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.

Well, aside from child actors - I mean how much can your normal, average kid earn? I've no idea really, but it's been interesting to see how much my son managed to earn doing a couple of casual jobs. DS1 earned about $80 a week doing a paper round for almost two years - he enjoyed the morning walks with his dad and stuffing the folded papers into the letter boxes. As it took 2 hours to deliver the papers, five days a week, this works out at $8 an hour for him - a pretty good hourly rate for a primary school kid. But, this isn't counting dad's time spent supervising and lifting newspaper bundles, or the cost of driving to and from the paper route.

More recently he'd started learning the recorder at school, and enjoyed performing at the school concerts, so I got him a busking licence from the city council. When he was in the city for his Saturday morning music lessons we'd take the opportunity to let him busk for a short while. At his age he gets lots of interest from the passing tourists, especially when he's wearing his medieval jester's cap. He has sometimes earned a surprising amount in a very short time - the exact amount depending mainly on the location chosen. In the main city park there was a lot of passing trade, but very few people stopped to listen. The average amount contributed was also small - around 10c-50c per person from this audience. The return was much higher outside the public art gallery - the pedestrian traffic flow was less, but the audience was more appreciative, included lots more tourists, and the amount contributed was typically higher - some contributions were $1 or more.

My son enjoyed busking for short periods - after 10 minutes he'd lose interest and need a break (a quick tour through the art gallery was always fun). Then, after a second 5-10 minute session he'd knock off for the day. One time he got carried away and kept playing for 45 minutes! He quite enjoyed earning the money, counting it afterwards, and depositing it into his savings account. Now that he's finished his music lessons in town he probably won't get a chance to do any more busking unless we're in the city anyway to visit a museum, go shopping or take in a movie.

He's been busy learning Christmas carols in his recorder class, so if we go into the city to visit the Maritime museum before Christmas he may get another chance to busk this year.

So far his earnings from busking are:
15 mins $ 2.35 (park)
15 mins $ 6.30
20 mins $ 6.80 (park)
20 mins $12.15
30 mins $10.65
30 mins $19.85
45 mins $49.65
20 mins $10.95

All up, $118.70 for 3.15 hours work = $37.68 an hour!

His annual busking licence cost me $41 and expires next May. (For Sydney City busking details see this) I don't think I'll renew the licence next year as we probably won't be in the city often enough to make it worthwhile (I pay for the licence so it doesn't cut into his earnings, but I'd like him to make more than the licence cost me, otherwise I may as well just increase his allowance and he can spend the time practicing at home). Unfortunately our local council only allows busking in very restricted areas and the licence fee is exhorbitant, so it's really the City or nowhere.

I must admit that the question of inheritance doesn't take up much of my time - I expect to have enough accumulated to fund my own retirement, and there's a good chance my parents will still be around when I retire - I have a Great Aunt still alive in her 90s, and two of my Grandparents lived to 94. So if I ever inherit anything I'll probably be too old to enjoy it anyhow.

However, for a lot a Baby Boomers who have been "living in the moment" and are only now starting to get concerned about where the money will come from in their retirement, the possibility of an inheritance bailing them out may have been in the back of their mind.

I had read that this hope was misplaced, with the current crop of retirees planning to spend their money, and possibly use a reverse-mortgage to spend the family home as well. So they'd bit little left for the Baby Boomer's to inherit.

But a new Citibank report contradicts this belief. Apparently most retirees are living within their means and around 85% plan on leaving a bequest to their children.

The average amount expected is $427,000, but some are planning on leaving a lot more:
Expected size Proportion of
of Estate Retirees
$900,000 15%

wealth, retirement

"Investing for your future" is a basic investing home-study course available online. The 11-unit home study course was developed by the Cooperative Extension system for beginning investors with small dollar amounts to invest. It is aimed at those who may be investing for the first time or selecting investment products, such as a stock index fund or unit investment trust, that they have not purchased previously.

It has some valuable information and some cute graphics, such as the "investment pyramid" (reminiscent of the "food pyramid"):

And it also has some exotic terminology that I haven't come across before, such as "loanership"!

All in all, a good read for a cold winter's night in front of the PC with a cup of hot chocolate.

personal finance, investing

Want to improve your personal finances? You risk tolerance is one of the fundamental issues to consider when planning your investment strategy. Start by taking this quiz from Kansas State University. Choose the response that best describes you - there are no "right" or "wrong" answers. Just have fun!

Take the Quiz

ps. I scored 33 - "a high tolerance for risk", which is what I expected. The score ranges are:

Score Risk Tolerance Level
0-18 Low tolerance for risk
19-22 Below-average tolerance for risk
23-28 Average/moderate tolerance for risk
29-32 Above-average tolerance for risk
33-47 High tolerance for risk


personal finance, investing, risk

1. Start when you are 20

2. Earn an extra $3 each and every day

3. Invest it via a regular savings plan with 100% gearing ($100 borrowed for every $100 invested) into the following asset mix:
40% Australian Shares
20% International Shares
20% US Shares
10% Property Securities
10% Australian Bonds
Based on the historic returns for the past 20 years, and typical margin loan borrowing costs of 3% above the cash rate, this would result in $3,687,250 by age 65 - or $975,000 in today's money (assuming inflation averages 3% pa).

OK, this may not work out exactly as planned, but finding an extra $3 a day should not be too hard for anyone. And, as this is "extra" money, there shouldn't be any problem using a geared savings plan and a high-growth, high-risk asset allocation. For those that are risk-averse, just close your eyes and don't check the balance on your annual statement until you turn 65. In practice you may have to save up the $21 a week into an online savings account until you have enough to start such a geared savings plan - probably an initial amount of $1000 and then regular contributions of around $100 each month. Also, if you don't live in the "lucky country" you should probably change to asset mix to include your local shares and bonds instead of the Aussie versions, and switch the others as needed eg. from US shares to Asian for US readers who would be including US shares as their "local" share component.

There may be some tax due when you cash in a 65, but there shouldn't be much tax impact along the way, as the interest on the gearing loan will consume all your dividend income (more or less).

Our most recent addition to the family is now 7 weeks old - plenty old enough to start planning for his retirement

I had a look through the current superannuation (retirement) account offerings on the web, and found one (ING OneAnswer) that seemed to fit all my requirements - low initial amount ($1,000), low regular savings plan additions ($100 per fund) available monthly or quarterly, and a suitable mix of investement options (as the investment has a 65 year time horizon before it gets rolled over into a pension I'm going for high-growth asset mix with some gearing).

It will be a "child superannuation account" (so friends or family can make contributions into the account on my son's behalf), which means the maximum that can be contributed is $1000 per year (actually, it's $3000 every three years per account, and you could set up more than one account if you wanted to contribute more than $1000 per year per child). I made the minimum initial contribution ($1000) via direct debit from my bank account and set up an automatic direct debit from my bank account to contribute another $200 every quarter, starting from next June. This will mean I don't exceed the $3000 cap within the first three years of opening the account.
The asset mix I selected for the initial $1000 is as follows:
Geared Australian Share Fund 30% ($300)
Australian Shares Index Fund 20% ($200)
International Shares Index Fund 20% ($200)
Global Small Company Fund 10% ($100)
Global Emerging Markets Fund 10% ($100)
Property Securities Fund 10% ($100)
The regular savings plan contributions will be split:
Australian Shares Index Fund 50% ($100)
International Shares Index Fund 50% ($100)
At the end of three years this will mean the asset mix only contains around 3% Property and 3% emerging markets, so I'll probably top up the savings plan contributions after year three with an additional $100 into the Property Fund and $100 into Emerging Markets Fund each year to reach the $1000pa contribution cap. I won't bother rebalancing as the buy-sell spread is still an unnecessary cost, even if switching is free. I'll just change the weighting of the savings plan contributions to keep things roughly 50% AU shares, 30% Int shares, 10% Emerging market shares and 10% Property Securities.

The account will automatically come under my son's control when he turns 18 - but as he can't withdraw the funds until he reaches retirement age (60) it will be a good tool to teach him a bit about investment management.

I lodged the application via a financial planner who will rebate 100% of the initial application fee (which is around 4% for the front-load option) as additional units. Hopefully, he will also OK the rebate of the on-going trailing commision (0.6%) - he did this when I set up a child superannuation account for my first son five years ago. [As he has processed several of my other investment applications (on a non-advisory basis) he earns enough trailing commision from me to make it worthwhile processing the odd "freebie".]

The trailing commision rebate will add quite a lot to the account's performance over 60+ years - if it earned 10% pa on average (after fees), the trailing commision rebate would add another 0.6% to this - a boost in performance of 6%! This will basically mean an extra 6% in the final value of my son's retirement account (maybe $20,000 in today's money) - just by processing the initial application in the best possible way.

Of course all this planning is highly speculative - who knows what changes to superannuation rules will be made over the next 60 years. Also, I'm being optimistic and assuming my sons will both be around to enjoy their retirement. Although there will be some benefits to them much earlier on - when they start work they won't have to worry about making extra contributions to their retirement account (probably just the 9% SGL minimum will suffice), so they can concentrate their savings on buying a home etc. Also, having a significant balance in their retirement account will mean they won't need as much life insurance.

retirement

A couple of month after our last tenant moved out, and we're getting a bit desperate - with the wife on unpaid maternity leave, getting no rent will mean the mortgage payments eat through the extra that we'd paid off our mortgage at an alarming rate. Finally, the estate agent called today to advise that she has someone wanting to rent - but only on a short (4 month) lease with an option to then continue on a month-by-month basis at the end of the lease, while their new home is being built. She'd already rung the wife, but just wanted my OK to lease the property for this term.

With Christmas soon upon us (and hardly anyone moves house over the holidays), if we didn't take this tenant the rental property could be empty till the end of January. So, better to take a short lease and hope that the building takes longer than expected and they stay a while, than hold out for an "ideal" tenant.

Anyhow, the worst* that can happen is that we are looking for a new tenant again in four months time, and have to pay another week's rent to the agent to find us another tenant.

*OK, the worst is actually that we have a "tenant from hell", who trashes the place and then moves out without notice owing some back-rent, and disappears interstate. (I've had this happen before...)

There is much to be said for starting an investment portfolio as soon as possible - compound interest works it's magic over long periods, and you can set your asset allocation to a much more aggressive "high-growth" mix if you have a very long time horizon. So, starting an investment portfolio for your kids is one of the best possible strategies, and is even more so with the proposed changes to superannuation tax in Australia - ie. that there will be no tax on superannuation withdrawals made during retirement.

This means that if you set up a child superannuation account into which you (or any relatives or friends of the child) can contribute up to $1000 each year. (There is a cap of $3,000 every three years PER ACCOUNT - if you wanted to save more than $10 per week you just setup several accounts for your child). There will be no tax due on deposits (as they are made as undeducted contributions), no tax on pension or lump sum payments over 65 years of age, and a maximum 15% tax rate on earnings (likely to be reduced below 15% due to the benefit of franking credits on share dividends).

For example, if you contribute around $10 each week ($250 per quarter) into a child superannuation account from birth until 18 years of age, and then no additional contribtions are made, at retirement age (65) the account would be worth $2,218,843 (or $317,898 in today's dollars) - assuming an average return of 10% pa for a high-growth asset mix (shares (preferably geared), some bonds and some property), and an average inflation rate of 3% pa.

For a total contribution of $18,000 your child's retirement fund will have added $300,000 (in today's dollars) by the time they retire - with no further contributions required after they turn 18. This will let your child concentrate on paying off a mortgage or investing outside of super when they start working.

personal finance, investing, money, saving, wealth, investment

Here is a list of the eight best and eight worst money moves you can make, and why:

Eight Best Moves:
1. Pay Yourself First - no matter how much you earn, you should put aside a fixed percentage of your income as savings each pay day. This will develop good savings habits. You can start off with a small and painless percentage and build up slowly to a significant amount, for example when you get a pay rise.
2. Cut up your credit cards and pay cash for everything. This will ensure you never run up credit card debt.
3. Borrow against your home equity. You can borrow at very competitive interest rates and invest this money in high-growth assets, boosting your returns using gearing. Home equity loans also have an advantage over margin loans because they aren't subject to margin calls.
4. Invest in index funds. The market is reasonably efficient, and studies have shown that very few professional fund managers can "beat the market", after allowing for the higher fees compared to index funds.
5. Invest in managed funds. Some managers (Buffet, Lynch) have consistently produced superior returns, so it is worth seeking them out.
6. Diversify to reduce risk without reducing your returns. Your portfolio asset mix should be on the efficient frontier.
7. Put all of your eggs in one basket and watch the basket carefully. You should spend enough time and effort to identify a few excellent companies and buy them at the right price for the long term. This is what Warren Buffet does.
8. Borrow to invest. Also known as "gearing" this will boost your returns and can provide tax benefits if the interest on the loan is tax deductible and long-term capital gains are taxed at a lower rate than current income (dividends).

Eight Worst Moves:
1. Pay Yourself First - if you have any "bad" debt (loans for non-investment items such as clothes, toys, cars, holidays etc.) you should pay this off before you even consider a savings plan.
2. Cut up your credit cards and pay cash for everything. Several reasons you should keep your credit cards and learn to use them responsibly
- they can act as your "emergency fund" so you can be fully invested without having to keep an "emergency fund" in a low-interest cash account.
- they are much safer than carrying wads of cash around, and are especially convenient overseas.
- by paying off the balance in full each month you can get up to 55 days interest free credit on your day-to-day purchases, so you can keep an extra month worth of expenditure invested.
3. Borrow against your home equity. People who borrow against their home equity or against the 401K to pay of credit cards often run up the credit card debt again. Others use HELOC to spend more than they earn on things like cars, holidays and lifestyle. You can end up still having a mortgage when you retire, or, in the worst case could put your home at risk.
4. Invest in index funds.You are condemning yourself to mediocre (average) investment returns. Some managers (Buffet, Lynch) have consistently produced superior returns, so it is worth seeking them out.
5. Invest in managed funds. Although some managers (Buffet, Lynch) have consistently produced superior returns, you have Buckley's chance of picking who are the superior managers - last year's (or five year's) performance is no guide to next year's winners (but everyone can identify them in hindsight).
6. Diversifying your portfolio (also known as "di-worse-ification") will drag your investment returns towards back down to the average.
7. Put all of your eggs in one basket. If you make one or two bad calls you'll put your portfolio in the toilet. Do you really think you're the next Warren Buffet?
8. Borrow to invest. Gearing will magnify any gains or losses, but, if the market tanks you can get a margin call and be totally wiped out, so you never get to benefit from the magnified gains when the market recovers.

Confused? Well, it just goes to show that there are no "one size fits all" answers in personal finance. Some would argue that this is why you need to get help from a financial planner. My view is that you need to learn enough about yourself, your position, and available options to form an educated financial plan. The fees you'd pay a financial planner are high enough to eat into your investment returns, and, at the same time are too low to buy enough time and effort from a professional financial planner to really get to know you and your situation well enough to give an optimum plan customised for you. The best you'll get is a fairly vanilla plan that is "reasonable" for your situation.

OK, these probably aren't the top eight anyhow - I just wanted to make the point that in personal finance there are many shades of gray. If you read about technical analysis and want to try day trading, first read all the evidence supporting the weak version of efficient market theory, and, remember, in day trading it's a zero-sum game, so you have to be smarter than more than 50% of other traders (allow for trading costs) to hope to make a profit. If you like fundamental analysis, remember that companies makes honest mistakes in their reports, they sometimes obfuscate (or downright lie), and, even if the figures are correct, they are historic, so are a pretty poor guide to the future.

I spent a lot of time for my first decade of investing learning everything I could, and trying to find out the "truth" about investing - what is the "correct" way to invest, and the "best" strategy. What I've come to realise is that no-one knows - especially not what is best for YOU. So, just keep learning all the time, and remember, it's always just going to be your "best guess", so always evaluate and manage your investment risk.

At the end of the day, you've really got no-one to blame for your investment performance but yourself. On the bright side, at the end of the day, we're all dead, so it doesn't really matter anyhow

A study by the National Centre for Social and Economic Modelling at the University of Canberra has shown that the average Australian was 25 per cent better off in 2006 than in 1996, after adjusting for inflation.

While the rich did get richer over the past decade, so did nearly everyone else. Both the richest 10% and poorest 10% of Australians increased their real incomes by about a quarter. However, for the poorest this meant $29 more per week, after inflation, compared to $256 more per week, after inflation, for the rich. The group that made the biggest gains was actually the "middle income" group which gained about 30% in real terms over the decade.

One group that did fall behind the rest was second poorest 10% of the Australian population, mainly age pensioners, who failed to keep pace with everyone else, but still managed a real gain of 14%. This is likely to be a persistant trend as the government struggles to fund aged pensions as the ratio of taxpayers to aged pensions drops with the aging population - the number of Australians aged oved 60 is projected to double by 2040.

wealth

Well, the Australian tax year runs from 1st July - 30th June, and the deadline for returns is 31st October. Way back on 14th August I wrote "Hopefully now that I've started using Quicken 2006 I'll be able to add in all the info for my current holdings over the next few months." - well, it never happened. What, with the birth of our second child in September, some uni assignments and doing too much blogging (!) I've never spent the time needed to enter all my expenses since 1 July as planned. What's worse is that I haven't brought my old share records in Quicken up to date, so I'm left with wading through my margin loan account statements to see what has been sold during the financial year, and then going through old records to work out the cost base.

Hopefully I'll get it all sorted out tonight and fill in the electronic eTax forms tomorrow so I can lodge it on time. As I'm owed a refund (I think) there probably wouldn't be a penalty for late lodgement, but I really want to get it over and done with. My new financial year's resolution is still to enter all my expenses into Quicken this year, and get my share records in Quicken up to date... we'll see how it goes.

tax

Money can't buy everything, but there are lots of things that can be bought and which will increase your "happiness" level - for example, shelter, food, clothing, education and healthcare. Money is a tool, and it can be used to maximise happiness by spending on the things that are important to you. For example, if your kids getting a good education is important to you, you will be happier knowing that you are regularly saving in a college education fund, than you would be without. Similarly, if you want to provide for your family if anything happens to you, paying for life and disability insurance and having an emergency fund put aside will increase your level of happiness. And many people are happy to be able to afford charitable giving to those less fortunate than themselves.

When people say "money can't buy you happiness" they are generally thinking of people who are unhappy despite being "rich" - but they often forget that their current level of contentment relies on having sufficient money to satisfy their basic needs and some of their aspirations. A recent report issued by the
Pew Research Center found that of those surveyed 49 percent of respondents with an annual family income of more than $100,000 said they were happy, while only 24 percent of respondents with an annual family income of less than $30,000 reported that they were happy. (The findings are drawn from a telephone survey of a nationally representative, randomly-selected sample of 3,014 adults, conducted from Oct. 5 through Nov. 6, 2005.)

Once you have enough income to take care of basic needs, any excess can be used to maximize your happiness. But in order to do this, you have to know what's important to you, and set some realistic goals. It's often best to put these goals down on paper, with dollar amounts required to achieve them, and a realistic time-frame. If you put down some milestones along the way, so much the better.

investing, money, wealth

The mechanics of creating a budget are well-known, and, while not very enjoyable for many people, not hard to complete. The difficulty lies in implementing and sticking to your budget. You can greatly increase your chance of sticking with your budget if you give careful thought to the CHANGES that need to be made to get from your old budget (starting position) and the new budget you hope to implement. Each change should be classified as either a ELIMINATION or a SUBSTITUTION.

An elimination is when you have to totally get rid of a particular spending behaviour - for example, quitting smoking or cutting up your credit card. These changes are very hard, and should only be done if absolutely necessary. A lot of changes SHOULD be classified as a substitution - for example, drinking filtered tap water and tea rather than softdrinks and Starbucks. These are usually much easier to implement as you are not having to eliminate a behaviour pattern 'cold turkey', but are still able to follow your normal routine with minor changes. Generally, after a week of substitution it will become a habit and can be followed without any further effort of will needed.

Many people make the mistake of classifying intended changes as an elimination when they should be aiming for a substitution instead. For example, if you wish to save on entertainment costs, it is far better to substitute your cable TV subscription with borrowing DVDs and books from your local library, substituting gym membership with lunchtime walks and so on. Trying to eliminate spending without introducing a suitable alterative will leave you in a permanent state of "deprivation" and you are more likely to fall back into old spending habits.

money, saving

While clipping petrol discount coupons off my "weekly" shopping dockets I decided to analyze my spending based on the dockets sitting in my wallet. Generally I just put the total amounts into Quicken, and track the total spent on "groceries" against my budget. But I realised that this doesn't really tell me WHAT I'm spending my grocery shopping budget on. I knew that I buy the odd snack/junk food or drink items, but I was shocked to find out exactly how much money I was wasting on these items:
Analysis of my last 8 shopping dockets:
Total spend $351.86
Avg. spend per trip $ 43.98

Category Amount % of total
Household cleaning/laundry $20.07 5.70 %
Basic foodstuffs $190.06 54.02 %
Snack/Junk foods $50.78 14.43 %
Snack/Junk beverages $48.74 13.85 %
Medicines $10.82 3.08 %
Baby care $29.10 8.27 %
Toys/gifts $2.29 0.65 %The first thing that jumps out is that I'm shopping way too often (I tend to drop in to the supermarket nearly every second day while I'm collecting my mail from my post office box - this is NOT a good habit. I really should stick to one major shopping trip each week, and only get items that are on my shopping list).

The second thing is that spending 28% of the total on junk foods and drinks is ridiculous! I'm the one in our household that eats and drinks most of this junk, so I've no reason not to just eliminate this completely. This would save me around $2,500 a year AND be much better for my health. I think I'll add a new target to my blog - spend less than 5% of my grocery shopping on snack/junk food and drink.

money, saving

I had to see the doctor twice last week. The first "long" consultation (about 20 mins) cost $80, and the follow-up visit (a "short" consultation of around 10 mins) cost $50. Because I'd registered my banking details with the practice, my Medicare rebate was paid electronically into my bank account the next business day after I'd paid each bill using my day-to-day credit card. I got $59.70 refund from Medicare for the long consult, and $31.45 back for the short consult - overall a refund of 70% of the total doctor's bill. It's nice to get some of my tax dollars back, but I'd rather not be sick in the first place! The presciption medications cost me a total of $88.50 - each item costing just the $29.50 PBS (Pharmaceutical Benefits Scheme) subsidised price. I'm not sure how much it each item actually costs the government, but I'm sure it's well over twice the PBS price.

Ending up around $130 out-of-pocket for half an hour of a GPs time and several hundred dollars worth of medicine seems like a bargain. While I can see that this would still be a large cost for a "working poor" family, I believe some small co-payment should be required from all patients - say, $5 from the bulk-billed patients for each visit to the doctor. Most doctor's still "bulk-bill" pensioner patients, in which case the patient pays nothing, and the doctor gets a slightly reduced amount from medicare. A small co-payment would discourage overservicing - such as lonely pensioners visiting the doctor just for a chat!

I just read the Fugal Duchess' "6 Ways I Scam Myself into Saving" and although it's an entertaining post I have to disagree with each one of her 6 ideas - I'll explain why.

1. Hide-don't-Seek: I do this occasional by accident, and any "found" money goes into the kids money box as extra pocket money (My eldest son saves 100% of his pocketmoney anyhow, so it's a good deal). I would NOT do this scam intentionally as a) you risk losing notes if you just stuff bills into your pockets!, and b) how are you going to learn GOOD spending behaviour if you just avoid the effort?

2. Break the Bill: I do the exact opposite - I try to never take out cash (I use my day-to-day credit card for grocery shopping at the supermarket, doctors visits, bill payments etc. so I earn points - an extra 1% or so saving). When I have to take out cash (to make a payment that doesn't take credit cards, or charges a surcharge for payment by CC) I will then keep all the bills unbroken for as long as possible. I've trained myself hate having to hand over a nice whole bill and get a measly handful of "shrapnel" back. Also, having a random mix of small notes and many coins makes it hard to track exactly what you have spent each day and I find the money will magically disappear over a week if I don't keep an eagle-eye on it!

3. The Break-the-Bank trick: I've nothing against using banks or credit unions that have few ATMs or branches so that it is hard to take out funds (although these days you can use electronic payments to pay bills, transfer to savings accounts etc. so this doesn't really impact me as I don't use much cash) but I think selecting a bank where "the rates may be lousy" is just plain stupid - I'm sure you can find an inconvient bank with lousy service and GOOD rates!

4. Duck-the-Flyer: It's almost impossible to avoid getting bombarded with junk mail, so I've trained myself to look through them but never buy anything that I hadn't been already planning on (of course this means that you need to think about your needs and wants in a quiet corner - not when window shopping or reading through catalogues!). If you avoid advertising flyers completely you'll miss out on specials/discounts on the stuff you DID intend to buy - never buy at full price.

5. Cart-the-Check Around or Keep the Check in the Mail: Cash it and transfer the money immediately into your high-yield online savings account. You have to cash it eventually anyway (or lose the money entirely), so what's the point in missing out on interest in the meantime?

And as for her favorite trick:

Eat gourmet ice cream.

If you can only avoid over-spending when you feel "over-indulged" you need both overeaters anonymous and spenders anonymous!.

Over the years I've slowly grown out of the habit of buying "stuff" - mainly because I already have lots of cool "toys" that I don't have time to play with, and also because we really don't have any spare room to put more things. I don't count any of my "toys" in my net worth calculation as I don't intend to sell them, I don't know how much I'd get for any of them, and, if I sold them, I'd probably then have some room to buy new "stuff" so I wouldn't end up keeping any of the cash anyhow...

Some of my toys: [S=bought second hand, N=bought new, R=restored]
Item cost est. value (?= hard to sell)
A hovercraft $ 5,000 [S] $ 2,000
A boat $10,000 [S] $ 8,000
A 100 yr old steam engine* $10,000 [S] $ ? (* don't ask me why!)
Telescope, camera etc. $ 8,000 [N] $ ?
Family car, compact $12,000 [N] $ 5,000
Vintage car, restored $20,000 [R] $10,000
Computers, various $ 8,000 [N] $ 500 (the 1980 ZX80 isn't worth much nowadays)
Sports equipment $17,000 [N] $ 3,000
TOTAL $90,000 $28,500
As you can see, my "stuff" has lost over 2/3 of it's value. If I'd invested the money instead, I'd probably have around $200,000 extra by now! Thus the total cost of my toys is around $171,500 opportunity cost - or around $10,000 per annum... Hmmm - how much fun have I really had with all this "stuff" anyhow? The upside is that I have plenty of activities to do with my kids for the 20 years without buying anything else!.

ps. I'm not really that well-disciplined. After Australia qualified for the 2nd round of the football (soccer) World Cup I got carried away and ordered a team shirt signed by all the team members. When it arrived I found that the display case is so large I don't really have anywhere to hang it - so it's sitting in it's delivery box behind the couch. Meanwhile the "10 easy monthly payments" are appearing on my day-to-day expenses credit card each month.

Some common mistakes people make when planning their finances:
Not setting measurable financial goals.
Thinking that only the wealthy need a financial plan.
Thinking that you can avoid starting to plan until you get get older.
Thinking that financial planning is the same as retirement planning.
Confusing financial planning with investing.
Making a financial decision without understanding its possible effects on other aspects of their finances.
Neglecting to review their financial plan periodically.
Waiting until a money crisis to begin financial planning.
Expecting unrealistic returns on investments.
Thinking that you can leave decision making to a financial planner.
Not understanding what a financial planner is advising.
Paying excessive fees for the sake of convenience.
Believing that financial planning is primarily tax planning.

A recent survey conducted as part of the Fujitsu/JPMorgan Australian Mortgage industry Report (Volume 4) found that there are significant differences in attitudes towards mortgage lenders and awareness of interest rates between different age groups.

The survey divided respondents into four groups by age - Seniors (over 60 years old), Baby Boomers (between 45-60), Generation X (between 30-45) and Generation Y (between 18-30).

The survey found that:
* Significantly more Baby Boomers and Generation X prefer to use a mortgage broker, compared to Seniors and Generation Y respondents, who said they would prefer to use a bank for their home loan needs.
* Generation Xers are more aware of mortgage interest rates - with 88 per cent claiming they could quote the interest rate on their mortgage while only 22 per cent could quote the interest rate on their credit card.
* Baby Boomers were also considerably more aware of their mortgage interest rate with 55 per cent of respondents claiming they could quote the interest rate on their mortgage, compared to 28 per cent who could quote the interest rate on their credit card. On the other hand, only 32 per cent of Seniors and 24 per cent of Generation Y respondents were aware of the interest rate on their home loans. (Perhaps because most people in these last two groups don't HAVE a home loan!)
* Generation X showed the highest predilection towards fixed rate loans, with more than 51 per cent claiming they would consider a long-term fixed rate re-finance compared to 31 per cent of Baby Boomers, 13 per cent of Generation Y and one per cent of Seniors.
* Boomers were more likely to have investment properties than Seniors (67 per cent and 41 per cent respectively).
* Owner-occupied mortgages were most prevalent amongst the Generation X group (55 per cent) while investment mortgages were significantly more popular in the Baby Boomer group (59 per cent).
* Unsecured lending was most common in the younger peer groups, with 36 per cent of Generations Y and 22 per cent of Generation X with unsecured car loans.

personal finance
money
real estate

I recently had a chance to look through the training materials provided by a leading financial planning/wealth management company (it "fell off the back of a table"). It confirms my suspicions that the main target of most "wealth management" services is to manage as much money as possible from your account into their pockets - hopefully while providing you with sufficient residual return on your investments (after fees) that you don't take your business elsewhere.

For example, due to increased competition reducing the margin available in the traditional stock-broking based model which focused on equities research and transactional fees (read "churning"), they are aiming to move to a fee-based "scaleable wealth management" model. The target is to move from having 200+ clients per advisor yielding $4K in revenue per client (from brokerage), to having fewer, high net worth clients - 100 clients yielding $30K+ revenue each (from fees). This is to be achieved by putting such clients into "high margin, high sophistication" products. (read "expensive and hard to understand")

The main driver for this move is a graph showing that the average brokerage rates have dropped below trailing commisions - so it is better for them to push managed products rather than direct equity investments.

An interesting part of the transition plan was how to eliminate current clients that are "small" and "unscalable" by shifting them to a discount broker or "other advisor" . And the methods for finding new "scalable" clients included:
* Internet Research
* Relationships with accounts and lawyers who focus on sales of businesses
* Look for ads of business sales in newspapers
* Relationships with Private Equity companies who will be buying businesses

I found it intriguing that the entire focus was on how to maximise fees from clients, and not a word about maximising returns for their clients, or any relationship between fees and performance.

In a similar vein, the Sydney Morning Herald recently had an article written a student financial planner. It gives a stark insight into just how much the financial planning industry is oriented towards maximising fee revenue, with just enough consideration of the clients needs and situation to avoid running afoul of the regulating bodies. Read Confessions of a student planner.

personal finance, investment, investing, wealth

Yes, Credit Cards CAN be good for you! I have one credit card that I use for all my day-to-day expenses (shopping, petrol, bill payments) but as I pay off the balance each month in full, it doesn't cost me a cent in interest - the only cost to me is the annual fee of $19.80

The card has a "rewards" program which gives you some points for spend, and one of the redemption options is to get a $100 credit onto your card for 13,500 points.

This past year I've made $75.46 net profit from using my credit card (no, using a card for payments does NOT change my shopping habits and encourage me to spend more - in my mind putting $10 onto the card is exactly the same as taking a $10 note out of my wallet):
Spend = $35,234.89
Points = 12,861
= $95.26 credit onto my card
fee = -$19.80 pa
profit = $75.46Of course, this only works if you have the self-discipline to
a) not spend any more using the card than you would using cash,
b) always pay it off in full each month,
c) the card has a low (or no) annual fee, and
d) there's no fee for participating in the rewards program.

Over the past 20 years that I've had this same credit card, I've forgotten to pay it off by the due date three times, and have then had to pay interest on all purchases for the current month and next next billing period. On each occasion it would have cost me as much in interest as I earn in points for the entire year! This makes me VERY careful to pay the balance off in full on time - these days its much easier as I can schedule an automatic payment from my credit union savings account to my bank credit card on the due date.

One other benefit of having a credit card is that the credit limit ($15,000 on my day-to-day credit card) would allow me to cover my basic living costs for six months in the event of an "emergency". So I can choose how much to keep in interest-bearing cash accounts, rather than having to keep six months spending money sitting there.

Of course I have some other credit cards that are only used to obtain a 0% balance transfer offers, which will earn me interest on the amount I've borrowed from those lenders at 0%.

And I have one credit card used only for making internet purchases - usually only $20 or so every couple of months. I use a separate card for these purchases so that if the card details ever got stolen and misused I could cancel the card immediately to avoid liability, and it wouldn't cause any problems with my scheduled bill payments coming off my day-to-day credit card as usual.

saving

It's always good to get some "free" money from your employer. Yesterday I had my application for study assistance approved, up to a maximum of $1200 this year. I'm currently doing a Masters in IT by distance education and my employer has agreed to reimburse me for 50% of the course fees for the subjects I'm doing this year (paid when I pass each subject). As the course fees are tax deductible [as "work related self-education" expenses] the refund from the company will be somewhat offset by the reduced tax deduction, but I'll still end up ahead by about $900.

As usual the process of applying for study assistance is extremely bureaucratic - I'd previously had an application to be reimbursed for the entire cost of the degree approved - unfortunately the approval was only "valid" for that particular financial year budget, and as the degree will take about 8 years of part-time study by distance education this ended up meaning I got nothing refunded for the subjects I completed that year. Working out how to submit an application worded in a way that means I'm entitled to get some money back within the current budget period took some doing!

As I'd already budgeted for paying my course fees, when I get the refund money I'll probably use it to by some shares for my new baby boy.

personal finance
money
saving

The National Information Centre on Retirement Investments (NICRI) has just launched a website full of basic financial advice.

The site provides basic advice, plus calculators to help you see what you can achieve when you start investing or saving.

Six Tools are provided online:
1. Budget Sheet.
2. Assets and Liabilities tables.
3. Needs and Objectives - learn about and prioritise investment objectives.
4. Risk Profile – determine your attitudes towards risk.
5. Choosing Investments – access to information about 30 investment types and investment related topics.
6. Calculators.

personal finance
investing
money
saving

Insurance is undoubtably a "good thing". Unfortunately there is still an archaic commision-based sales system in place that adds huge costs to many insurance products.

While you can shop around via the internet for car and home insurance these days, and competition has therefore brought costs down, the story seems to be totally different when it comes to life insurance and loss of income insurance.

I have my life insurance via my company's superannuation scheme, which has the benefit of being paid for out of "pre tax" dollars. The group rates that apply are comparable to what I could get outside of super [I think the situation would be different in the US where there is more discretion in the setting of individual rates]. However, the downside is that this requires being a member of my company's "preferred" superannuation provider. Now that "choice of superannuation fund" has become a reality in Australia, I'm tempted to shift from my current BT/Westpac scheme into one run by Vanguard in order to save on fees, but I'm not sure that I'd be able to get the same amount of Death &TPD life cover outside of my superannuation scheme.

The BT scheme I'm in has a MER (fee) of around 2.25% of my superannuation balance, although I'm lucky that my employer has arranged for a "rebate" of some of the fee back to members. This reduces the overall MER to around 1.5%. This is still a fair bit higher than Vanguard Superannuation, where fees start at around 1.1% for the first $50,000 (.75% admin/plan fee + .29%-.37% management fees) and then reduces to around 0.85% for the balance above $50,000. Over 20 years the extra 0.65% would have quite an impact on the final balance when I retire! Based on published research about the likelihood of getting outperform from an active fund manager vs. an index fund, I don't think I'll end up ahead by paying the higher management fees.

Even with the Vanguard Fund, the fees in Australia are significantly higher than what Vanguard charges in the US. And in the case of the Superannuation funds, I can't see why the .75% admin/plan fee on the first $50,000 ($375) can't cover their cost per plan for administration overheads. As far as I'm concerned the admin fee for the balance over $50,000 should be zero, and their profit margin come only from the 0.29% - 0.37% management fees (more than sufficient for a mix of index funds!)

My other main insurance expenses are private health cover (around $50 /mo) and around $75 /mo for income protection insurance. These too have negatives - the medical insurance is really only worthwhile to save tax - otherwise I'd probably have to pay a medicare tax surcharge the same or higher than the insurance is costing. In terms of benefits, the hospital-only cover we've got has reimbursed one ambulance fee in the past five years. It was of no use for the delivery of our baby last month, as we couldn't arrange accomodation at the private hospital, so had to "go public". In any case the care in public hospitals is generally just as good as private, and being a private patient would still have cost us several thousand dollars more out of pocket due to the gap between the medicate scheduled fees, the private cover, and what the private charges are. I suppose the "payoff" for having private cover will come if we ever need "elective" surgery, such a hip replacement or some such.

The loss of income insurance costs are not too steep. Planning of working for another 20 or so years before retirement, and having two kids, the odds (around 20%) of suffering a medical disability that severly reduces my income earning ability and increases living costs is too high to be uninsured. Having a two year waiting period before payments commence kept the premiums down - I rely on having several months paid leave and sick leave accumulated, plus sufficient investments to see me through. One thing that does irritate is that the loss of income insurance pays "commisions" of 50%+ of the first year's premiums to the online insurance agent I used to arrange the cover. And, what's worse, they will be getting a "trailing commision" of 30%+ of each payments I make in future years!

If you want to do a quick "high level" plot of your net worth goal, there are many calculators available on-line, such as this one from National Australia Bank. You just plug in your current net worth, expected annual savings, average investment return and period. It provides a value for each future year, which would be print out and use to check yourself against each year going forward. For more detailed modelling (eg. breakdown by asset class, sensitivity analysis for the expected variability (risk) of returns, annual review of expected vs. actual position) I use an excel spreadsheet. But this is good enough for a "back of the envelope" calculation of your overall goal:

As your credit report can affect your borrowing power, and, at least in the US, what interest rate you are charged, it is important to obtain and check what information the credit agencies have on you.

The NYT had a good article on this topic today, relevant to US readers. Main points are:
* There is only one Web site—www.annualcreditreport.com—where you can either download or order your free reports by phone or mail (the toll-free number is (877) 322-8228).
* You should check your report once a year and correct any errors.

For Australian readers, two main agencies maintain credit databases, and you need to obtain and check the report from each. This will cost a fee(eg. $27 from Baycorp) if you apply online. If you write in and ask for a copy of your details you can get it for free in around 10 days. (They obviously want to make it as hard as possible to make a "free" request.). A form is available online from Baycorp Advantage and Dun and Bradstreet.

There is good information on what's included in your credit reports available from here. The most relevant bit is
"If requested in writing, credit reporting agencies must provide you a report detailing all records on your file. The credit provider must provide a copy of your file within 10 working days of receiving your written request. Section 33 of the South Australian Fair Trading Act 1987 states that this must be provided free of charge to South Australians. If you require a copy urgently, you can request this online or by fax. However, a fee will be charged for this express service."

Most other states have similar legislation, so just write in and ask for a copy of your report from each agency.

Personal finance, Money, Investing, Investment, Wealth.

I just got notification from QBE that they have more money than they know what to do with, so they're discontinuing the dividend reinvestment and dividend election (bonus share) plans.

Aside from having to send in my bank details (again!) so that dividends can be direct credited, I'm not too fussed. DRPs used to be a good deal in the days when they were issued at a discount to the prevailing share price, but they were always a pain to keep track of for CGT calculations (even more so under the old indexation method). These days they're mostly issued at the prevailing price, so you don't get much benefit apart from saving brokerage fees. A few companies round UP to the next whole share, which can be great value for small shareholders with only a couple of thousands shares in the company - getting 8 shares instead of 7.13 can boost the dividend yield substantially.

However, this will affect my sons holding in QBE shares. He was in the Bonus Share Plan, so he didn't get any dividend to declare on his tax return (but he would later pay CGT on the entire value of the BSP shares when sold, as they are deemed to have had zero cost basis). Now he'll be getting taxable dividends to include on his tax return. Luckily he will be under the income threshold where paying the exhorbitant 'child' tax rates cuts in, and he'll get the franking credits refunded, so it's not all bad news.

Just thought I'd jot down some notes about what I've been doing regarding my son's finances. He's turned 6 and is already quite money-wise. He enjoys earning some money busking at the Art Gallery with his recorder, and used to do a local paper round [with a lot help from dad the taxi service/heavy lifter]. As all his basic living expenses are taken care of and $3 per week pocket money, he manages to save 100% of his earnings! At his age and net worth he'd definitely be classed as a PAW (nb. see the millionaire next door for a great read and to find out the difference between PAWs and UAWs)

There whole area of money and kids can be quite complex here in Oz - especially as there is such a low threshold for 'unearned income' (around $1400 pa) beyond which a massive marginal tax rate of around 66% applies!

A couple of good things that you might not be aware of
1. Gifts don't count, so little Johnny doesn't have to include pocket money, xmas money from Grandma etc. on his tax return (you HAVE applied for a tax file number of his behalf, haven't you?)
2. Beware of investing too much in stocks etc. on his behalf - if he gets more than $1400 in dividends etc. he'll pay a fortune in tax (it's to avoid you putting all your money in your kids names to minimise tax). Anyhow, these days superannuation is such a good deal that you'd be better socking spare money into your super than your kids investments. If he does invest in shares, select those that have a Bonus Share Plan (so they don't issue dividends) would be a good way to accumulate more shares without earning taxable income. There will be a larged capital gain when he eventually sells the shares though - the Bonus Shares have a zero cost base.
3. EARNED income is treated entirely differently to unearned income - normal adult tax rates apply, so, basically earning $5,000 a year on a paper round didn't make him liable for any tax. Also, any interest or dividends on EARNED income that has been invested is also taxed at the normal adult rates - so make sure you he has separate bank accounts, Chess share HIN etc. My son has one St George Happy Dragon account where he saves his pocket money etc., where the interest will be considered unearned income, and he also has a separate Online banking account which is ONLY used to receive his paper round wages by direct payment. Any interest on this account can be thus be included when calculated the earned income total for his tax return.
4. He has a so-called "child super" account used for retirement investing in his name. Superannuation is another way to invest that avoids any issues with high taxation - super is only taxed at 15%, even for kids. The Macquarie account he uses is invested in a 50/50 mix of International Equities and Geared Local Shares - which is quite risky (volatile) but should give high returns over his long,long investment horizon (54 years till retirement!).
5. He also has second PERSONAL RSA (retirement savings account) with AMP so he can make personal undeducted contributions into superannuation and be eligible for the annual government "co-contribution". For each annual personal undeducated superannuation contribution of $1000 he receives the $1500 as a government co-contribution! A pretty good immediate return of 150%!