Money tips to make your decisions clearer and easier
Author: Matt Hern
Certified Financial Planner professional, Matt Hern has three times been awarded as one of Australia's Top 50 Financial Planners by The Australian Financial Review Smart Investor.
He is passionate about guiding you on the right financial choices to achieve what you really want.
Matt Hern is an Authorised Representative of Charter Financial Planning Limited AFSL 234665. All information is general advice only.
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:
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.
The 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.
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.
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.
Private health insurance rebate
Less than $84,000
Less than $168,000
$84,001 to $97,000
$168,001 to $194,000
$97,001 to $130,000
$194,001 to $260,000
$130,001 and above
$260,001 and above
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%.
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.
Counted income for Medicare Levy Surcharge and Private Health Insurance Rebate
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.
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.
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 🙂
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?
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.
Most policies cover over 20 different illnesses including the ones you’d commonly think of such as:
Paralysis, including paraplegia and quadriplegia
Loss of limbs
Blindness, deafness or loss of speech
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.
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.
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.
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.
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.
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.
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.
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.
For 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)
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.
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.
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.
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?
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.
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.
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.
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.
During 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.
Find the model of your old phone
Register your details
Print the postage paid label (cool!)
Send the gadget
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!
If 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:
iPads and other tablet computers
So next time you upgrade a gadget act quickly to see how much money you may be able to make from it.