoint as the trustee?

It really depends on the number of people you intend to involve in the whole process. Remember, every person that is named as a trustee of the unit trust is required to be named as the registered owner of the property. That can be very cumbersome if you pool together 10 friends. You even need to change the title registration every time a unit holder sells out or a new one comes in. After all, there is no need for a former unit holder to be a trustee.

Another option is to create a corporate trustee. It is a relatively simple process. Just build a company on Law Central and you are on your way. Now the company is shown as the registered owner of the property. Better yet, whenever unit holders change – you don’t need to change the trustee.

Who controls the corporate trustee?

In the normal course, you appoint at least one person to be the director. You also issue shares to each of the unit holders in the same proportions as their unit holding. That way each unit holder has an appropriate degree of influence over the corporate trustee.

Then, when unit holders change or their unit holding changes, they simply transfer the appropriate number of shares in the trustee company to ensure everything remains kosher.

I hope you and your friends manage to make a solid start in the property market. If you are unsure about what is right for you, speak to your accountant and adviser first to get the financial advice you need. Then call me and one of my team can set you in the right structure.

Women: a great little reminder from a hot guy

And after you’ve finished checking your breasts check if you have protection from the financial consequences of a serious illness like breast cancer.

The key tool is trauma insurance, which pays you a lump sum on diagnosis.

You can use the lump sum to:

  • Help fund out-of-pocket costs for medical treatment
  • Give your partner time off work to be with you knowing you can keep food on the table
  • Take time off work to smell the roses
Call me today to discuss how much trauma insurance cover may be right for you.

How compound interest works

MoneySmart, the financial literacy website produced by Australian Government regulator ASIC have produced this brief video to explain how compound interest works.

Compound interest is an essential base concept to understand before investing. So if you don’t understand it then I recommend you spend one minute watching this video. Then please share in the comments below – did the video help you understand?

 

National Identity Fraud Awareness Week

This week is National Identity Fraud Awareness Week. Last year I wrote a detailed article on how to protect yourself from identity theft. The article also shares the story of how my sister was defrauded of $2,000.

This year the Australian Federal Police have published an excellent survey to test how well you protect yourself against identity crime. The survey is a quick 15 questions and quite insightful. I recommend you take the survey now to test how protected you are.

Identity theft can cost you a fortune in lost money and time. This week take a few moments to assess how risky your behaviour is and read my article on how to prevent ID theft. Then of course take action!

Tunnel vision cost $5,000 a year

A couple of months ago I met Kate at a 40th birthday party. Kate had tunnel vision – metaphorically speaking – and her tunnel vision was costing her abut $5,000 by her own estimate. The problem was, Kate was blissfully ignorant to her condition. That was, until she met me.

A couple of months ago I attended a friend’s 40th birthday party and met one of her lovely friends, I’ll call her Kate. Once Kate discovered I am a financial planner the conversation inevitably turned to managing money. I’m ok with that as I love helping out.

After letting on she was a bit older than 40 and maybe even late 50s or early 60s I asked if Kate had been to one of the many free retirement planning seminars that are offered by financial planners around the place. The reply was:

“Yes, I’ve been to quite a few. But they always seem to want you to come in for a meeting and sign up for a $3,000 financial plan.”

I hear that a lot, but this time I quickly shoved another canape in my mouth to stop my urge to evangelise.

Imagine my shock when 10 minutes later we were discussing the transition to retirement strategy and Kate came out with:

“Lots of people at work have told me I’m crazy not to be doing it, but I just haven’t got around to it. Oh, it’d only save me about $5,000 in tax a year.”

Did your jaw just drop too?

That’s irrational! How can you be happy to pay an extra $5,000 of tax per year but be unwilling to pay $3,000 once-off for comprehensive retirement planning advice?

Kate’s mistaken beliefs about the value of financial advice had given her tunnel vision in regards to getting professional help.

That tunnel vision was costing her at least $5,000 per year by her own estimate. Imagine how much more benefit she perhaps could get from advice that she was was not yet aware of.

Are your beliefs about financial advice and financial advisers giving you costly tunnel vision?

Were those beliefs formed years, even decades ago? Were they formed just on someone else’s experience, not even your own? If so, the industry has changed – a lot!

Perhaps it’s time to take the blinkers off and discover what you don’t know you need to know.

What to do if massive world change is coming

“Perhaps the developed world is about to experience massive structural change”, mused my mate as we discussed the global financial situation recently.

In truth no-one knows what will happen.

The great news is that the actions which prepare you to survive a massive change also position you to thrive if instead a boom arrives. So irrespective of your personal forecast it is worth implementing these suggestions.

“Perhaps the developed world is about to experience massive structural change”, mused my mate as we discussed the global financial situation recently.

In truth no-one knows what will happen.

The great news is that the actions which prepare you to survive a massive change also position you to thrive if instead a boom arrives. So irrespective of your personal forecast it is worth implementing these suggestions.

What could happen

If massive change arrives it probably won’t be pretty. You may experience some of the following:

  • You lose your income, maybe for an extended period.
  • Just to keep food on the table you have to sell assets, maybe including your home, cheaper than what you paid for them.
  • Your loved ones lose their income and assets and move in with you.
  • Your investment values go sideways or even down.

It’s all about cash flow

To keep food on the table and a roof over your head you need cash flow. Your best bet to keep money flowing in is to keep your job.

Even in the Great Depression seventy per cent of Australian men remained employed, so if you play your cards right there’s a good chance you’ll stay employed.

To protect your employment income you need to maintain expertise of value to your employer, your industry and to the country.

One way to achieve this is through ongoing professional development. Another way is by being more productive – work smarter, not longer.

For some people though, reskilling and reinvention will be necessary. This will likely apply to those working in retail and other consumer discretionary industries. Don’t despair – these days changing careers is the new black.

Contain your expenses

Borrowing to the max seemed normal while wages and asset prices grew steadily. But it’s now evident many financial houses were built on unsuitable foundations. To survive and thrive avoid over-committing to large debt repayments that are reliant upon two incomes.

Make like a squirrel

It’s time to make like a squirrel and save up your nuts for winter. Build a reserve of emergency funds you can use to fund your expenses if the worst happens.

The best emergency fund is cash you can access within about 1 to 2 days’ notice. The cash can take a number of forms including:

  • Actual cash in a high interest online bank account
  • Available redraw on your mortgage because you are way ahead in your repayments
  • Withdrawal capacity in a personal line of credit secured against your home

Don’t rely solely on your investments

You may be thinking your investments are your backup plan.

If massive world change arrives it may be the worst time to sell your investments. In fact for lumpy assets like property you may not even be able to find a buyer. I know people who during the Global Financial Crisis couldn’t find buyers even after cutting prices.

In a “crisis” companies may slash dividends to preserve cash, leaving you empty handed.

And if people start bunking together to save costs your investment property may be without tenants. Or you may have to slash rents just to get a tenant.

So don’t rely on living off your investments if you lose your job for an extended period.

When the sun shines

Of course doomsday may never arrive and instead we’ll re-enter years of prosperity.

In that case, having invested in your professional development you’ll be in demand and may experience significant pay increases.

As a diligent debt repayer you won’t care as much when interest rates go up (to curb inflation) because you’ll have much less, if any debt.

Couple the higher income with contained expenses and you’ll have plenty of surplus income to invest in funding your early and luxurious retirement.

Chill out

Follow this timeless, common sense approach and you can confidently keep a “she’ll be right mate” attitude no matter what happens.

Why are only 5% of Aussies millionaires?

“One day I want to be a millionaire!”

I recall that being an often expressed goal around the traps twenty years ago.

Back then the median gross annual income was just $17,056* so the millionaire goal was quite a stretch. It was also before the explosion of free information on the internet.

Since then there’s been an endless stream of information published to show you how to wisely manage your money and become rich. Most of the information is dirt cheap or even free.

So despite all of this information why still do only 5% of Australians have net wealth in the millions? (Excluding the value in their principal residence.)*

That is the question I often ask participants in my seminars and courses.

The common reasons they suggest are:

  • It’s easier to spend now than save. We don’t have the discipline.
  • We make bad decisions.
  • We don’t know what is the right or wrong decisions so we don’t make a decision.
  • We get sucked into glamorous marketing and don’t know how to evaluate if the investments are any good.

All of those reasons are spot on. What do you think? Are there any other reasons you’d add?

Choice overload is a big problem

We’ve had an explosion of choice but our ability to make wise choices has not kept pace. So we hit information and choice overload.

In such circumstances often we either:

  • Throw our hands in the air in exasperation and do nothing.
  • Grab at something close that gets our attention and seems easy and do it whilst hoping for the best.

The problem with that is delay is the greatest cost in wealth creation. And bad choices can be just as costly.

This applies to all lifestyle goals

You may not have the goal to be a millionaire but I bet you have other lifestyle goals like a dream house, holiday, car, children’s education or retirement lifestyle.

Money is one of the resources that helps fund your important life experiences.

If you’ve ever said “I’d really love to do that but I just can’t afford it” then this probably applies to you. I bet the reasons you didn’t have the money for what you really wanted when you wanted it include those reasons listed above.

What to do about it

The elusive delayed gratification

Applying discipline is tough.

In the financial context I suggest you:

  • Get clear on what matters most to you in life
  • Save for the significant
  • Automate as much as possible

Last Thursday one of my cash flow coaching clients said to me:
“I’d rather have lunch in Venice than buy lunch at work every day.”

She was getting clear on what was more important to her and then changing her habits to ensure she achieved her dream of lunching in Venice with the love of her life.

What about you? What experiences matter most to you in life?

Once you know what you really want next I suggest you harness recent technological advances to do the heavy lifting and protect you from your impulsive self. In the old days they used envelopes or jars and manually topped them up. Now you can have multiple online high interest bank accounts and set up automatic transfers to coincide with your pay cycle.

Learn how to make smart choices

You don’t need to know everything. You just need to know what you need to know.

You can save yourself a lot time, indecision headaches and stress if you learn how to filter the information overload.

The big time saver comes from learning how to quickly filter out things are not appropriate to you right now.

The big financial kick comes from knowing how to choose actions that are right for you and will boost your net wealth. You can avoid procrastination and inaction and get on with doing.

To have enough money for what you really want when you really want it I strongly recommend you invest time in learning how to make smart choices.

Stop scouring the internet and media for tips on the best shares, suburbs and other investments to buy into.

Rather than learning more about all the possible investments out there instead learn decision making models and frameworks you can use to filter every new thing you hear.

The knowledge of how to choose stays with you for life and can be frequently reused. Learning how to choose therefore pays you dividends for life.

You gain clarity from knowing how to identify what are right and wrong decisions. Therefore you’re much less likely to get overwhelmed and either do nothing or follow the next hot tip you hear.

Here’s the plug

My observation is that there are plenty of books telling you what you can do but not many teaching you how to choose.

So I created a course DIY Wealth Creation for Busy People that teaches you how to make the right choices for you right now. In the course I share many decision making models you can apply for the rest of your life.

They’re decision making models I’ve created so you can only get them from me.

If you want to learn how to make smart choices I recommend you check out my course DIY Wealth Creation for Busy People.

Interested but can’t make it?

If you’re interested in the course but the time or location does not suit you please e-mail me and let me know (including interstate folk). That will help me make smart choices about other formats for effectively sharing the knowledge.

 

Article sources:

  • ABS 1301.0 – Year Book Australia, 1991
  • ABS 6554.0 – Household Wealth and Wealth Distribution, Australia, 2005-06 (latest release)

How much super you need to fund a comfy lifestyle

The biannual update of the ASFA Retirement Standard has just been issued showing that to live a comfortable lifestyle in retirement a couple would spend around $55,000 per year. That’s a $1,000 per year increase compared to the December 2010 study.

Perhaps the most interesting aspect of this release are the projections of how much superannuation you need to accumulate to fund that lifestyle.

To fund that comfortable lifestyle ASFA estimate you need to accumulate $510,000 in superannuation (combined, in today’s dollars.)

However, ASFA project that if your household has a combined income of $100,000 earning 9% superannuation contribution over thirty years will accumulate just $366,000 (in today’s dollars).

The moral of the story is a familiar one: 9% p.a. compulsory employer superannuation is not enough to enable you to retire on your terms.

Regular readers of The Money Guide hopefully have received that message loud and clear and have taken steps to boost their Financial Independence Fund.

Sadly we observe that most Australians only get the message in their 50s when it can be too late to make a big enough difference.

 

 

 

Ruth Ostrow’s tip on how to discover what matters

I believe financial planning is about acting purposefully to ensure you have enough money for what matters most to you.

To help you achieve that outcome one key practice I recommend is to

 “save for the significant and minimise the insignificant”

Obviously you first need to know and identify what life experiences are significant for you.

In Ruth Ostrow’s column today in The Weekend Australian she writes about how her jealousy of a friend revealed a life experience which really mattered to her that for various reasons was missing from her life at the time.

If you occasionally catch yourself resenting others for what they have then head on over and read Ruth Ostrow’s tip on how to embrace jealousy and turn it into something useful.

Then head back here to The Money Guide to learn how to ensure money is not the obstacle to you achieving what you really want in life.

A great 21st birthday gift

My partner and I would like to buy shares for my son’s birthday. He will turn 21 on 9 November and we want to buy him something that he will have for a very long time. Eventually we came up with the idea of starting him off with his own share portfolio, but we have absolutely no idea how to go about this. We also don’t know if it is possible and whether it is a viable, long-term plan. We’d appreciate some advice…

Earlier today I received this question by e-mail:

Hello Matt

My partner and I would like to buy shares for my son’s birthday. He will turn 21 on 9 November and we want to buy him something that he will have for a very long time. Eventually we came up with the idea of starting him off with his own share portfolio, but we have absolutely no idea how to go about this. We also don’t know if it is possible and whether it is a viable, long-term plan.

Regards, Jane (name changed for privacy)

My instinctive thought of  a gift that would last him a very long time is that of financial literacy. The knowledge on how to make smart, appropriate financial decisions will last a life time and will both make and save him hundreds of thousands of dollars. However, it’s hard to gift financial literacy for a birthday as you can’t force a horse to water let alone force them to drink.

A really useful gift

Following the financial theme my next instinctive idea was to gift him an opening balance in a First Home Saver Account. I think this is a great idea for the following reasons:

  • It’s likely that he’ll want to buy a house some time
  • A house and a mortgage is something he’ll have for a very long time
  • The Government gives you some free money when you contribute to the account
  • Giving him a boost on saving for a house will improve his financial position
  • You can’t easily withdraw the money and blow it on indulgences

When I spoke to Jane she said they’d also considered buying a gold bar.

The problem with giving shares

Buying shares, a manged fund or a gold bar all have a certain novelty factor. But there’s no guarantee your 21 year old will have any of them for a long time. They all can easily be sold.

In fact once your child finally leaves the nest and buys their own home it would make good financial sense to liquidate all other financial assets to reduce their mortgage.

If giving your child a financial gift like shares, managed funds or gold bars has a spin-off effect of increasing their interest in managing rather than just spending their money then terrific. But I suspect that is luck and not something you can manufacture. Opening a First Home Saver Account could have the same affect and be more aligned to what they foresee in their future.

As it turns out Jane’s son is already diligently saving to buy a house, but not using a First Home Saver Account. So I suggested she investigate that route as fitting her criteria of a viable, long-term plan.

How to give the gift of financial literacy

For those parents whose adult children live in Perth you can give them a gift of financial literacy by enrolling them in my course: DIY Wealth Creation for Busy People. In fact two of the current participants who are aged in their 20s told me they are attending because their Auntie raved about the course, insisted they attend as “it would set them up for life” and even paid their course fee. 🙂

With math this bad would you trust this adviser?

Yesterday I received an e-mail message from financial services firm [name removed*] pre-promoting a “big event” they’re holding in October.

The following is part of their big sell:

Too right that’s not pretty reading.

Mr [name removed*]  has used simple math of dividing $1 million by $6,464.10 to come up with “154.7 years to become a millionaire”

That’s such B.S. (Yet the decimal point makes it seem so precise and legit.)

In fact it’ll take just under 35 years to accumulate $1 million if you are smart enough to invest your regular savings.

Here’s the assumptions in my calculation:

  • You invest your regular savings and earn a conservative  5% per annum net after-tax
  • The average wage grows at around 4% per annum
  • The regular saving is increased each year in line with the increase in wages so that you always save 10% of the average wage

You too can verify the calculation. Use this Future Value of Growing Annuity formula.

(Of course in 35 years the buying power of $1 million will be a lot less than now.)

The number’s don’t lie

The ironic thing is that the subject line of the e-mail was “Ouch! Numbers don’t lie…”

I agree that saving just 10% of your wage probably won’t make you rich. (In fact last year I reported on some research that estimated you need to save around 20% to achieve just a comfortable retirement.)

But using such sloppy projections to promote a wealth creation event is misleading, in my opinion. The numbers may not lie but…

It makes me wonder what other trickery may be included during this big event to encourage you to part with your hard earned?

——–

* I really wanted to name the firm and event promoter but my wife made me remove it. (Excuse me while I go and make her lunch.)

Budgeting tip: Medical costs

You don’t know when you’re going to be sick and need to see the doctor. That makes it tricky to include an allowance for medical expenses in your budget.

Medical expenses are included under the category of “irregular expenses” in my budgeting approach. You save a regular amount each pay period into a dedicated savings pool from which you later draw when the expense occurs.

If you’re just setting up your budget and haven’t been tracking your expenses for the past year you can get an initial estimate of your annual medical expenses from a combination of these sources:

  • Medicare online – allows you to download past 12 months and shows you net out of pocket
  • Your private health insurer –  online access or just call them
  • Past credit card and bank statements

As you complete your tax return this year you may need your Medicare claims history. Keep this information each year and over time you’ll get better at estimating your medical expenses.

Yes, sometimes you’ll have an unexpectedly costly medical bill. This can be covered from your budget’s contingency, which I’ll write about soon (so stick around).

View more budgeting tips or read the introduction to my Better Budgeting method.

Latest AXA Guide to Investment Markets

About every six months AXA Australia publish an interpretation of what has been happening in the local markets and economy in the context of the global economy. Of the many commentaries published by Australian product providers the AXA guide is one I feel is most written in plain, accessible language.

The latest AXA Guide to Investment Markets, dated June 2011 is titled “Understanding the ups and downs”.

Among the topics covered in the latest guide are:

  • Global debt
  • Surging commodity prices
  • “Two-speed” economy in Australia
  • Australian dollar
There’s one guarantee in economic interpretations – and that is that all the economists will disagree. No-one has a working crystal ball.
So read the AXA guide (and all others) for your interest but with caution – it’s not fact nor gospel.