Besieged by the non-stop promotion of the consumer life-style everywhere we look and everywhere we go, many people are struggling to cope with consumer debt and the pressure to live a lifestyle that is, to be honest, beyond the means of their available income. However, if you look back at how our grandparents are earlier generations lived, we are currently living in a "golden age". To quote an article in the SMH:
"A couple of decades ago, the language of prosperity was almost like a foreign language ... Now, phrases like full employment, stock market highs and the commodities boom roll off the tongue.
Across the board, jobs are plentiful, wages are high and individual wealth continues to rise. There's no doubt this is a golden age of prosperity - possibly the best of economic times Australia has experienced.
And there's no doubt, either, that the economy is surging. The latest figures for the June quarter showed annual growth of 4.4 per cent, the highest for three years. Non-farm GDP growth, which removes the impact of the drought, was at its fastest in almost 13 years at 5.2 per cent."
At the same time, looking forward there are problems with "the limits to growth" that could quite possibly make living conditions much more difficult for our descendants. The apocalyptic prophesies of Malthus and, much more recently, the "club of Rome" turned out to be wrong (or at least premature). But the more recent concerns about climate change (whether or not they are caused by human activity) could mean we run into problems supplying food and water at reasonable cost to everyone. And the commodity boom has some chance of turning out to be a supercycle (or a "peak" in production of many commodities, not just oil) which could lead to ongoing real price increases in resources.
Therefore, there is a least some chance the our current economic situation is just about "as good as it gets". If so, we'd better make the most of this opportunity to build up of families wealth so we have some store of wealth put aside to tide us, or our kids and grandkids, over where the hard times come again. Make hay while the sun shines, for there may be some hard winters ahead for our descendants.
Copyright Enough Wealth 2007
Viewing the 'family finances' Category
Besieged by the non-stop promotion of the consumer life-style everywhere we look and everywhere we go, many people are struggling to cope with consumer debt and the pressure to live a lifestyle that is, to be honest, beyond the means of their available income. However, if you look back at how our grandparents are earlier generations lived, we are currently living in a "golden age". To quote an article in the SMH:
The answer of course is personal, as it depends on what type and how much cover you decide you need. For interest I added up my main insurance costs to see how much I'm paying:
Cover $ Policy Type Premium /mo
$400,000 Death or TPD $89.84
$62,340 pa Loss of Income' $59.81''
Private Hospital $151.45'''
Car CTP $27.58
$340,000 House & Contents $82.93
TOTAL COST /month $411.61
' 2 year waiting period applies, paid until age 65
'' Premium is tax deductible
''' After government premium discount has been applied
The recent tree fall that could easily have destroyed our rental property shows the value of insurance, but I wish it was possible to buy insurance "direct" from the insurer and get the commisions rebated - most insurance policy premiums pay a large chunk of the first years premium and a considerable trailing commision to the insurance broker who "sold" you the policy.
Copyright Enough Wealth 2007
I was enjoying a nice relaxing afternnon at home when the phone rang. The nextdoor neighbour of our rental property asked "Do you know that there's a big tree fallen on top of your house?" [our rental property]. It was news to me. So, we all jumped into the car and drove over to our property to inspect the damage. The tree was bigger than the house and had just missed landing on the house and flattening it completely. As it is, few large branches have gone through the roof, and the lounge room was full of debris.
Luckily the tennants weren't home at the time - they usually park their car where the trunk of the tree landed. As no-one was home at the time I'm a little disappointed that the tree didn't drop two metres further to the left, in which case it would have entirely demolished the house. The house is insured for aroung $385,000, which would have gone a long way towards building a nice, new house on the block. As it is, I guess that the house is probably repairable, so we'll just get the inconvenience of getting repairs done and end up with the same 50-year old house as before.
Apparently the tree fell over in a strong wind gust around 2pm this afternoon. All the heavy rain in the past month has made the ground very wet and spongy, so any strong winds are likely to make lots of tree uproot. When we got to the property at 4:30pm and saw the damage I called the local State Emergency Service (SES). The SES volunteers arrived within 15 minutes and will clear off the branches embedded in the roof and cover the gaping holes with a tarpaulin (to keep out any rain).
When we got back home at 5:30pm I called our insurance company to lodge a claim. The assessor should inspect the property tomorrow and let us know if the tenant can stay there while repairs are made, or has to move out, and the extent of the damage. Our insurance also covers loss of rent, but I've no idea what happens if the tennat decides to just give four weeks notice and move our (their 6 month lease expired last month).
I'm also not sure if the insurance will cover the cost of getting the main body of the tree removed, or just the actual house repairs. Best case we'll be out of pocket for the $100 excess. Worst case we'll also have to pay for getting the tree removed, landscaping the damaged rockery, lose some rent while the property is getting repaired, etc. etc. That's why, since no-one was home at the time, I'd have preferred the tree to land square on the house and demolish it completely.
DS1 is on school holiday for the next two weeks. I booked him in to a "bridge building" course which will be run next Monday and Tuesday afternoon at the NSW University by their GERRIC (Gifted Education Research Resource and Information Centre) department. The course only runs for a total of 6 hours, and costs over $100, but could be money well spent if it stimulates DS1 to do well at school. I'm not even sure if DS1 is "gifted" as such - he started independent reading when he was just turned 4 and is doing well in his reading and math as school even though he's one of the youngest in his class. But on the other hand we had an "assessment" done by a phsychologist at GERRIC when he was three (when he'd started reading), but at that age he was very shy and didn't assess as particularly exceptional. I'd get him assessed again (now that he's older and more confident with strangers), but at $500 an assessment it's too much money to waste. Anyhow, it can't hurt to expose him to a group of kids his age that are gifted - it may motivate him to excel. And if nothing else, spending a couple of afternoons designing and building model bridges sounds like fun.
Copyright Enough Wealth 2007
I'd arranged to take a day of annual leave today, as DW is now working on Mondays and Tuesdays and we had made an appointment for DS1 to go to the Children's hospital today for a "Soy challenge" (he has quite a few severe allergies, but the latest skin-prick test indicated that he may have grown out of his allergy to soy). We had to get up earlier than usual as we were due to check in at 9am and the hospital is 1.5 hrs drive from home in peak hour. We've all had a bit of a chest "bug" for the past week, and this morning DS1 didn't have much appetite and had a slight temperature. When we arrived at the hospital they first checked his weight and temperature and found that his temp was a little bit high. After checking his breathing the Doctor said he had a bit of a wheeze, so it wasn't good to do the Soy challenge when he wasn't very well - just in case he did have a bad allergic reaction to the soy. Oh well - a three hour round trip wasted. At least they booked him into the next session at the end of July.
We stopped off at the tax office on the way home as I wanted to apply for a TFN (tax file number) for DS2. I thought that I had all the required documentation with me, but it turned out I also needed my Citizenship Certificate which was at home. As I already have a TFN and had my driver's licence with me as ID, I don't quite understand why the ATO needed to sight that extra documentation, but with the tax office rules are rules.
I intended to drop DS1 off at my parent's house for the afternoon so I could sort out some of my tax paperwork with everyone out of the house for a couple of hours. But when DS1 and I arrived my parents were concerned that DS2 (whom they'd been baby-sitting) had a temperature and was crying when he coughed. I booked a visit to our GP for later in the afternoon and went home to get the missing TFN documentation and then went back to the tax office to apply for DS2's TFN.
Then back to my parents place to collect DS2 and take him to the doctor, where he got prescribed some antibiotics (what we all have caught is probably just a virus, but after coughing for a week DS2 is quite congested and may have developed a secondary infection - his temperature was quite high).
So, I didn't get much done on my "day off", although I managed to spend around 5 hours driving over 150km to and fro all day. At least DS1 and DS2 seem a bit better tonight and are resting comfortably.
At least the day didn't cost too much. The hospital visit is covered by medicare and my hospital insurance, so it didn't cost anything out of my pocket. The doctor's visit cost $50 but I got about $35 refunded by medicare (the refund gets automatically paid into my bank account electronically the next day), and the antibiotics are on the PBS so they only cost $17.50
DS1 has now gone into business as a sole trader, busking on the weekends and he is planning on growing some potplants (buxus) from clippings in the springtime to sell at the local market. So to make it easy to fill in his tax return we went online to http://abr.gov.au and applied for an Australian Business Number. The entire process in very quick and easy, taking about 10 minutes to complete. There is no fee for applying for a business number and the 11 digit ABN was provided immeditely once we hit the "submit" button. The main benefit of DS1 being self-employed is that under the new Simpler Super rules he can contribute $1000 to his retirement fund each year and will get the $1500 government co-contribution.
Many people like to lend a helping hand if they are able, especially when it comes to close family members. But financial assistance may be ineffective if you don't fully understand the situation of the person you've helping out, and how they'll react to their new situation. When you're helping out relatives you don't want to pry into their finances, but I'd advise making the effort to make discrete enquiries, even if it seems a bit awkward.
As an example, my grandfather changed jobs shortly before he was due to retire (in order to move back to the region his wife and he had lived when they were young). Unfortunately this meant that he didn't qualify for a pension from the company he had worked at for over thirty years, and instead had to rely on the government old age pension. As my grandparents didn't own their own home, my father decided to buy a house for them to live in, thinking that this would substantially boost their living standard in retirement. Later on, one of my grandparents had to move into a nursing home for several years while other other one continued to live in the house my father had bought them. It was only after my grandparents had both passed away that my father found out that the nursing home fees would have been paid for by the government if my grandparents had no substantial assets. However, because of my father's generosity they had managed to save a substantial portion of their government pension for many years (without telling anyone), apparently hoping to leave something to their kids and grandchildren. This had meant that they were required to pay the nursing home fees themselves, until all their savings had been used up. So, due to a lack of communication my grandparents hadn't gained any benefit from my father's financial help (if they'd spent part of their pension on rent they wouldn't have had to pay the nursing home fees), and the end result was simply that my father's money was tied up in a country house that didn't appreciate at all in value, when it could have been more effectively invested elsewhere.
The 70,000km service was done (needed new front brake pads) and the faulty alternator replaced with a reconditioned one. All up, the bill came to A$818. I hope that this alternator lasts until we get rid of this car when it reaches 150,000km or 2013, whichever comes last. By that time DS2 will be ready to go on camping trips etc. and the Festiva will be getting too small to transport two adults and two teenage boys. We'll probably replace it with a used Subaru Forester. Hopefully we can get one in good condition, with low kms, a couple of years old for around 60% of the new car cost.
The paperwork from eSuperFund confirming the establishment of our Self-Managed Superannuation Fund (SMSF) arrived today. Overall the process has been very quick and efficient. The initial online application only took five minutes to complete and gave a false sense of simplicity - when the actual "paperwork" to create the SMSF arrived it was a very thick package with FIFTY of the little, yellow "sign here" stickers attached! Anyhow, the paperwork has now been processed by the ATO (Australian Tax Office) and everything is now in place. In total we received:
* A TFN (Tax File Number) for the new fund from the ATO
* An ABN (Australian Business Number) for the new fund
* A "V2 Plus" Bank Account with the ANZ (to handle all deposits into the fund)
* A Share Trading account with E*Trade for the fund
* A second ANZ Bank account to hold funds to settlement of SMSF share trades
The next step is to visit the local ANZ Bank branch and present passport, drivers licence etc. for myself and DW (the trustees of the SMSF) to complete the 100 point identity check required for any new bank account. At the same time I'll get a CRN (Customer Registration Number) and "telecode" from ANZ so we can register online for online access to the ANZ Bank accounts.
This should all be in place by next week, at which time I can do the paperwork required to transfer funds out of our current Employer-sponsored Superannuation fund (run by Westpac/BT) and into the new SMSF. DW has around $50K in her account, so we'll transfer the entire amount and arrange for future SGL (Superannuation Guarantee Levy) amounts to be paid from our employer into the new account. This will mean she loses the current life insurance cover we have via the BT Super Fund, but she only had a nominal amount of cover anyhow. I have a $400K policy through the BT Super Fund, so I'll probably transfer the majority of my balance into the new SMSF, but leave a small amount there to maintain my life insurance cover. I'll also let my future employer SGL deposits go into the 'old' BT account to cover the ongoing insurance premiums. I can always withdraw the remainder of the balance if I change jobs or have a large balance build up in that account. I wouldn't want to do too many transfers out of the BT Fund though, as they charge $35 for each withdrawal! There will also be the ongoing annual member fee if I keep my BT Super account open (around $55 pa), but at least I'll be avoiding the fairly high fund management fee of around 1.25% (even after our employer's fee rebate has been applied). Overall, with a combined Super balance of around $350K in the SMSF we'll save around $3,500 each year in management fees, even after deducting the $600 pa management, audit and reporting fee charged by eSuperFund on our SMSF.
In the future we will probably add any future savings into the SMSF as the tax benefits are considerable, especially under the new "Simpler Super" changes that apply from 1 July. With a maximum annual contribution limit of $400K ($50K each of pre-tax contributions (SGL and salary sacrifice), and $150K each of post-tax contributions) we would be able to put all our future investments into the SMSF if we want to (the only significant draw back of this strategy is that we can't get money back out of superannuation until we reach 60).
We run a 2000 Ford Festiva which we bought new just before DS1 was born (my old Ford Capri convertible didn't have a big enough back seat to take a child seat). Up to now it has been pretty reliable, but yesterday it started missing and then stalled when I was parked with the engine running and the air con on. It took a couple of attempts to get it restarted and I noticed that the LCD display on the clock radio flickered and went out - a sure sign of an electical problem. Luckily there's a garage close to my workplace where I normally get the car serviced, so I dropped it in for a quick check. Sure enough the battery wasn't being charged when the engine was running, so the alternator needed replacing. As this would be done the next day I decided to also get the routine 10,000km service done at the same time. I got a lift home from someone at work that lives close to home, and this morning had to catch the bus to work. Even though a city express bus departs only 200m from my front door, having to change buses in the city to get to work means that the bus trip takes just over an hour, whereas the trip by car usually takes around 45 minutes. Public transport is quite relaxing - I can close my eyes and nap on the way - but it isn't as economical as you might expect.
The two bus fares required to get to work cost a total of $8.80 each way, so travelling to work by bus each day would cost around $4,224 pa. By comparison our car uses $35 in petrol each week (including a couple of trips on the weekends), and probably an extra $1000 each year in servicing and tyres. Depreciating the full purchase price over a ten year worklife, costs around $1,300 pa and insurance and registration another $800 or so each year. Hence taking the car to work each day costs around $4,780. Even if I can slightly cheaper bus fares by buying weekly or return tickets, the car isn't that much more expensive to run than using public transport for one person. Once DW goes back to work (she works in the same suburb as me) we will share the car costs, so it will be cheaper to travel to work by car than it would be taking the bus! And the ability to use the car in the evenings and on weekends definitely makes it good value for money.
Anyhow, the car wasn't ready to take home this afternoon - although the alternator had been replaced, the service had required a clip for the brakes that wasn't in stock, so I had to get another lift home tonight, and will catch the bus to work again tomorrow.
The Australian Treasurer handed down the annual budget tonight, and, as expected in an election year, there are some generous handouts to "middle Australia" (ie. swinging voters). Those of personal interest are:
* A "one off" doubling of the government superannuation co-contribution for the 05/06 financial year. This means that DW and DS1 (who both made $1000 undeducted contributions into their superannuation accounts that year), will get a total of $3,000 in co-contribution, rather than the expected $1,500.
* Tax cuts at the "bottom end" starting from 1 July 2007. The threshold for the 30% rate has been increased from $28,000 to $30,000, and the low income earners tax rebate has increased from $600 to $750, which means anyone with taxable income less than $30K will pay 0% tax on the first $11,000 of income (the 15% tax rate normally applies above $8,000).
Having recently withdrawn $34,000 of unrestricted, undeducted, non-preserved money from my superannuation account (prior to the rule changes taking effect on 1 July), I'll now be able to salary sacrifice a large fraction of my salary for the next two years. This will
a) save tax on the sacrified amount (super contribution tax rate is 15% rather than the income tax rate of 30% which would otherwise apply)
b) reduce my taxable income down to around $30,000, so I'll be eligible for the $1,500 government superannuation co-contribution if I make a $1,000 undeducted super contribution (it may even end up being $3,000 if this year's "one off" increase ends up being repeated!)
c) substantially reduce our combined family taxable income so we are eligible for some Family Tax Benefit payments.
The others changes won't immediately affect us, but the childcare rebate changes should be good once DS2 starts preschool in a couple of years.
I got $36.35 in dividends from Alinta today. However, I also spent $200 for DW and DS's dentist visit. Purely by coincidence I was also booked in for dental work today (with a different dentist). I'm getting a crown done for a molar that previously had root canal and a couple of fillings. I still have another appointment to get the crown fitted (today was just the prep work and mouldings), but the dentist charged for both sessions today - $1,450!
I also finally decided to buy myself a new PC today - a base model Dell with some extra RAM, bigger HDD, slightly upmarket graphics card and a 20" "ultra" LCD monitor. Hopefully it will be OK to edit my digital home videos with - although running Vista it could be a struggle with 2GB of RAM. Total cost was $1802.90 - it didn't sound so bad when I worked it out as costing $1.65 a day over three years. I'll mainly use it for maintaining my investment records and doing my university assignments, so the depreciation will be tax deductible, reducing the "out of pocket" cost further. Dell phoned when I got home to confirm the order (and try to sell me a four year extended warranty for an extra $165 - no thanks), and advised that the computer should arrive within 10 business days.
Anyhow, if I manage to quit drinking 4L of diet coke each day as planned, I could afford to buy a computer like this every 9 months
Total net spend for the day $3,416.55. Oh, and we also bought a roast chicken for dinner and did some grocery shopping on the way home - call it a round $3,500.
I'm currently using a 3 yr-old Toshiba Satellite notebook as my main PC at home. I'd bought it after my previous Gateway PC died (OK, I was an idiot and plugged in a USB device upside down without looking and totally shorted out the motherboard. D'Oh!). The one I had before that was a "clone" Pentium-100 that I'd had for ages - it has been serving quite well as DS1's PC - he's only 6 so most of the software he runs works quite happily on a P-100. Unfortunately when I got home tonight I was informed that they'd had to turn it off when there was a "bang" and smell of smoke. I inspected the PC and all appeared OK, but the old VDU was smelling of smoke, so I think it's the monitor that has broken. I can probably pick up a replacement monitor for free as lots of people seem to put out old/broken PCs for collection when the bi-monthly council cleanup is on.
One of these days I'll buy a new desktop PC (probably a Dell) as I'd like to be able to edit and burn our home videos onto DVD and run some of the games I have. The notebook doesn't run most of my games as it doesn't have a suitable graphics card, and it only has a DVD player and CD-burner. I keep putting off buying the new PC though as each year they get cheaper and have better features. I've bought quite a few PCs since my first one (a Sinclair ZX80) and got a bit sick of spending a couple of thousand dollars every couple of years on a new PC.
The paperwork from ESuperFund.com for setting up our new Self-Managed Superannuation Fund (SMSF) arrived in the post yesterday. A very thick envelope of "personalized" boiler-plate, with sixteen(!) little yellow tags showing where DW and I have to sign our names. I'll take a stab at wading through the details of the more relevant parts (the Trust Deed and the Investment Strategy) this weekend, between doing my university assignments and hiding Easter eggs* for DS1 to find, and hopefully we can get it all signed and sent back next week. Transferring DW and my super from BT super into the SMSF will save at least $1,670 in annual admin fees as far as I can tell**. I'll invest in the same asset mix within the SMSF as I had selected in the BT super scheme, just via Index funds instead of actively managed funds in some cases. If the capital gains tax liability caused by liquidating my stock portfolios isn't too high I'll also look at shifting my direct share investments into the SMSF as well, as there will be considerable tax savings over time within the super environment (especially NIL capital gains tax on super assets sold when the SMSF is in pension mode). You can't use gearing within a super fund (they're not allowed to borrow, except for very limited cases, such as when settling share trades) but, apparently it is OK to buy CFDs.
* They're actually lots of little packets of Trolli "bunny surprise" sweets (a bit like gummi bears), as DS1 is allergic to both milk and soy, so chocolate eggs are a no-no, even the "lactose free" ones. Just as well that he loves gummi bears
** The SMSF admin fee is AUD$599 pa. The BT fund charges a $53 pa member fee, plus an admin fee of around 1.5% pa. Our employer has arranged for a "member fee rebate" of about 0.9% pa but this still means that on the combined balances of DW and myself (around $370K) we're currently paying a net admin fee of around $2,270 pa to BT.
I started working on creating a nice looking "table of accounts" to provide a detailed, single-page snapshot of my fiscal situation. This was partly triggered by DW stating that "if you're hit by a bus I won't know what's going on with all your finances". I also want to have a more detailed "snapshot" of my accounts than my overall networth calculation provides. Although initially I'm just creating an excel spreadsheet to display the required information (see below), I'm toying with the idea of writing a .net application (either VB or Java) to display this info. The benefit would be that I could later on add in a webscraper object (eg. WebZinc) to automatically collect the latest figures off the internet (for nearly all the items), which would mean I'd only have to update some figure manually once a month (like my property valuation estimates, and some online data that has overly secure login methods). I don't think I have the time to start on such a hobby project at the moment though - I have some uni assignments due this weekend for the Master of IT and Grad Dip in Seconday Education courses I'm enrolled in.
One thing this chart already shows is that I have overly complicated my life by accumulated lots of surplus accounts in recent times. The three different margin lending accounts were opened as I evolved from starting with just a basic margin loan account to then adding one that also provider online trading access, and then to another from my home loan provider where the interest rate was at a slight discount. Most of the online savings accounts were opened just to get a small opening bonus, or accumulate some referral bonuses. And most of the credit card accounts were opened to make use of 0% balance transfer offers. There are also some cash management accounts that were automatically opened for me when I opened margin loan or brokerage accounts.
An interesting thing I've included which I don't normally consider, are contingent liabilities and contingent assets ie. Capital Gains Tax that would be due if I liquidated my stock investments (I'm still updating my stock transaction log, so I don't even know what this figure is at the moment), the value of my life insurance policy, a guestimate of possible inheritance (although this could easily end up being $0), and the current value of my accumulated annual and long-service leave which would be paid out if I quit my current job.
While I was home sick yesterday the plumber finished his second day of working to clear out our blocked sewer pipe. Apparently there is no accurate plumbing diagram for our house available (it was build about 40 years ago, and had some additions done before we bought it four years ago) so he had a few false starts digging around to find the sewer pipe. He said he'd send the bill, so I've no idea how much it will end up costing. I did opt for him just clearing out the blockage (tree roots) and coming back when/if needed again in a few years - the alternative was to reroute part of the existing sewer line outside of our house (for some reason it runs underneath our house), but this would cost around $1,500 and wouldn't guarantee we wouldn't get some more roots blocking a different section of the existing pipework anyhow.
I was back at work today and had an appointment with the dentist at lunchtime to repair a tooth that lost a large chunk out of it last week. The same tooth had root canal done a few years ago (around $1,000), and later on a repair job to fix a chunk of tooth that broke off the back of the tooth a short while later. This time a different part of the same tooth had broken off the front. The session cost $300 - $60 for two x-rays (my other teeth look fine, except for another molar on the other side that also had root canal done a few years back), cleaning, descaling, and fluoride treatment. Plus the actual repair job which "only" cost $90. Unfortunately the dentist recommended getting a crown done for the tooth asap, as it is badly cracked and won't last very much longer left as it is - this means the $90 repair job is only going to be used for a couple of weeks. I think she said the exact same thing two years ago when she made the last repair, so decided that it's time to "bite the bullet" and get the crown done. I've booked in for the two sessions required for the crown - it will cost around $1,400 for one crown! They have a nice, realistic tooth-like appearance, but at that price I almost expect solid gold like the "good old days".
We only have basic private hospital cover, with no dental cover, so this is all "out of pocket". I will get a 30% tax rebate for the amount of total "out of pocket" family medical expenses this tax year for any amounts above $1,200 or thereabouts. I may look into the cost of adding dental cover to our health plan, as the other molar that had root canal a few years ago apparently will also need a crown eventually. Plus DS1 has started getting loosing his baby teeth and has an overbite - so he may need braces or something later on. And DW doesn't have the best teeth in the world either...
I'll have to do a cost-benefit analysis based on the expected annual cost of the dental cover vs. likely dental work. I won't pay for dental insurance just on the off chance of needing some major work, as any emergency work (eg. from a car accident) would be covered by medicare in the public hospital system, and I've no interest in any "cosmetic" dental work that might be covered.
As Dr. Evil would say "ONE, TRILLION, DOLLARS!"
That is the amount the Australian Household debt is likely to hit this year. Despite three interest rate rises by the Reserve Bank last year, which temporarily dented consumer confidence and slowed the growth in consumer debt, the rate in growth in credit for households and business was 1.4% last month - the fastest it's been in four years. This could trigger another rate rise at the Reserve Bank Board's monthly meeting next Tuesday, but many economists expect them to wait until they get the latest quarterly inflation figures next month. Borrowing for housing made up 86 per cent of the household debt figure ($840 billion) and the remaining $137 billion is personal debt (including credit card borrowing and personal loans).
It's not a trick question. I was just wondering today what is the ultimate effect of adding $1000 to my "family fortune". As I think I'm on track to have enough to live off by the time I retire, additions to my net worth over the next 20 or so years should end up increasing the size of my estate. Of course one has to make a lot of assumptions to model this. My assumptions are:
* my kids and descendants either make their own way, or at least live off the income of the "family fortune" rather than blow the lot. A big assumption, but at least I won't be around to find out if I'm wrong
* the "estate" will be invested tax effectively and in a sensible asset allocation that provides a reasonable "real" return - say 4%. This could be conservative, if the assets are mainly "high growth" ones such as stocks, real estate, and some bonds. But, looking at the long term there is the risk on entire markets doing very poorly, hyperinflation, and so on. Imagine if your family fortune had been entirely invested in Russia, Germany or Argentina 100 years ago. So there is probably a need to diversify between markets and also to spread the actual holdings to several different countries to minimise sovereign risk. This is likely to diminish to overall returns achieved.
So, what might $1000 be worth? It could provide a weekly income of around 77 cents per week on an indefinite basis. Not as much as you might have thought.
I collected DWs mobile phone today - I'm glad the repair report showed that a short-circuit in the speaker had been found and the speaker replaced. There's nothing worse than dropping in electrical equipment that has an intermittent fault, only to get it returned a few days later with the dreaded "no fault found" message. The warranty doesn't run out 'til next monday, so it didn't cost anything to have it repaired. Hopefully both our phones will last for several years.
The dentist didn't have a vacancy until next Tuesday, so it's lucky that my molar with a large chunk of tooth missing isn't hurting. Upon reflection maybe this shouldn't be a surprise, as this is the tooth that previously had root canal -- so there won't be any live nerve left in that tooth? Dental costs aren't covered by medicare, so, unless you have a comprehensive private health insurance plan (we just have basic hospital cover to avoid the extra medicare levy) it is normally an out of pocket expense. It does count towards our total non-reimbursed medical expenses for the year - anything over the threshold (around $1500 I think) gets a tax rebate (of around 30%). If you can't afford to pay, and don't have private insurance, there is free public dental care available from the State government. But it's got a limited budget, so there are very long waiting lists for anything except emergency dental work.
The bathroom plumbing has been playing up - taking a long time for the bath and toilet to drain sometimes, and making strange "blup, blup" sounds. DW arranged for the plumber to drop by and clear out the waste water pipes with an 'electric eel'. Unfortunately this is a different pipe to the one he cleared out last year, and he couldn't find the access point. The drainage diagram that was attached to the documentation we got when we bought the house doesn't show much detail - and I think it shows the original plans, without some additions that were added to the house later on. The plumber had to leave to locate some more detailed plans - hopefully he'll be back tomorrow and the total bill won't be too high. I have a new flush valve assembly to install in the toilet - I'll have a go at doing that myself, but I draw the line at clearing out blocked sewer lines. I'm quite happy to spend my money for someone else to do THAT job!
While I was collecting the wife's mobile phone at lunchtime I dropped into the Aldi store closest to my workplace. They had a USB high-definition DVB-T received on sale this week for $79. Hopefully I can just plug it in to my laptop and watch TV - I'm not 100% sure it will work as the specs say it requires a 64MB Video card, so it may not work on the laptop. I'm also not sure if we have any reception of terrestial digital TV signals where we live (it's in a bit of a valley). Sigh -- another $79 that would probably have been better spent going into my retirement fund, or one of my kids retirement accounts ;0
The market was up 39 points today, which approximates to about $3,500 profit "on paper". I ignore such ups and downs in my daily net worth figure (although I like to plot the chart) - if I let how my investments were going affect my day-to-day outlook on spending I'd alternate between days of buying big-screen TVs and days of eating leaves and water. I find it relatively easy to stick to my "budget" for spending, and just treat by investment performance as an intellectual curiosity. I find that doing this also helps me to stick to my long-term asset allocation when, for example, the market crashes or is in a prolonged slump.
One of the things financial planners will always review is your life insurance cover. Not everyone needs life insurance of course - and not everyone is able to get the amount of cover they need at a reasonable cost. In Australia life insurance is often best value when the policy is taken out within your superannuation (retirement) account, as the premiums will be paid from money that has been concessionally taxed (usually at 15%), rather than at your marginal tax rate (of up to 40% or more). Another benefit of getting your coverage through your superannuation fund can be cheaper rates - if you are part of your employer's superannuation plan, the life insurance is often at cheaper "group" rates than you could obtain outside of super. Often the maximum cover available without having to have a medical exam is quite generous too. I have $400K of death and "total and permanent" disability cover (there are several different types of cover possible). Its basically term insurance, guaranteed renewable until age 65, with the premiums based on sex and whether or not you're a smoker. The premium increases each year with age, and with generally rises in insurance costs (although the amount of cover remains fixed, companies will increase premiums across the board as life expectancies increase).
One consideration for me when starting up a self-managed superannuation fund (SMSF) will be whether it's worth keeping my existing employer's superannuation fund account open with a small balance, just so I can retain my existing insurance. Although the management fees are proportional to the balance (and thus won't be an issue), there is a small monthly account keeping fee which would add to the cost of retaining my existing insurance cover. I'll probably keep my existing cover while I get my new fund setup, and not close it until I have got quotes for a new insurance policy with the same benefits, and had my application accepted (it will probably require a medical exam). It would probably be worth keeping the existing super account open just for the insurance if I can't get a new policy - the annual account is only around $50, and I should be able to save at least $1000 pa in reduced fees by moving the bulk of my superannuation into a SMSF.
I mainly have life insurance to provide for my family if I die. As the death benefit will be added to my retirement fund balance and other investments, the amount of cover needed should decrease over time - so I can probably keep the cost of insurance fairly constant by decreasing the amount of cover as I approach retirement age.
In addition to Death and TPD insurance, I also have a "loss of income" policy that will pay 85% of my salary until 65 if I am disabled. It differs from TPD insurance in that there is a "waiting period" that applies before you start being paid a benefit if you are disabled. The premium is less for longer waiting periods, so I choose a 2-year waiting period in order to minimse the cost. I have significant annual and sick leave accumulated, plus enough assets to see my through this period without any income. This type of insurance is tax-deductible if obtained outside of super, so it's usually best to obtain these policies outside of super (ie. paying the premium with your after-tax dollars).
Online comparison tools are very useful for comparing rates available from different providers for different policy types and conditions. It's very important to consider the strength and reputation of the provider, and the "fine print" of the cover, when comparing prices, to ensure you are comparing apples with apples. One site available for comparing life insurance policies in the US is Life Quote Centre.
Yes, I know, that isn't news to anyone. But my annual notice from my health fund arrived today letting me know exactly how much my premium is rising this year. After announcing that they paid a record amount in claims last year (up 8.5%) they got down to the nitty gritty and let me know that my monthly premium for basic family hospital cover is going up to $151.45 per month (including the 30% Federal Government Rebate). This is only an increase of 2.0% from last years $148.40 a month. BUT, there's also a change in how the 'excess bonus feature' works. Instead of getting a $100 cash refund at the end of each year if you haven't made any claims, this is now being replaced by up to two excess free same-day or overnight admissions per year. Although the benefit seems similar, it's actually not much of a benefit to us as we've any made one claim in the past five years. Instead of getting $500 worth of refunds, under the new rules we'd have just saved $100 for one excess payment. Adding in the loss of the $100 refund each year, the actual "out of pocket" increase in premium is 8.1%.
If we didn't have private hospital cover we would have to pay a 1% medicare levy surcharge when our combined taxable income (with 2 dependants) iss above the $101,500 threshold for any year. We would probably have been under the threshold this year as DW spent a large part of the financial year on unpaid maternity leave, but most years our combined income would be over the threshold, so we'd end up paying at least $1000 in extra tax. The net cost of having the private hospital cover is therefore only around $68 a month, so it's probably still worth it in case any of us ever need 'elective' surgery - which is available in the public system, but can have very long waiting lists.
Although there are plenty of figures around to calculate depreciation rates for appliances regarding tax deductions for rental property investments, when it comes to working out how much you actually need to budget for replacement of common household appliances the figures can be harder to work out. CNNmoney.com has published some data by Bank of America Home Equity and conducted by the National Association of Home Builders that gives real world estimates of the life expectancy of a variety of home components. To save you flicking through the 13 pictures on the CNN site, here is a summary of the life expectancy of common household appliances:
Applicance Expected Life
Gas Range 15+ years
Refrigerator 13 years
Dishwasher 9 years
Cabinets 50 years
Masonary 100+ years
Counter tops 20+ years*
Wood decks 20+ years
Electricals 10+ years*
Plumbing 15 to 50 years
Flooring 25 to 100 years*
Roofing 20 to 50 years*
Siding 20 to 50 years*
Windows 15 to 30 years*
* depends on quality/material
If you divide the purchase cost by the life expectancy that should give you a guide as to how much "depreciation" to save up each towards the items eventual replacement. Scaling up the amount each year to allow for inflation would also be a wise move.
Over the past two years, AMP and the National Centre for Social and Economic Modelling (NATSEM)have producted a series of reports that open windows on Australian society, the way they live and work – and their financial and personal aspirations.
The reports focus on the distribution of income and wealth as key factors that differentiate generations and segments of Australian society.
Well worth a look as the reports are well written and easy to digest, pulling together heaps of detailed statistical information that would otherwise be hard to track down and analyse.
The comics I had ordered from the Federal Reserve Bank of New York's educational website (available for free) arrived today. When I got home from work DS1 was busy reading the first one and after dinner he wanted me to read through it and discuss some of it with him. He thought some of the jokes were quite funny, so it seems these are pitched just right for an intelligent 6 year old. He'll probably take one to his "news" day at school on Thursday to tell the other kids.
The ones I got seem the most useful:
The Story of Money
Once Upon a Dime
A Penny Saved
They arrived via airmail from the US (and cost the Fed USD3.70 in postage!). I can recommend these to anyone with 5-10 year old kids.
I've been doing some research on Self-Managed Superannuation (Retirement) Funds with a view to setting one up for myself, DW, DS1 and DS2 (luckily the maximum number of members in a SMSF is a perfect fit to my "nuclear" family).
The potential benefits of a SMSF compared to my company-selected superannuation fund are:
* can invest in any "suitable" investment (eg. direct shares, index funds) rather than picking from the list of 20 or so managed funds available via my current Super Account.
* saving money on fees - although our employer has arranged for a "rebate" of part of the standard admin fee charged by the Super Fund (so it ends up being around 0.4% instead of 0.95%, plus the managed fund management fees of around 1-1.5%), this is still higher than the $500 pa "flat fee" available from eSuperFund.com.au for a SMSF (eg. on my current Super Account balance of $315K this equates to an admin fee of 0.16% pa)
There are some possible drawbacks though:
* I currently have life insurance via my Super Fund. If I changed funds I'd have to apply for cover again, and, for the amount of cover I currently have ($400K) I'd probably have to pass a medical exam
* As a member of a SMSF I'd have to be a trustee and be responsible for setting an investment policy and abiding by the rules regarding running a SMSF, otherwise the SMSF can lose it's tax-advantaged status. This shouldn't be too onerous though, as I previously acted as an employee-appointed Superannuation Fund trustee at my previous job.
The other thing I have to consider is shifting some of my assets that are currently held outside of Superannuation (ie. my geared investments in Australian shares) into a Superannuation account to save tax. Basically an undeducted contribution of up to $1M can be made before Sep 2007 (due to recent changes in the Superannuation rules) and there won't be any contribution tax. Once held by a Superannuation Fund, the assets income is only taxed at 15% (rather than my personal marginal tax rate of around 30%+) and capital gains are taxed at 10% (rather than half my personal marginal tax rate). Also, once I reach retirement age (65) all withdrawals from the Superannuation account are not taxable under the new rules.
The disadvantages of putting these assets into a SMSF are:
* Can't "borrow" for a Superannuation investment, so gearing is out. However, this isn't a big issue as I'm thinking of eliminating my gearing this year anyhow as the stock market has had a good run for 3 years and will eventually have a "correction" of 10%-30%, not a good time to be geared up. Also, Superannuation Funds can invest in "warrants" which give you similar effects as margin loans, but without the risk of margin calls (but the effective "interest rate" built into warrants is higher).
* You can't "roll" existing stock investments into a Superannuation account without triggering a CGT "event" - so I'd have to pay Capital Gains Tax on the currently unrealised gains in my stock portfolio. If I was just selling off enough of my stocks to pay off my margin loans I could probably offset a large part of the realised gains by selling off all the "losers" in my portfolio.
* I'll have to get all my CGT records up to date in Quicken so I can work out how much capital gains tax I'd be liable for (I have old records up to 1998 in my old Quicken backups, but need to trawl though the past 8 years of transactions to get my CGT records up to date! It's amazing how little time I've had "spare" to do my financial records in Quicken since I got married and started a family!). I wouldn't want to do the transfer till after the end of the Australian tax year (30 June) as DW is on maternity leave this FY and may get some family assistance money if our combined income is not too high this FY. So the "window of opportunity" to make a large (up to $1M) undeducted contribution into Super for me is between 1 Jul and Sep this year. After Sep the max undeducted contribution each FY is going to be $50K, so it would then take 6 years to shift my current Australia Share investment into Super.
* Once assets are in a Super Fund they can't be "released" until retirement (except in exceptional circumstances). Thus, I'll be keeping some other assets outside of Super to act as my "Emergency Fund".
I'm also looking into DirectPortfolio.com.au which offers a managed direct share service, which can be done within a SMSF. I like the fact that they run individual stock holdings for each account, so you avoid some of the unintended tax effects that can arise when investing in managed funds. But their admin/management fee is quite high (around 2%) and you have to pay a $1000 setup fee when open an account with them. The setup fee covers recording all your CGT history if you transfer existing stock holdings to them, so it would be reasonable if I transferred my existing stocks without triggering a CGT event. But if I transfer my shares into a SMSF CGT will have been paid on the date of transfer, so there's no CGT history data required - so the $1000 setup fee seems a bit high in that case. Looking at DirectPortfolios results for their various "mandates" they have achieved around 2.3% above the ASX200 accumulation index for this period, which means they "outperform" by slightly (0.35%) more than the fees are costing. But, they don't provide data on the "beta" of their "mandates" so it's hard to tell if their risk-adjusted return actually outperforms enough to offset the management fee. So, if I decide to move my stock assets into a SMSF I'll probably just sell them off and deposit cash into the SMSF, then use it to buy a Vanguard Index Fund (perhaps their "High Growth" Fund).
Lots to research and think about in the next 5-6 months!
Easy Change wrote to me with a good question in response to my Asset Allocation post:
"I was wondering if you would be so kind as to talk more about when you started investing and/or what age range you are in at this point in your life. I am coming up on thirty soon myself and I find the whole concept of getting to 100k before then (which is what several pfbloggers are shooting for) to be a huge undertaking."
I think I've covered most of this before, in bits and pieces, but to summarise:
I'm 45, live and work in Sydney, Australia. I have a wife, two young sons, a mortgage and no pets. My personal net worth has just hit one million Aussie dollars. I come from a middle class background, have degrees in IT, industrial math and applied chemisty, and have only ever worked as a "wage slave" - first ten years as a scientist for a private R&D company, and then for ten years as for a market research company - working my way up from an entry level quality assurance role to a junior management position. My salary package is currently $8x,000, but until 2 years ago I'd never been on more than $60,000.
I started out investing by saving my pocket money and earnings (paper round, market gardening, and supermarket shelf packer) during high school into a bank account. When I worked during the Uni vacations (as a process worker in a pencil factory) I saved via my bank account and occasionally invested a lump sump ($1000) into government bonds or unsecured notes from a bank-owned customer credit company (AGC).
I first learned a bit about the stock market doing a Business Economics subject at Uni, which included doing "paper trades". As this course ran in the second half of 1987 it was quite interesting! Once I completed Uni and started working full-time I began investing in Individual stocks (using broker research to choose them), and eventually bought my first investment property.
Over time I learned more about stock selection, minimising brokerage fees and choosing Mutual Funds (for overseas stock exposure) that didn't have exhorbitant fees. Later on I began to use gearing (via margin loans) to offset dividend income with tax-deductible margin loan interest - effectively "converting" current, taxable income into tax-deferred capital gains (which, in recent years, are taxed at half the tax rates of current income).
I sold my original investment property (at a slight loss), as it was in a very poor suburb and tenants proved very unreliable. I swore off direct property investment, but then bought another property after I got married, as my wife wanted to reinvest the funds she had from selling her unit back into real estate.
Recently I've diversified my investmenting to include hedge funds, agribusiness investments (pine, sandlewood and teak plantations) and some wine, coins and bullion. I started direct investment into US stocks last year - trying out the "Magic Formula Investing" method outlined in the "Little Book that Beats the Market".
I'll probably reduce my level of gearing this year, as the stock market has had a very good run for several years and I'm ahead of my projections - no point risking reversion to the mean, especially when using margin loans. I'll also add any future wage rises straight into my superannuation (retirement) account, as by doing a "salary sacrifice" it gets taxed at 15% rather than my marginal personal tax rate. They've also recently changed the tax treatment of retirement income from superannuation accounts in Australia, so that they will be tax exempt. This makes superannuation more attractive than gearing shares or property investments for accumulating assets, although there are some limits to what you can invest in via superannuation, especially if I stick with the company-selected retirement fund, rather than opening a "self-managed" super fund.
I reached $100K net worth by age 30. That was worth more than $100K in today's money, as it was way back in 1991. But it was also easier for me than for most people, as I was living at home still (not paying rent or board), and I had no student debt outstanding when I graduated (I paid the HECS (Uni) fees as I went along. And HECS fees in Australia are only around 25% of the full cost).
My accumulation of net worth over time was covered in a previous post.
Worst investment decisions:
* Spending the money I saved up working during uni vacations on a 10" meade SC Telescope. You can buy one today for about the same price I paid back in 1982, and I've probably only used it for a total of ten hours in the last 20 years. Then again, I always wanted to be an astronaut when I was a kid, so it was worth every cent. I just wish I'd got around to building that observatory up at my parent's farm...
* Spending around $1000 on a Sinclair ZX80 computer and accessories in 1980 - I should have bought some Microsoft shares when they listed instead...
* Buying $2000 worth of an unlisted internet stock (GEN) in 1995, which went broke before it could list on the NASDAQ. If only I'd waited and bought Google or Amazon.com instead...
I picked up my new pair of glasses today - $630. It had been four years since my last eye-test and also the nose-piece on the current trendy, frame-less, titanium pair had broken off (titanium is expensive, light-weight, but tends to fatigue and can't be easily repaired). So it was overdue to have a new frame and lenses. The new pair isn't quite as "cool" looking as the old pair, but appears to be more robust, so it may last 5-10 years if I'm lucky. The old pair actually got repaired at no extra cost by the optometrist, so I had a good "spare" pair now.
NCN did an interesting post that listed how much he had earned so far, and how much he could have saved up by now (if he'd saved 10% of his income every year) compared to what he's actually accumulated (starting a couple of years ago).
I thought I'd run through the same process myself, just for interest:
"How much money have I made during my lifetime."
Here are the details. I'm almost 45, and I've worked since I was about 14 (part-time during high-school doing a paper round, market gardening, storeman & packer and music tutor, and then during uni vacations working in a pencil factory). The breakdown:
These are rather rough estimates (but pretty close) for the early years. I got my first "real" job in 1984 working as an "engineering trainee" while finishing off my first degree.
So, how much money have I made, in salary, over the past 32 years? $935,719. Now, for some folks, that's not much money, and for others, it's a lot of money. Whatever you think about the amount you have to admit that it is a pretty decent chunk of change. To continue with NCN's method of analysis... Where would I be if I had SAVED 10 percent of my salary, at say 8 percent interest, per year. And how does this compare to where I'm actually at. Let's run the numbers:
Ten Percent End Of Year
At the end of the 32 year period, I would have had 220,152.18 in my retirement account. Not bad. Instead, I have about 304K, as I've been putting in more than 10% and have averaged more than 8% by investing in the "high growth" funds available in my retirement account. Now, for the sobering reality. Ready? If I NEVER put another dollar into retirement, but left that 304K to grow at 8 percent, how much money would I have in, say, 20 years when I'm ready to retire?
Yep, that's right. I've saved around 10 per cent of my income while working, and in another 20 years I should have over $1,000,000 dollars in my retirement account, without ever saving another cent.
Wow! Now, as you can see, I have "low-balled" my estimates. I assumed a VERY modest amount of savings, and a very, very modest rate of return, which is why I actually have 38% more in my retirement account than this model predicts. If I just stick with the conservative 8% return and don't contribute any more I STILL would have over 1 MILLION dollars in my retirement account. This shows how important time is.
In reality, I'm now saving around 20% of my salary into my retirement account and will continue to do so. Assuming I earn to same amount for the next 5 years and then take a pay cut when I take up a high school science teaching job, I'll end up with $1,401,207 at 65. The recent Australian tax changes mean that my retirement account earnings are only taxed at 15% and the final benefit, taken as either a lump sum or a pension, will be tax free. So this should be enough for a comfortable retirement. In fact, based on my current spending and the fact that I won't have a mortgage when I retire, I'll probably have more income than I need and will be able to increase my savings rate when I'm "retired". I suppose at that time I'll have to consider myself a "professional" investor. After I've completed my teaching qualification and Master of IT I may enrol in the Master of Finance course my wife is currently doing so I can officially call myself a "pro"
My other assets (around $700K) will continue to be invested in real estate and stocks, even after I retire, so this should provide a sizable estate for my two sons and their heirs. I've already set up retirement accounts for each of them, so they should end up with a comfortable retirement even if they never contribute anything to their retirement accounts.
It's amazing what you can achieve on a "modest" salary via a regular savings plan and sensible investments over the long haul.
The free credit report I'd requested on 31st October still hadn't arrived, so I rang up Baycorp to check. After confirming my details the CSR advised that it had been emailed on the 9th November (funny how to free report which can "take up to 10 days" to send, was emailed EXACTLY 10 days after I'd faxed in my request). As I hadn't received the report I asked the CSR to check what email address they had sent it to - sure enough, even though my email address had been printed clearly in block letters they had managed to data enter a typo and send the report to some other address (Hopefully that email address is not in use by anyone - the password security on the emailed report is simply to enter my DOB, which I'm sure is available online somewhere).
As it was their stuff up, the CSR promised to immediately despatch a new report, and it turned up in my email about 10 minutes later. The end result was that ended up getting a free copy of the "premium" report (normally $27). There's not much to the report - as I haven't made any late payments there was only my current and previous address, and a list of 12 credit enquiries made over the past 5 years or so. It all looked pretty much as expected. I certainly wouldn't bother paying for this report.
A group of charities has banded together to recommend people use a free online financial planning program called MoneyMinded that has helped 15,000 Australians gain control of their finances. A recent evaluation by RMIT University found that 93 per cent of those who used it had changed their spending habits, drawn up a budget or made other positive changes.The charities are urging people to complete the program's 45-minute planning and saving course that showed how to make a family money plan. Among other things the program helps people differentiate "between items they need and items they want when shopping". Such education is desperately needed by low and middle income families - a recent survey of 400 Sydney families by Wesley Mission found almost one in four had never prepared a budget.
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