Budgeting tip: They don’t make things like they used to

When an electrical good suddenly gives up you can be faced with finding a tidy $1,000 or so to replace it. For many people this causes unwanted financial stress and can result in them funding the purchase through debt or other savings. Neither of those options is ideal.

My parents still have a refrigerator that has one of those locking door handles on it. You know the ones that a small child could lock themselves into. It must be 30 or 40 years old and it still works.

Unfortunately electrical goods aren’t made to last that long, yet they’re cost is significant.

When an electrical good suddenly gives up you can be faced with finding a tidy $1,000 or so to replace it. For many people this causes unwanted financial stress and can result in them funding the purchase through debt or other savings. Neither of those options is ideal.

Funding through debt just increases the cost courtesy of the loan interest.

Funding from savings that were earmarked for something else is frustrating as it can mean you miss out on that  other thing you were saving more. Clearly that is not what you want in your life.

Save for the predictable

Next time your fridge, washing machine or TV goes on the blink there is no need for you to blow a fuse.

It is reasonably predictable that your household electrical items will need to be replaced during your life time.

The exact timing is uncertain but you can assume items will last about one or two years past the expiry of their warranty. That’s just how items are made these days.

Similarly the precise cost is unknown but it can be estimated. Just take the current replacement cost and increase it for inflation of about 3% per year.

How to save for replacing household items

Knowing the approximate time and cost you can then calculate the regular amount you need to save each month so that money is there when you need it.

Don’t worry about including interest on your earnings in the calculation. In fact for ease just assume the interest earned on the savings will offset the inflation.

Just use a simple calculation of replacement cost divided by months until money needed divided equals regular monthly saving amount.

If the item lasts longer or costs less than your estimate that’s a bonus. You then have some ‘spare’ cash you can use for those items that need replacing sooner than planned or cost more than planned. This budgeting strategy can have an in-built contingency.

Household items to plan for

For an idea of what items to save for just take a walk around your house, both inside and outside and note the significant items you would replace when they break down. The household electrical items include:

  • Refrigerator
  • Freezer
  • Dishwasher
  • Oven and cook-top
  • Microwave oven
  • Washing machine and dryer
  • Television
  • Stereo
  • Computers and printers

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

Time for tax planning

Three days before the end of last financial year I received a call from a journalist from the Australian Financial Review. He was writing an article for publication the next day about tips for managing your tax that financial year.

With tongue firmly in my cheek I suggested my top tip was “to slap yourself in the face for leaving it that late.”

Fortunately he laughed, agreed with me, and also agreed not to quote me.

June is not the time to start thinking about how you will reduce your tax that financial year. Often it is too late to implement the most tax effective strategies.

June is the time for implementing the final tactics of the tax strategy you planned well in advance.

Right now is the time for tax planning

Most Australians are employees so they have reasonably predictable incomes, even when you include investment income and debt.

Therefore your tax position for the financial year can be estimated close enough to give you a good insight into key tax management factors including:

  • Your taxable income
  • Your marginal tax rate
  • Your tax payable
  • Your surplus income after lifestyle expenses

Knowing those factors you can review strategies to decide how you will manage and hopefully reduce your tax.

How to reduce your tax

Tax management should be considered in the broader context of how you manage your money.

The ultimate purpose of managing your money is to ensure you have enough for what you need when you need it.

Yes, reducing your overall tax will increase the money you have.

However many tax effective strategies have significant impacts on your cash flow. Some tax strategies can increase your investment risk way above your risk tolerance and risk capacity.

So tax should not be looked at in isolation. More importantly for most people tax reduction should not be your primary driver in selecting financial strategies. In my experience most people have much bigger financial fish to fry.

I have published a detailed introduction to key ways to reduce your tax. Read the article and consider the strategies that may be appropriate to you this financial year.

What you can do right now

My top tips for the tax effective financial strategies you can implement right now include:

  • Salary sacrifice a regular amount to superannuation based on what you have estimated you need to save in order to achieve your financial independence goal
  • Purchase an income protection insurance policy (if you don’t already have one)
  • Contribute a regular amount after-tax to superannuation related to your eligibility for the spouse contribution tax offset and/or the Government co-contribution.
  • Shift your cash savings into the name of the lowest income earner (or better still onto your home mortgage)
  • Submit a PAYG Variation form to your employer considering the expected net taxable income loss from your geared investments (e.g. property). This strategy is better for your cash flow and avoids giving a large loan to the Government.

What you do in June

In June you make tactical tweaks to your strategies. For example:

  • Advise your employer of how much of your anticipated annual bonus you want to salary sacrifice to superannuation.
  • Adjust the after-tax amount you contribute to superannuation that month now you can closely estimate your eligibility for the co-contribution and tax offset.
  • Pre-pay interest on investment loans
  • Self-employed people can make their annual deductible contribution to superannuation based on what they earned that year.
  • Extra charitable donations from your surplus

Guidance on which strategies are right for you

Not sure which tax effective strategies fit your situation and goals?

If you’re in Perth I recommend you attend my next DIY Wealth Creation for Busy People course. You’ll discover how you can strike a balance between spending, saving and tax.

If you’re outside Perth or can’t make the course then call me to discuss financial planning.

How to reduce your tax

A desire to reduce tax is one of the key drivers many people list when they initially contact me for financial advice. So today I will share with you my perspective on how you can save tax.

First a word of caution

Only tax accountants and tax lawyers are legally allowed to provide you with specific tax advice. This article is an introduction to some key concepts of reducing your tax from a big picture planning perspective. And of course at the fringes there are some special cases. Start by understanding the key concepts before delving into the fringes.

Speak to your tax accountant for personal tax advice. And if you don’t have one – maybe you should get one as part of your financial team.

Key ways to reduce tax

Four key ways to reduce your tax are:

  1. Spend money in the production of taxable income
  2. Spend money where the Government wants you to
  3. Give money away charitably
  4. Park your money in a lower tax entity (e.g. superannuation, company, trust, partner’s name)

Note that the first three ways listed above involve you giving away or losing money as a way to reduce your tax.

Key concept: you don’t get everything back

A common misconception is that a $1 tax deduction saves you $1 in tax. That is not correct.

You don’t get everything back.

For an individual tax payer you get back the equivalent of your marginal tax rate. The majority of Australians have a marginal tax rate of 30% (excluding levies). So they get back only 30% of what they spend on deductible items.

An example

You give away $10 to charity. At the end of the financial year you claim the donation as a deduction and the tax on your income is reduced by $3 (what you ‘get back’ when your marginal tax rate is 30%).

Your net cash flow has however reduced by $7. That’s $7 less you could repay off your mortgage, invest or spend.

Spending money in the production of taxable income

Spending money in the production of taxable income is probably the primary source of higher tax deductions and thereby a reduction in your tax payable.

Conceptually you can split it into deductions related to active (personal exertion) income and those related to passive (investment) income.

Save tax on active income

As you may already be aware you can claim some expenses relate to your job, including these common categories:

  • Self-funded work-related education
  • Uniforms
  • Some travel
  • Some car expenses (not a full deduction as it is subject to some fringe benefits tax)
  • Retirement savings (i.e. before-tax contributions to superannuation often through ‘salary sacrifice’)

The Australian Taxation Office (ATO) publishes guides for specific industries and occupations. Check them out to see if there is a guide relevant to you and consult with your tax accountant.

One easy deduction you may not be aware of is that of your income protection insurance premiums. Most insurance is not tax deductible but income protection is because if you later need to claim then the benefit will be taxed as if it was your employment income.

Save tax on passive investment income

In general if your investments earn income each year you can claim a tax deduction for expenses related to those investments, including for:

  • Interest paid on money borrowed to invest
  • Expenses related to maintaining the investment

In Australia you can also use investment related expenses to reduce your taxable income from your job.

That aspect gets many people salivating so much that they overlook key financial principles.

  • If through investing your investment income is higher than your investment expenses you will actually increase your taxable income and pay more tax.
  • When your investment income is less than your investment expenses your investment is losing money.
  • Your net investment loss may reduce your tax payable on your wages income but you don’t get all of the loss back (remember). So you still have an after-tax net income loss.
  • When you’re making a net income loss on your investment you need to make it up in additional capital gain so that overall you get an acceptable return on investment.

Save tax on investment gains

When you sell your investment you realise your capital gain. In Australia the capital gain is included in your taxable income for the year.

You can reduce the tax payable on your capital gain through:

  • Holding the investment for over 12 months so that only half of your gain is taxable
  • Deducting capital expenses such as transaction costs and stamp duty
  • Offset prior realised capital losses

Tax rebates and offsets

The Government really wants you to:

  • Keep working and earning money
  • Raise future tax payers (so they earn more tax)
  • Look after yourself in retirement (so they spend less tax)

So the Government gives you an incentive to do that by rebating some tax to you for ‘expenses’ related to their goals. Current examples include:

  • Child care rebate
  • Education tax refund
  • Spouse superannuation contribution tax offset

Along the way there are other rebates that come and go depending on what behaviour the Government wants to incentivise at the time.

The difference between deductions, rebates and offsets is the way the Government calculates what you ‘get back’.

The key is to stay aware of what is out there and then delve into the detail for those schemes that may apply to how you live your life. Your financial planner and tax accountant are a great help in keeping you aware.

Park your money in a lower tax entity

I believe tax management needs to be looked at broadly across the total tax you pay on all of your money.

In my opinion one of the best ways to reduce your overall tax payable is to reduce the tax rate that applies to the income you earn. Primarily you can achieve this by holding your money in different legal entities, since each class of legal entity can have a different tax rate. (Think of a legal entity as a big tank which can hold financial stuff.)

Examples of legal entities are:

  • You
  • Your partner
  • Superannuation trusts (commonly known as ‘super funds’)
  • Discretionary trusts
  • Companies (e.g. Pty Ltd and Ltd)

The tax rate for individuals such as you and your partner is based on a sliding scale related to your taxable income. The top marginal tax rate is 45% (excluding levies). As mentioned earlier the majority of Australians have a marginal tax rate of 30%.

Companies pay a top tax rate of 30%, whilst superannuation trusts pay a top tax rate of just 15%.

So the majority of Australians could reduce their total tax bill by investing through superannuation rather than in their own name. Your individual tax payable may not reduce but your total tax will reduce and therefore your net wealth will increase.

Another simple way to reduce tax is to hold your investments in the name of the partner with the lowest marginal tax rate. For example keep your cash savings in a bank account in their name. (Better still keep your cash savings in a mortgage offset account – but that is another article.)

High income earning Australians (those with a marginal tax rate above 30%) could reduce their tax by investing through entities such as companies and discretionary trusts. But the tax saved could be offset by the cost burden of establishing and maintain the entities. Plus there are other really important considerations, which you should first discuss with your advisers.

Putting it all together

As I said earlier I believe tax management needs to be looked at broadly across the total tax you pay on all of your money.

More importantly for most people tax reduction should not be your primary driver in selecting financial strategies. In my experience most people have much bigger financial fish to fry.

The ultimate purpose of managing your money is to ensure you have enough money for what you need when you need it.

Yes, reducing your overall tax will increase the money you have.

But there are some non-tax saving strategies, like repaying personal debt, that will increase your wealth and lifestyle faster, easier and more sustainably. Learn about those strategies too.

Qn: How do we get out of debt?

This year I have again volunteered for the Financial Planning Associations’s Ask an Expert program. Following is one of the questions I just received and my answer.

The question

Hello Matt, my husband & I own our own home but have a mortgage of nearly $300,000. It is an equity style loan, we only have approx $30,000 of equity left to use.

We are paying interest only and those payments we are finding very hard to meet, we do have a credit card which i think is probably not a good idea.

We are currently a single income family with an income of around $62,000 a year gross. But we have approx $15,000. of business related outgoings per year, this figure can go up to $20,000 a year.

We also own a half of an inheritance property worth a lot of money but the other party doesn’t want to sell.

Our question is, is there a way given our current situation that we could manage to cut down our debt and start to pay some of the money off our loan without losing our home?

My answer

As I don’t know you personally I don’t know your level of financial knowledge, so in explaining my guidance I’m going to start from some base principles. Please forgive me if this seems like statements of the bleeding obvious – it is not my intent to be patronising.

Your priority in reducing debt should be highest interest rate debt first then cascade down to lowest interest rate debt. Therefore if you have a carry-over credit card balance you nail that first, then personal and car loans and finally home mortgage. Paying off your debts in the right order is a fast way to generate spare cash for further debt repayments.

At the core the ways to reduce debt are:

  • Make lump sum additional repayments
  • Make higher regular repayments

To be able to make higher regular repayments you either need to:

  • Increase your earnings;
  • Reduce your costs (spending);
  • A combination of both of the above.

Some options to help you achieve that include:

  • Crank the business earnings
  • Get a second, even third job (Perth restaurants and cafés are crying out for staff so they can actually deliver decent service)
  • Pull your belts in so you spend less. You may need a cash flow coach to support you in creating the new habits to do that. It is a bit like a personal trainer for you money.

My article on budgeting may provide some guidance on reducing your expenses.

You can make higher lump sum repayments by selling stuff you don’t need to generate cash. Or you could even sell other investments and repurpose them to debt repayment.

If you really think you are close to losing your home and if the only other wealth you have is the inherited property then you really need to either sell it or mortgage it. A mortgage it is probably not feasible as that’ll just increase your repayments. If you haven’t done so already then perhaps tell the other owner of the inherited property that if you don’t sell then you’ll end up losing your home. Maybe they could consider buying your share from you?

To get out of a financial pickle like this it really comes down to ‘what are you prepared to do?’ There is no magic rabbit out of a hat. You have to dig deep and hustle.

Once you sort out your cash flow then it’ll be more appropriate to consider a plan. Watch my free presentation on The Six Stages of Wealth Creation to get a sense of the right next steps from there.

Residential property vs shares since 1926

The residential property versus shares debate is popular and can be as fiery as political and religious debates. So I’m often asked about comparisons of the long term returns.

Following is some commentary I came across from Dr Shane Oliver, Chief Economist and Head of Investment Strategy at AMP Capital Investments. (Emphasis added by me.)

After allowing for costs, residential investment property and shares generate similar long-term returns. This can be seen in the next chart, which shows an estimate of the long-term return from housing, shares, bonds and cash.

Over the long term, the returns from housing and shares tend to cycle around each other at similar levels. In fact, both have returned an average of 11.5% p.a. over the last 80 years or so. While housing is less volatile than shares and seems safer for many, it offers a lower level of liquidity and diversifcation. The bottom line is, once the similar returns of housing and shares are allowed for, and these characteristics are traded off, there is a case for both in investors’ portfolios over the long term.

 

Source: Oliver’s Insights, Edition 37 – 25 November 2010, ‘Australian housing – is it a bubble? What’s the risk?’

Is this a scam?

Smart scammers try to make themselves appear legitimate as a way to suck you in. Before doing anything check the ASIC list of companies you should not deal with.

Smart scammers try to make themselves appear legitimate as a way to suck you in. They’ll use official sounding names, even names that are very similar to real companies.

In fact I had some scammers copy my e-mail newsletter template to send their spam. So their message looked very legitimate.

The Australian regulator, ASIC have compiled a very useful list of companies you should not deal with. It includes a list of official sounding overseas investment regulators and exchanges that are actually fake.

If you’ve been contacted with an offer that seems attractive:

  1. Get all of their contact details including registered business name, website address, physical address and phone number.
  2. Ask them to post a hard copy of their Product Disclosure Statement (PDS) and Financial Services Guide (FSG). Don’t give them your e-mail address.
  3. Insist you will do nothing right now and instead will call them back after considering the offer.
  4. Check their business name  and ABN are legitimate using the ABN Lookup tool and ASIC registers
  5. Check the ASIC list of companies you should not deal with
  6. Report the scam to ASIC

Scammers will of course provide very serious resistance to steps 1 through 3 so that alone could be a big indicator to go no further.

I also recommend you read my article about protecting yourself from identity theft.

Beware of industry super fund advice

I’m annoyed! But rather than pointlessly vent,  this soapbox article is an attempt to turn my recent annoying experience into a useful lesson for all.

Many people I meet are wary of going to their bank to get financial advice. They say they don’t want to just be sold the bank’s products.

The Industry Super Fund Network loves criticising financial advisers on the same issue and a related issue about commissions.

Well a financial adviser from a major industry super fund just disclosed that his job is to keep accounts within his employer’s product. (Like bank advisers he wouldn’t be authorised to advise on anyone else’s product anyway.)

The lesson here is to have your eyes wide open if you get advice from the advisers tied to your industry superannuation fund. It could be just as restricted as if you get advice from your bank.

Don’t assume the advice will be in your best interests having considered all available options.

I say that last bit because it was a discussion about the limitation of his employer’s product that led the adviser to the inadvertent disclosure. He was annoyed at the product’s limitation which could ultimately result in $500,000 dollars flowing out of the product to a retail superannuation fund. (And it wasn’t even a fancy facility I was looking for – just something pretty simple.)

So my mind wonders…do the industry super fund’s advisers not recommend certain actions to clients because their product couldn’t facilitate it?

I err on the side of trust in people’s positive intent and assume the industry super fund advisers don’t consciously make such limited recommendations. But maybe their brains are so accustomed to the limitations that their brains no longer even flag the alternate strategies for consideration? Hmm…

So beware – the advice from industry super funds may be cheaper in fee but costly in consequence. Importantly don’t assume it is any less conflicted or limited than the advice from your bank that you are so wary of.

Up to $500,000 in school fees per child

Figures released by the Australian Scholarships Group suggest that the cost of educating your child could be up to $500,000 if you send them to the top private schools. Given that annual fees start around $10,000 per year from early primary school that total figure probably comes as no surprise.

ASG have kindly provided very detailed summaries, which makes their information worth a look.

Figures released by the Australian Scholarships Group suggest that the cost of educating your child could be up to $500,000 if you send them to the top private schools.

Given that annual fees start around $10,000 per year from early primary school that total figure probably comes as no surprise.

If however you are hoping to send your children to private schools let this be another nudge to ensure that you have detailed plans in place for how you are going to be able to afford that dream.

At the same time consider what safety nets you have in place. Do you really want to have to move your children to a new school away from their friends if you strike a tough financial patch?

Note that whilst I appreciate ASG publishing these figures I am not a fan of education bond products like those of ASG. I believe there are better ways to save up for and fund your children’s education. I believe funding school fees should be looked as one lifestyle goal (albeit a big one) as part of a total financial well-being plan. That can give you greater flexibility as well as better bang for your savings buck.

School fee summaries and estimates by state

ASG have kindly provided very detailed summaries, which makes their information worth a look.

You can browse national figures and by state. Figures are also split between metropolitan and regional and between education ‘systems’ (Government, Systemic such as Catholic, Private).

And they also include estimates for children starting pre-primary this year (2011) and those children born this year.

View the ASG school fee estimates here.

 

 

How much you should spend on your next house

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

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

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

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

It is a question you have probably considered too.

“How much should I spend on a house?”

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

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

Can you see why I read it as a challenge?

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

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

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

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

How much you should spend on your next house

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

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

The maximum amount you should borrow is a function of:

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

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

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

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

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

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

You can download an example calculation here.

Extra tips

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

In completing the affordability calculation I recommend you:

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

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

In practice

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

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

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

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

Please share your thoughts

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

Dec 2010 qtr retirement cost statistics

For those thoroughly planning for their retirement you may be interested in the latest statistics of the actual amount spent by current retirees.

Previously I’ve written a more detailed article about retirement planning and this statistic – this article just advises you of the latest update.

The Westpac ASFA Retirement Standard for the December 2010 quarter shows that a couple wanting a comfortable lifestyle in retirement need to target to be able to afford to spend approximately $53,879 per year.

Those seeking a ‘modest’ retirement lifestyle need to spend $30,708 a year.

Download detailed budget breakdowns here.

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.”

I suggest most people do their planning with the aim of a comfortable retirement lifestyle. Our lifestyle expectations only seem to be expanding with every generation.

Job change checklist

Changing jobs is often an exciting time of life. It can also be a busy time. Following is a checklist of important items to promptly address to ensure you keep your financial well-being on track.

Changing jobs is often an exciting time of life. It can also be a busy time.

Following is a checklist of important items to promptly address to ensure you keep your financial well-being on track.

Cash Flow

  • If your pay date will change then consider resetting the automatic transfers that support your smart budgeting techniques
  • Revisit your budget to accommodate changes in remuneration. If you’re going to be paid more also see the wealth creation tips below.

Use free online calculators, like those from the ATO, to help you work out your new net (after-tax) pay.

Wealth Creation

All pay rises are terrific opportunities to accelerate your wealth creation. I suggest you put at least half of your pay rise towards a combination of the following:

  • Higher loan repayments.
  • Increased allocation to long term investment. For example you could boost your salary sacrifice to superannuation, which will soften the tax blow on your pay rise whilst making you wealthier.

Plan in advance and be ready to adjust your automatic transfers as soon as you start your new job.

Employer share plans

Do you have an employer share loan you need to repay upon leaving employment? If so, a common way to repay the loan is to sell some or all of the shares. If you don’t have a broker then read this article to discover how to sell shares without a broker.

Superannuation Fund

Don’t:

  • Blindly nominate your previous employer’s fund to receive contributions ‘just to keep things easy’. Your new employer may have a cracking deal on offer.
  • Blindly accept the default fund offered by your new employer. It may be a shocker compared to your old fund.
  • Blindly roll your old fund into your new employer’s fund. When you rollover you automatically lose your insurance cover. “So what?“, you ask. Well almost all Australians don’t have enough cover, so odds are you probably need to keep what you already have.

Do:

  • Promptly investigate what happens to your balance and linked insurance when you leave your employer. Do this before your last day in your old job.
    • Is the balance automatically rolled to a new ‘holding’ fund within a certain number of days?
    • Is some or all of the insurance automatically cancelled? If so, can you apply to have it continued? (If a continuation option is available you usually have around 30 or 45 days to apply.)
  • Complete a comparison of your new employer’s fund to your previous fund to ascertain which is better for you. I recommend you also consider some off-the-shelf funds in that comparison.

Employer Funded Insurance

One great thing about employer group insurance policies such as group salary continuance is that you probably didn’t need to disclose anything about your health to get it. So you can potentially be a basket case and still be covered.
The older you get the more likely that is.

Keeping that cover is therefore a golden opportunity.

Group insurance policies often have continuation options that allow you to retain cover under a personally owned policy without medical underwriting. However you have to apply quickly – usually within 30 or 45 days of leaving your employer.

In my experience it helps to contact HR before your last day. They’ll usually refer you to the adviser appointed to the group policy who will then guide you through the process.

Call your adviser

If you have previously worked with a financial planner then a job change is one of those moments you should proactively contact them. Changes in income can trigger tweaking of your strategy. Also job changes sometimes occur as a result of the natural evolution of what you want in life. Your financial well-being strategy needs to evolve with you.

Your financial planner will be able to guide you through all of the above and alert you to anything else you should think of.

How to sell shares without a broker

Over the last 20 years there have been plenty of share floats that have brought everyday Australians into the world of share ownership. One day, perhaps upon retirement, you may decide that you want to sell these shares to fund your lifestyle. This article reveals how to sell your shares without a broker.

Over the last 20 years there have been plenty of share floats that have brought everyday Australians into the world of share ownership. For example:

  • Privatisation of Government assets like Commonwealth Bank, CSL and Telstra.
  • Also large companies like AMP have demutualised and listed on the stock exchange and in the process issued shares to policy holders.

One day, perhaps upon retirement, you may decide that you want to sell these shares to fund your lifestyle. But, how do you sell your shares when you don’t have a broker?

(Technically you can’t directly trade on the Australian Stock Exchange – you have to use an authorised broker. By ‘without a broker’ I mean without the old-school method of talking to a human.)

Online share trading facilities

In our modern world the first idea that may spring to your mind is to establish an account with one of the many online share trading providers.  Certainly that will work. But if you only want to conduct one or two trades it is a lot of effort.

Plus in setting up an account most online providers also establish a new, linked cash account for settling the trades. Again for one or two trades it is an extra account that’ll probably be more hassle than benefit.

Further, if you have some shares in your name, some in your partner’s name and even some in joint names you also may need a separate trading account for each ownership type.

One off trading facilities

If you just want to sell shares and not buy then a one off guest or visitor trade is what you need.

With a visitor trade you can sell the shares and receive a cheque posted to you, which you deposit into an existing account of your choice. No need to establish a new bank account.

Both of the big Australian online share brokers E*Trade and Commsec offer one off trading services. E*Trade refer to it as a Visitor Trade and CommSec refer to it as a One Off trade. You can download the forms from their website.

Paperwork

Yes it still involves a bit of paperwork and you still have to prove your identity by submitting certified copies of your ID. But it does avoid the extra paperwork of closing an account at the end.

TIP: If you already are a customer of CBA and have therefore proven your identity you can avoid that part of the process if you use the Commsec one off trade facility.

Cost

One off trades usually cost more than the standard per-trade fee from each broker. But it is still as low as $50 with E*Trade or $66 with Commsec (depending on size). See their websites for specific details to decide which is cheapest for your trade.

Market price only

One disadvantage of a one off visitor trade compared to establishing the online account is that your shares will be sold at the market price at the time your form is processed. You don’t get to dictate the sale price.

If you want to be able to time the sale of your shares and nominate the sale price you will need to establish the online account or go through the traditional human brokers (remember those?).

Issuer sponsored shares only

You can only use the one off trade facilities if your shares are what is known as “issuer sponsored” rather than “broker sponsored”.

The Commsec form describes how to tell the difference:

  1. Find your share holding statement.
  2. Look for the Shareholder Reference Number (SRN), which it is a 10 digit number.
  3. If your SRN starts with  the letter “I” then your shares are issuer sponsored.
  4. If your SRN starts with the letter “X” then your shares are broker sponsored.

Broker sponsored shares

If your shares are already broker sponsored then just contact that broking company and ask them about the process and cost to sell the shares. You’ll be able to find the broker’s name and contact details on your share holding statement.

If you don’t fancy them or their fees then you can establish an account with one of the online share brokers and transfer your shares to them as your new nominated broker. Then you sell your shares using the normal online trading facility.

The Truth (And Myth) About Passive Income

Do you salivate at the thought of passive income and long to start your own business?

Nacie Carson, founder of The Life Uncommon, a career transition and entrepreneurship community has written an insightful article examining the truth and myths of passive income. Carson draws on her own experience to highlight common delusions as well as frame some realities.

The first time I read through their information, I interpreted their material as “passive income is easy and effortless, all you have to do is set it and forget it.” When I revisited their material, I understood that their actual message is “passive income is a great revenue source that is earned from persistent, ongoing cultivation.”

The context of Carson’s article is online entrepreneurship however I think her observations are relevant to the pursuit of easy money and passive income in traditional investing.

You don’t just get rivers of golden passive income for life just by buying any old property or share, or starting a business. Wealth accumulation takes “persistent, ongoing cultivation”.

Other nuggets from Carson include:

So what’s the truth about passive income – is there such a thing, or is passive income a myth that marketers tell to line their own pockets?

From my own experience, I say there is such a thing, but it’s a nuanced thing.

…[my] passive income triumphs required a significant up-front investment of time, effort, and tinkering on my part, and in many ways I see them more as delayed payment or ongoing dividends.

[I] would tell any fledging entrepreneur that the simple truth of passive income is this: passive doesn’t mean effortless.

Carson’s comments echo comments I frequently make about the Do It Yourself approach to wealth creation. It takes a significant up-front investment of your time and energy to first acquire the expertise you need.

Then it takes additional time and effort to apply the expertise before you earn a decent return on investment for your money.

You then have to consistently apply that expertise to get a return for the up-front time and energy you invested.