The source of financial stress

Two years ago I wrote about relieving financial stress for Stress Down Day.

Fellow financial educator Carl Richards of Behavior Gap just released a new diagram that summarises one key source well:Circle-Stress

One value of financial planning is in removing the uncertainty and replacing it with clarity of direction and the confidence to act.

So if you’re tired of constantly thinking about and even stressing about money related issue then I recommend you invest in professional financial planning advice.

P.S. Carl writes some insightful articles about how our behaviour impacts our financial situation. I recommend you consider subscribing to his newsletter.

Better budgeting

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

Cue Skyhooks tune…

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

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

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

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

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

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

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

Pay Yourself First (in practice)

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

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

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

(Download a PDF version of the model here)

Top-down or bottom-up?

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

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

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

Your pots of money

1. Financial Independence

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

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

2. Pre-retirement Essentials

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

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

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

3. Irregular Expenses

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

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

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

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

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

4. Existing regular commitments

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

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

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

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

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

5. Regular Essentials & Comforts

All the regular items you spend at least every month.

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

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

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

6. Impulses and Indulgences

The final category is a little allocation for spontaneity.

How much to allocate to each pot

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

But we’re not.

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

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

Automatic wealth creation

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

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

Is now the time to fix interest rates?

Eighteen months ago when I first wrote about fixing interest rates there had been just two RBA rate rises and fixed rates were much higher than the variable interest rates. It was also still early in the recovery and for many it may have been too early to call. So a decision not to fix interest rates may have been easier to stomach.

Now fixed interest rates are similar, even lower than the variable rate as shown in the table below. And while the RBA has recently softened its talk future rate rises seem probably to many – especially those living in boom regions. So fixing rates may be starting to look attractive to some.

Source: Cannex (accessed 20th April 2011)


The real problem with fixing anything for a time period is that you need to be very confident in the accuracy of your crystal ball. The last boom seemed to last long enough to affect people’s memory and lull them into thinking it would go on for much longer.

Inflation was getting uncomfortable for the RBA so rates had been up going up. That lead many of the boom-believers to fix their interest rates in the hope of beating the rises – sometimes for 3 and 5 years.

What transpired was much gnashing of teeth when interest rates plummeted, as summarised in the graph below of the RBA cash rate.

The consequence of an error-prone crystal ball can be very costly.

So should you?

For a detailed examination of the considerations in fixing rates read my earlier article. There are some circumstances when you would fix interest rates.

Right now include the following when contemplating your decision:

  • The recovery is not certain. Rates may not move for some time. So if you fix your rate you may trade off flexibility for no benefit.
  • Another sharp down-turn is possible. How will you feel if you’re paying a higher rate than the variable rate?
  • The future gets increasingly uncertain the further out you project. Exercise greater caution when considering longer terms for fixing rates.

A personal observation

In my role as a financial planner I have seen how rapidly people’s life and goals change in just a few short years. For those who fixed their interest rates (before becoming clients) I’ve noted how the lack of flexibility has inhibited their money management and wealth creation.

Don’t underestimate how quickly life evolves.

If you’ve had some big changes in the last 3 years then maybe you also will in the next 3 years – it may just be the way you roll. So,  perhaps a 3 year fixed rate is not the best thing for you right now.

Misleading marketing finally acknowledged

I shudder whenever I see the big newspaper and magazines advertisements of companies that purport to teach people how to easily & profitably trade shares and derivatives (like options, warrants & CFDs). They promise so much confidence and certainty of gains.

According to their website (accessed 20 April 2011) the business Safety In the Market (operated by The Hubb Organisation Pty Ltd) has “assisted thousands of Australians [to] discover how they can trade the financial markets safely and profitably” since 1989.

That’s over 20 years of big promises.

Finally the regulator ASIC has reigned in their promises by obtaining court orders preventing Safety In The Market from making or publishing misleading or deceptive representations about its trading methodology.

ASIC’s concern was about claims that the methodologies were “proven”. A nice piece of marketing bollocks you will read in lots of adverts.

This kind of grandiose marketing can go on for years before the regulator gets around to taking action – as you can see by SITM’s longevity. So just because an organisation has been around for years don’t interpret that as being evidence of a basis to their big claims.

As always be aware and ask yourself if you have what it takes to be one of the minority with the intelligence and discipline to consistently make a profit.


B.S. from GE Money

I just heard on the radio the latest advert for the GE Money Personal Loan. It claims to give you more money to enjoy the things that matter. A lovely marketing tug on your emotions but total B.S.!

I just heard on the radio the latest advert for the GE Money Personal Loan. It claims to give you more money to enjoy the things that matter.

A lovely marketing tug on your emotions but total B.S.!

After you’ve blown the loan amount you’ll have lots of interest to repay – at a rate not much lower than credit cards. So a personal loan such as this will actually give you LESS money to enjoy the things that matter (for a long time).

Save for the significant. Minimise the insignificant.

If you really want to ensure you have enough money for those things that really matter to you follow this process:

  1. Identify those things that matter most
  2. Work out how much money you need for them, and when you’ll need it.
  3. Establish automated saving and cash flow management plans to ensure that money is there when those things that matter occur.
  4. Enjoy life with the peace of mind you’ll have the money to enjoy what really matters most.
  5. If there is any money left over you can spend it on insignificant things suchs as impulses and indulgences.

If you need a personal loan (or credit card) to fund experiences and items that matter to you take it as screaming alarm bells that your cash flow control is on fire. Run away from the lenders and towards a financial counsellor or decent financial planner.

Learn more about my cash flow coaching here.

Margin call calculation

When you have a margin loan it is important to understand how much your portfolio value can fall before you receive a margin call. This article reveals the formula for calculating the percentage fall to trigger a margin call.

A margin call occurs when you no longer own enough of the investment to keep the lender confident they’ll get their money back. If you receive a margin call you are asked to either:

  • Add more security for the loan – this can be cash or other approved investments
  • Reduce the loan balance – either through cash or by selling some of the investment

Neither of those remedies can be particularly pleasant so when you have a margin loan it is important to understand how much your portfolio value can fall before you receive a margin call.

The formula for calculating the percentage fall to trigger a margin call is shown below:

LVR stands for Loan to Value Ratio. It is calculated based on the amount you owe (the loan) divided by the total value of the security (the investment). For example an $80,000 loan against a $100,000 investment has a LVR of 80%.

The abbreviation in the margin call formula are:

  • Base LVR% = maximum allowed LVR% based on the quality of the lodged security (the investments)
  • Current LVR% = your loan ÷ your current portfolio value
  • Buffer% = the allowed buffer before triggering a margin call

Generally lenders won’t call you as soon as your Current LVR hits the Base LVR. Since the investments often fluctuate in value daily they give you a bit of leeway – know as a buffer. Many lenders give you a buffer of 5% but some have a buffer up to 10%.

For example if your Base LVR is 75% and the lender’s buffer is 5% they will call you when your Current LVR hits 80%.

Below is an example calculation of how much your portfolio needs to fall to trigger a margin call. The parameters in the calculation are:

  • Base LVR% = 75%
  • Current LVR% = 50%
  • Buffer% = 5%

If you choose to gear conservatively (at 50%) against quality assets with an allowed LVR of 75% (base) then your portfolio value can fall 37.5% before you trigger a margin call. That has happened but it is rare, which should give you confidence to consider margin lending.

If you can’t be bothered doing the calculation the following table gives you some examples of the percentage fall required. Note the buffer in this table is 10%. (Source: Leveraged Equities.)

From the above table you can see that when your buffer is 10% rather than 5% in the earlier example then for a current LVR of 50% and base LVR of 75% then your portfolio can fall by 41% before a margin call is triggered.

SMSF Guide

If you are contemplating a self managed superannuation fund or already have one then you may be interested in this useful SMSF Guide produced by Macquarie’s technical team

Over 29,000 self managed superannuation funds were established in the 2009-10 financial year, taking the total number of SMSFs to 427,491. (Source: ATO, Sept 2010).

If you are contemplating a self managed superannuation fund or already have one then you may be interested in this useful SMSF Guide produced by Macquarie’s technical team. (Look in the section called ‘Education Centre’. The Guide is called “Self Managed Super Funds – from set up to wind up“)

Self managed superannuation funds are increasingly popular as people believe a SMSF gives them greater control over their money. However a SMSF is often not needed to get the level of control you desire. Read my earlier article to discover when you may or may not need a SMSF.

Crazy ways it could happen to you

Most of the time most of us have our wits about us and therefore don’t get injured.

But it only takes a momentary lapse in concentration or a ‘brain freeze’ moment and injuries or even death can occur to smart, cautious people.

Following are some statistics I come across of crazy ways that people got injured or even killed.

3 Australians die each year testing if a 9V battery works on their tongue.

71% of people over the age of 50 are injured due to opening supermarket packaging.

43 Australians were admitted to casualty departments in the last 2 years from attempting to open beer bottles with their teeth or eye socket.

142 Australians were injured since 1998 from trying on a brand new shirt & not taking out the pins first.

18 Australians were seriously burned in 1988 from putting on jumpers while having a lit cigarette in their mouth.

31 Australians have died since 1996 from watering the Christmas tree while the fairy lights are still plugged-in.

19 Australians have died in the last 3 years by eating Christmas decorations they believed were chocolate.

Hospitals reported 4 broken arms last year after cracker pulling incidents.

58 Australians are injured each year by using sharp knives instead of screwdrivers.

8 Australians have cracked their skull since 1997 after falling asleep (passing out) while throwing up into the toilet.

The above stats are courtesy of CommInsure.

If you are mostly healthy and careful but, like me, are the occasional victim of brain freeze then an accident-only insurance policy may be worth considering as a cost-effective way to protect your lifestyle.

Be prepared to lose your job

Whilst there’s not as much doom and gloom around now as there was during the global financial crisis (GFC) of 2009 the world hasn’t returned to over-brimming confidence. Recent natural catastrophes plus instability in the Middle East have dented the return to confidence.

Don’t worry – I’m not dragging out my dusty crystal ball and predicting an imminent recession.

Which is why now is the perfect time to make plans for if you do lose your job at some time in the future.

Waiting until gloom is upon us often leaves not enough time to squirrel away your chestnuts.

That is what happened pre-GFC. People had been:

  • Borrowing up to their eyeballs expecting continuing pay rises and asset price increases to keep them cosy
  • Spending everything they earned and more

Then the GFC hit and many people were stressed about how they would survive if they were retrenched. Many who did lose their jobs struggled to survive and had to rely on selling assets and the generosity of others.

That kind of financial and personal stress wreaks havoc on your quality of life and relationships.

But it doesn’t need to be that way. When you have your financial affairs in order losing your job can be just a blip on the journey.

How to prepare for retrenchment season

Last night in my DIY Wealth Creation course we talked about risk management. Two ways to manage risks are to minimise the likelihood and to minimise the consequences.

Emergency savings minimise the financial consequences

If you have plenty of easily accessible savings then you can use these to keep food on the table and avoid the bank knocking on your door about missed mortgage repayments.

I recommend having at least three months’ worth of total expenses squirrelled away for emergencies. If in your line of work you think you could be out of work for longer before getting a job then put away more.
By total expenses I include everything: all loan repayments including credit card as well as your lifestyle expenses.

That recommendation assumes you know your expenses. So if you don’t know how much you spend then start working that out. The knowledge will both help you plan and also help you survive if misfortune strikes.

Keep the savings liquid

You need these savings easily accessible and cash is the most liquid. But if you have a home mortgage then your cash could work harder if it was reducing your loan interest. After all you don’t expect to use this amount – only if a true emergency arises.

So I recommend saving your three months’ worth of expenses and making an additional loan repayment. Then if misfortune strikes you can redraw that amount. Don’t see the available redraw and be tempted to use it for a holiday!

If you don’t have any personal debt then a high interest online savings account is a great spot. Have a separate account for emergencies than for your other savings (such as holidays).

Whilst shares and many managed funds are liquid the economic situation that may lead to your retrenchment may also be a time when you don’t want to be selling investments. So I suggest you don’t invest you emergency savings.

Professional development minimises the likelihood

You can minimise the risk of retrenchment by ensuring you are very employable.

You can do your best to ensure you are so valuable to your employer that you are one of the last to be let go.

But if your company or project closes then retrenchment may be unavoidable. In that case you want to be one of the first people snapped up by other employers.

Professional and personal development is essential in today’s world to ensure you continue to be very valuable to your employer and your industry. Is it time to brush up on your expertise or even expand it? Maybe your networking and relationship building could be polished? Those networks could help you get your next job.

Professional development also makes sense for wealth creation. It should help you increase your actively earned income, which you can then spread between increasing your lifestyle and your investment.

Don’t max yourself out

You can also minimise the consequence of losing your job by not maxing yourself out in the first place. Stress test your major lifestyle and investment decisions before committing to implement them.

For example: don’t borrow the maximum amount the banks will give you. Leave yourself a buffer both in interest rate increases and other costs.

Need help saving?

If you need help saving up for emergencies like this then talk to me about cash flow coaching.

Pet insurance

Do you love your pets so much they are considered family members?

How far would you go if your pet got sick?

Fellow financial educator Scott Pape, The Barefoot Investor, loves his dog Buffett. Recently Buffett was bitten by a tiger snake and required urgent medical treatment costing $5,000. Read Scott’s story here.

In the article Scott notes: “so long as you buy the right policy, pet insurance is a smart investment. The yearly cost to cover your pet for treatment of illness or injury ranges from $250 to $350.”

For that amount of money Scott says you can get around $12,000 of cover.

Many pet lovers commenting on Scott’s blog and Facebook page considered that amount of money easily justifiable for a pet they consider to be a family member.

Protect your human family members first

But I wonder how many of those same people baulk at spending money to protect the lifestyle of their human family members? And in most cases you can get much higher cover for the $250 p.a. premium.

For example I just completed a recommendation for a 30-something client who can get $105,000 of top-notch trauma insurance for the same premium – just $250 per year.

So if your pet gets seriously ill you’ll only get $12,000 and still have a $500 excess hit you. Yet, if YOU get seriously ill you could receive around $100,000 (and no excess). Now that’s value for money!

And did you know that for around $50 per year you can get $50,000 of trauma cover for your children? I’m sure you would do whatever you can to help your sick child, just as you would for the beloved family pet. Give yourself more treatment choices by considering child trauma cover as an add-on to your own trauma insurance.

So the next time you get bleary eyed over the thought of something happening to your beloved pet, spare a thought for how to protect yourself from the lifestyle impact of you, your spouse or child getting sick.

50 entrepreneurial ideas

Thought leader Seth Godin has written some terrific stuff recently about having ideas, bringing them to fruition and making money from them.

One of Seth Godin’s colleagues on The Domino Project has just published a nifty free e-book collating 50 anecdotes of people who’ve had an idea and are now turning it in a business.

If you dream up lots of ideas but are nervous of the risk of trying them out then I recommend you read the anecdotes.

Read more and download “SXSW Pokes” here.



Where to find managed funds

One of the common questions in my DIY Wealth Creation course is “how do you find what managed funds are available?”

(For context: this question comes up when I recommend people start by investing indirectly rather than directly. It is an easy place to start with less to learn. Plus you can start with low dollar amounts and get a diversified portfolio.)

There are tens of thousands of managed funds licensed to operate in Australia. To my knowledge there is no single database of all the funds that is easily accessible to the general public.

Some places to start finding out about available managed funds  are:

  • Advertising (online, TV, radio)
  • In the financial media

In Australia the financial media that often provide limited lists of managed funds are:

  • The Australian Financial Review newspaper
  • The Business or Wealth sections of The Australian newspaper
  • Smart Investor magazine
  • Money magazine

Which ones?

But just knowing which ones are available is not enough. How do you make a smart choice of the ones that are right for you right now?

To wisely construct a portfolio of actively managed funds you need expertise plus time to research and apply your expertise. If you don’t yet have that expertise then you first need to invest time and energy in acquiring that expertise. Otherwise your portfolio construction will be little more than uninformed speculation.

Fortunately with managed funds there is a quick-start way that I recommend in my DIY Wealth Creation course. Start with index funds, which are also know as passively managed funds. Pick an index fund that is diversified – which means it invests in a blend of asset classes. Match the blend to your risk profile. For example: if your risk profile is aggressive you could choose a High Growth or All Growth index fund.

One of the largest retail index fund managers in Australia is Vanguard. (Also in the USA.) But most of the big brand active fund managers also have index based funds. So you can even pick a portfolio of index funds within most good retail superannuation accounts.



The dilemma of realistic financial goals

“Should our goals be realistic?” asked one participant on the opening night of my DIY Wealth Creation course last Wednesday.

They had just completed an exercise defining all the important life experiences, achievements and objects they’d like to have enough money for. This exercise is about defining the purpose of their wealth creation.

Many of us would have come across the traditional SMART goal setting technique where the R stands for ‘realistic’ and the A for ‘achievable’, so it was a good clarifying question.

“I have trouble defining realistic“, I answered. “For me, I next contemplate if I am prepared to do what it will take to achieve that goal.”

In my financial planning work I often find that people prematurely censor and filter out their financial and lifestyle goals, usually because they don’t think they are realistic.

I believe that money is one means necessary to facilitate the life I’d love to live. Therefore I believe in first defining that vision and then setting about investigating what it may take to achieve it.

I’ll occasionally drop a part of that vision as my values evolve and it is no longer important enough to me any more. I’ll also occasionally drop a goal when it becomes apparent that what it will take to achieve I am not prepared to do.

Is it realistic to set a financial and lifestyle goal of becoming a billionaire? Well many have achieved it from nothing, and Facebook founder Mark Zuckerberg achieved it in his 20s.

Many of the goals that spring to your mind may not be statistically probable, but usually they are also not impossible. If it is is truly important to you decide to investigate what it will take to achieve that goal. Then consider if you are prepared to do what it will take. Only then can you make an informed decision of what is realistic and achievable.

Beware of fake financial advice websites

Yesterday the Australian regulator ASIC advised they have taken action to close down some fake financial advice websites as well as closing the companies behind them.

Fakers tend to try to make themselves look as legitimate as possible so as to trick the unsuspecting user.

For example one of the websites ASIC closed down quoted a fake Australian Financial Services Licence (AFSL) number.

Just because someone quotes a registration number that looks authentic don’t assume it is real. With companies and financial services you can search the ASIC register by number to confirm who really is registered with that number. I strongly recommend that you do that.

For example you can search the ASIC AFSL Authorised Representatives register for the number 238821 and you will find me, Matt Hern. (and discover my middle name.)

In their media release ASIC provide the following six point checklist for consumers who are contemplating using services from websites:

  • Is the company a registered Australian company? (Check ASIC’s register)
  • Does the firm hold an Australian financial services licence or authorised representative status? (check ASIC’s AFS licensees register)
  • Does the firm’s licence conditions specifically authorise them to operate managed discretionary account services (MDAs)? This licence authorises the licensee to carry on a financial services business; to provide financial product advice for MDA services; to deal in a financial product by issuing, applying for, acquiring, varying or disposing of a financial product in respect of MDA services; and to deal in a financial product by applying for, acquiring, varying or disposing of a financial product on behalf of another person in respect of MDA services
  • Have you received a Financial Services Guide (FSG)?
  • Have you received a Statement of Advice and an Investment Program?
  • Does the firm have professional indemnity insurance?

(I am not sure how you check the professional indemnity insurance beside asking for a copy of the certificate.)

What price for financial advice?

Two days before Christmas the Australian Securities and Investments Commission (ASIC) released an interesting report into the financial advice industry titled “Access to financial advice in Australia“. There are many interesting insights in the report – the one I will highlight today is the cost of delivering financial advice.

In conducting the research ASIC “surveyed 35 holders of an Australian financial services (AFS) licence (licensees) selected as a sample of the personal financial advice industry“, as well as more detailed discussions.

The ASIC research reveals that “Licensees reported an estimate of the cost of providing comprehensive financial advice to a client in the range of $2500–$3500.” (para 171, page 42)

The report does not go into greater detail but I suspect that cost estimate does not include the cost of providing support in implementing the advice. That would be an additional cost to licensees. I also suspect (know) that more specialised advice and complex client situations have a higher cost to deliver the advice.

No business owner interested in staying in business wants to sell their services for less than it costs them to deliver them. In fact to reward them for the risks of entrepreneurism they need to add a profit margin above the cost. (Many professional service industries target a minimum profit margin of 30% in order to be sustainable and rewarding.)

So in shaping your expectations of what advice will cost you (“the price”) keep in mind what it could actually be costing the adviser to deliver it to you. By quoting you a fee in the thousands they are not having a lend of you, they are just trying to stay profitable.

ASIC noted in summary  “Overall, it appears that the costs of providing financial advice are much higher than the average amount consumers are willing to pay.” (para 169, page 42)

That is no surprise to anyone in the industry. But it is a big problem as it means that many people miss out on getting great advice because we as an industry traditionally haven’t clearly articulated the value of advice. But the value of advice is a topic for another article.