Enoughwealth's Personal Finance Blog

Once all the income items have been completed it's time to get to work on itemising my deductions. The biggest one for me is the interest paid on the margin loans I've used to buy stocks for my share portfolio. I pay some interest up to 12 months in advance (in late June) to bring forward the tax deduction, and the remaining interest component is part each month as it accrues. My overall gearing level is fairly modest - around 50% loan-to-value ration (LVR), which corresponds to a debt:equity ratio of 1:1. As the interest paid on the margin loan is more than the dividends received, I get a net income tax deduction from my stock portfolio. Eventually capital gains tax will be paid on realised gains when stocks are sold, but, provided they've been held for more than 12 months before being sold, the capital gains tax rate is effectively half my marginal income tax rate (the actual calculation is to apply my marginal tax rate to 50% of capital gains).

Enough Wealth

I saw an ad for a financial planning course and decided to visit ps146.com.au to see what was available. The Diploma course takes 8 days to complete (not quite the years of study I had to do for my Graduate Diplomas in IT and chemistry, but hey, it's probably a stretch for most insurance and investment salespeople to stay awake for 8 days of coursework!) and costs $4,360, or can be done by distance education over 4 months, for a reduced fee of $2,360.

Under the Australian Financial Services Reform Act 2001, all individuals who provide incidental personal or general financial product advice to retail customers must meet the minimum training standards as outlined in ASIC Policy Statement 146. (Hence the catchy website domain name ps146). I'm not planning on becoming a professional financial planner or investment advisor (I'm already doing a Graduate Diploma of Education in case I want to become a high school science teacher as a form of early retirement), but the subject matter looks quite interesting, and I like collecting bits of "continuing education" paper to stick on my home office wall So I decided to enrol in the course by distance education. I'll let you know if I learn anything interesting in the next four months. The subjects in the course are:

Subject Topics

Financial Planning (DFS 1) Generic Knowledge (GK)
Financial Planning Skills (FPS)

Insurance (DFS 2) Insurance (term, TPD, trauma & income protection insurance)
General insurance
Business overheads insurance
Consumer credit insurance
Travel insurance
Health Insurance

Superannuation (DFS 3) Personal superannuation
Retirement income stream products, pensions, roll-overs and annuities
Property ownership structures
Business superannuation

Investment (DFS 4) Managed investments (listed property trusts, primary production)
Securities (shares)
Foreign exchange
Derivatives
Fixed-interest products

Enough Wealth

The following

ad caught my eye - "Bid to Buy an Apartment for less than 5% of it's value!". It turns out that this is a sort of a lottery (although it appears that it probably is classified as a property auction, as there doesn't appear to be a lottery permit number on the site) with the entry (bid) fee costing $5 and the prize value being a Queensland apartment "valued" at $350,000. You have to pay $5 for each "bid" you enter in a reverse auction for the property, with a maximum of 20 bids allowed per bidder each week. The winning bid will be the lowest bid (below $17,000) that is unique at the time the auction closes - either a set date (although the site doesn't display that anywhere I could find) or when the required number of bids has been received (also that's also not listed anywhere that I could see).

In lotteries the total ticket sales generally add up to around twice the total prize pool value, so I'd guess the required value of bid fees is around $750,000. This would mean 150,000 bids. As bid amounts include dollars and cents, this means that a maximum bid of $1,500.00 would allow each bid to be unique, in which case the person who bid $0.01 would win the prize. In reality most people will be trying to bid as low as possible, so low bids are unlikely to be unique when the auction closes. High bids have more chance of being unique, but are unlikely to win.

Aside from the question of what the actual value of the prize may be, it's interesting to think of what the "best" strategy would be to employ in this contest. When you place you first bid you are emailed if it is
a) not unique
b) unique, but not the lowest unique bid
c) currently the lowest unique bid

In case a) you've obviously not won, but a lot of contestants would then proceed to place a higher bid (the email will tell you if the current winning unique bid is higher or lower than your bid). This will reduce the number of bids placed at low prices once the current "winning" bid has passed that price point.

In case b) you have to wait and see if all the lower, unique bids become "not unique" by the closing time of the auction.

In case c) you have to wait and see if anyone else bids this same amount before the auction closes.

The promoter states that if there are no unique bids when the auction closes the lowest price with two bids will be used to determine the winner - the person who placed the first bid at that price. However, with a price limit of $17,000 and $5 fee per 1c bid, this would mean that $8.5 worth of bid fees had been paid for a $350,000 prize! The promoter must be dreaming that this ends up being the case, but I doubt that that many entries will occur. In which case you'd get the best information and have the best chance of winning if you placed your bids close to the end of the auction. If I was going to enter this contest I'd contact the promoter to find out what the "stated date" for the auction to end actually is.

Assuming that the value of all bid fees ends up being around twice the prize value (like most lotteries), we can deduce that a bid of around $1,500.00 has a good chance of being unique. SO one strategy would be to enter an odd bid value around this number, say $1,384.73, and if you get notified that this is unique but no the winning bid you could enter a second bid for half this amount - say, $692.36. Assuming that all your bids came back as unique (but not the current "winning" bid) you would repeat this process until you bit a price that was not unique. If the current "winning" bid was less that this, you could then use of the remainder of the 20 bids you're allowed to place each week in small steps below this price, hoping to hit a unique value that had a good chance of winning the auction.

An alternate strategy would be to make a first bid at a much lower price point, say $236.57. The email notification would then tell you if the current winning bid is higher or lower than this price. If you made this initial bid too low there is a high probability that the bid won't be unique.

Although this contest is a bit more interesting than your run of the mill lottery, I don't think I'll enter this first auction. (I don't gamble much anyhow - and recently losing $3,000 on forex day trading has used up all my "play" money for the time being!). On the one hand no-one will know much about how many entries this auction will eventually attract, so you could be lucky and the contest doesn't attract many entries, boosting your chance of winning. On the other hand, in future auctions you could estimate from the previous contests winning bids what amount the winning bid is likely to be (say, $300-$400 or whatever), and roughly how many entries there were. If the number of contestants in future auctions doesn't increase, this extra info would help you target your bids at the prices most likely to win.

I may check back in a couple of months to see what the winning bids were for the first couple of auctions - assuming this contest is a success and the promoter stays in business.

ps. I doubt that the emails sent out to bidders will be encrypted. So a hacker that knew how to intercept emails could monitor the autoresponder emails for bids that have been entered, and therefore track what the current "winning" bid is, and ignore bid values above this price that have already been entered. Combine this info with the date the auction ends and the hacker would be in a good position to enter 20 bids that have a very high chance of winning, just before the contest closes...

I don't know how to do this sort of email hacking, but it's another reason I probably won't enter this contest - I'd hate to find out that the eventual winner was some pimply computer nerd

Enough Wealth

Credit Card Lowdown has me listed as #28 on their list of

the 100 most influential personal finance bloggers. Cool The list seems a pretty good starting point, with most of the listed blogs being ones that I've enjoyed reading. I'll have to go through the entire list carefully to check out any ones that I haven't visted before.

Enough Wealth

One of the changes made in the change to "Simper Super" went relatively unnoticed until now. All the media attention was around Retirement account withdrawals being tax free for retirees over 60 under the new rules, and the last minute opportunity to contribute up to $1 million into super before the new contribution limits come into effect on 1 July. It's only now that people have started to realise that under the new rules you will be hit with a 46% contribution tax rather than the usual 15% tax on pre-tax contributions if you haven't given your TFN details to your super fund manager. You also won't be able to make any undeducted contributions into a super fund after 1 July if you haven't given them your TFN - which would mean you can't get the co-contribution.

The media seems to have bought the government line that this change is all to do with making it easier to find the owners of "lost" super accounts. I think it has a lot more to do with clamping down on tax avoidance - the fact is that there have been a lot more tax file numbers issued to individuals than really exist in Australia. In the early days it was possible to open bank accounts under false names (no 100 point worth of ID was required back in the early 80s), and it was also fairly easy for someone to get multiple TFNs when they were first introduced (often by using a copy of a birth certificate obtained for a deceased person). These extra TFNs (under false names) were used to avoid tax. I'm sure there are still quite a few people working multiple jobs and using a different TFN for each, thereby getting the benefit of multiple tax free thresholds and low marginal tax rates. Up to now each of these jobs would have paid compulsory SGL amounts into a super account under those same false names. If the TFNs are provided for these super accounts the data matching used to find "lost" super accounts could help identify where one person appears to have multiple TFNs in use. If a TFN isn't provided for an account it could be a trigger for the ATO to check if the account appears to be legit. At the very least the lack of a TFN would mean any future contributions into the account would attract the top marginal tax rate.

I'm amazed that anyone in the media has swallowed the line that the requirement for TFNs will be used to reunite "lost" super accounts with their owner. After all, if the owner knows about the account and provides the TFN, it can't be "lost".

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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

Enough Wealth

Interest and Dividends are simple income items to calculate, with the only wrinkle being where a bank account is in joint names with DW I have to count half the interest earned on my tax return. This year I'll have earned more interest than usual, due to having a sizeable amount of 0% APR money invested from balance transfer offers. I usually don't leave too much cash sitting in interest bearing accounts as it is more tax effective to invest the money in high yield shares that pay fully franked dividends. With franking credits you have to declare the value of both the dividend received and the company tax paid, but you get a tax credit for the company tax that was paid. If your marginal income tax rate is less than the 30% company tax rate you will end up getting the surplus franking credit refunded.

For dividend income I keep all the dividend statements in one folder as they come in during the year, and also record the amounts into a spreadsheet. This makes it easy to spot if a dividend statement has gone missing, as there won't be the usual two dividends paid during the year. I've tended to less participation in dividend reinvestment schemes over the years - a combination of the extra paperwork required to keep track of the individual lots issued and the resultant complications in eventually calculating the capital gains when the stock is sold, and the phasing out of dividend reinvestment discounts by companies. Back in the 80s and 90s it wasn't unusual for DRPs to offer a discount of 5% or more of the average share price when issuing stocks under a DRP. These days most companies don't offer any price discount, so the only saving is the lack of any brokerage fee (but this is also not worth much now that online brokerage fees are so low). I still participate in a few DRPs where the number of shares issued is rounded up to a whole number. With small holdings the difference between getting 4.2 and 5 shares issued can significantly boost the dividend yield.

I also get all my dividends paid electronically into the one savings account, so it is easy to reconcile the dividend payments on my bank statement with my dividend spreadsheet. If any dividend statement has gone missing it will still appear on my bank statement, although I'll then have to do some research to check if the dividend was fully franked so I can compute the franked and unfranked components of the dividend payment and the corresponding franking credit.

If everything reconciles I can simply copy the spreadsheet totals of franked dividend, unfranked dividend, and franking credit into my eTax return. I also print a copy of the spreadsheet and store it and my dividend statements in the Tax Pack in case I eventually get a tax audit.

If I didn't manage my finances in a tax effective manner my salary income and my dividend income would combine to push me into the 42% tax bracket. As it is, using salary sacrifice and margin lending I end up with a total taxable income significantly less than my salary income alone would be. This means that my marginal tax rate is 30% (which applies to interest etc) and capital gains (held over 12 months) are taxed at only 15%.

Next - "Other" income in the Tax Pack Supplement

Enough Wealth

A lot of people are careful to hold onto their receipts in case they decide to return or exchange an item. But once you have your impulse shopping under control, you still need to retain your receipts in case an item breaks while under warranty and needs to be repaired or replaced. Yesterday our toaster gave up the ghost - despite being set for a light golden brown finish, the second slice of toast came out blackened. And when DW tried a third time, flames shot out of the toaster before it shorted out. Luckily I keep all the receipts for our electrical items with the user manuals in one drawer in the kitchen, so it was easy to take the loaster back to the store we bought it from last November. I got a credit note for the full purchase price and used this (plus an extra 75c) to buy a brand new toaster with a two year warranty. If all our future toasters decide to self-destruct while they're still covered by the warranty we may never have to pay for another toaster ever again.

There's nothing worse than having something break that you know is still covered by the warranty, but not being able to find the store receipt.

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The Australian Financial Year end on 30th June, so it's time to start working on this year's tax return and to get organised for next financial year. My tax affairs are reasonably simple - I have some investments and a "business" that is run as a sole trader, so it just forms part of my personal tax return. I've always done my own taxes, so I've learned the relevant tax return requirements for my investments over the years as I started investing in each new asset class and investment vehicle. In this series of posts I'll go through the various parts of my tax return and how they relate to my investment strategy.

Even though I use eTax to submit my tax return, I still work through the "Tax Pack" as it helps get my documentation organised and I can scribble notations about any unusual aspects of the item calculations. I usually organise my paperwork and receipts in the same groups I used last year, and it's easy to work through the current Tax Pack using last years as a guide to what information goes in which section.

The tax return starts out with personal details. The information for this section is generally the same as last year, unless I've moved house. There's always a question about whether this will be my last tax return - I expect the answer to this will always be "no".

The first question in the income section is about salary income and PAYG tax paid. By the time you get around to filling this in it's way too late to do anything about this. I previously reduced this a bit by arranging for salary sacrifice of $450 a fortnight - whereby my employer reduced my salary by the requested amount and makes a corresponding increase in the amount of employer superannuation contribution paid into my retirement account. The means that this part of my salary won't be taxed at my marginal tax rate, but will be taxed at the 15% superannuation pre-tax contribution rate. When making these arrangements for the first time it's a good idea to double check that you're employer won't reduce the compulsory 9% SGL amount. For next FY I've requested the salary sacrifice increase to $1600 per fortnight. The only reason I can afford to do this is that I withdrew $34,000 of non-preserved, undeducted contributions from my superannuation fund.

Next post I'll go through interest and dividend income items.

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My boss came over today and mentioned that he'd noticed something odd about my application for a day off next August. For the first time I'd used the category of "long service leave" rather than "annual leave". He asked if I'd received the notification from payroll about my long service leave* and I replied that it probably hadn't come yet because I'd joined the company in July.

A short while later he came back smiling and asked me to cancel the leave application and resubmit it as a day of "annual leave" instead. I'd miscalculated - I joined the company in 1998, not 1997, so the ten years required for long service leave isn't up until next year. D'Oh!

Well, it SEEMS like I've been in this job for ten years!

* Long Service Leave is an entitled to 8 1/3 weeks paid leave after 10 years continuous full-time service for the same employer.

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Having paid $490 for s set of professional photos of DS1 and DS2, we're planning on giving one of them to my mum for her birthday next week. I just need to find a frame the right size. I don't want to pay for framing as that will be more expensive that the photos cost. I thought I had struck it lucky this afternoon when Target had a 40% off sale for all "discontinued photo frames"...

There were labels advertising this sale all over the shelves where the photo frames were displayed, and no price stickers showing a reduced price, so I thought all the frames were on sale. After picking out three that were very nice and just the right size, I took them to the checkout. When they were scanned the original price came up, so I queried why the sale discount hadn't been applied. It turned out that only a few photo frames (with a price reduction sticker on them) are on sale. Having expected the discount, the effect of them not being on sale was as if the price has suddenly gone up 66%! So I didn't buy any photo frames at Target.

Looks like I'll be looking for photo frames this weekend.

Enough Wealth

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.

Enough Wealth

After a couple of months of exceptional gains in the reported average sales price for the suburbs our houses are in, this months figures show a drop back to the long-term trend (as I'd expected). This won't be reflected in my net worth figure until the end of July, but will knock about $30K off my net worth figure at that time.

It's been twelve months since our last annual review of the amount of rent being charged for our rental property. But the "new" tenants have only been in the house since last December so I think I'll wait until the end of the year before increasing the rent. We had raised the rent from $400 per week to $410 late last year, but this encouraged the previous tenants to move to a nearby house that was available for a similar amount (but also had a pool). As we had trouble quickly finding a new tenant just before Christmas, we decided to advertise the property at the previous $400 rate in order to find a tenant as soon as possible. This means that come December we won't have raised the rent for two years, and during this period rents for houses in this area have increased by over 10%. On the one hand if you don't raise the rent for a long while it's very hard to increase the rent back up to the market rate if your tenants stay on. On the other hand if you increase the rent every year and tenants are encouraged to move out, you can easily lose more rent from the vacancy rate than you get from the rent increase. Rents in Sydney are fairly low as a percentage of the property value, although with vacancy rates very low at the moment, rents have started to rise quite rapidly.

An interesting result to my first reader poll. The results show a distinctly bi-modal distribution with people exhibiting a preference either for "early retirement" ie. early 40's or else a "conventional" retirement age of around 58-65.



I think that the results show that many people will be unable to retire as soon as they'd like, as it seems unlikely that 30%+ of those polled would have sufficient retirement funds accumulated by age 46.

I found it interesting that not many people aspire to retiring in their late 40's/early 50's. Either most people are targetting their retirement savings plans to achieve a required amount by the time they reach 60-65, or else they are happy to work until 60-65 even if they expect to have accumulated the minimum needed to retire before they hit 60.

It also shows the importance of having disability and/or loss of income insurance in place, as people who are "on track" to retire comfortably at 60-65 will be in dire straits if they are forced to cease work in their 50's due to ill-health or accident.

Mighty Bargain Hunter recently posted about paying off Mortgage debt sooner rather than later. The point being that a mortgage is like any other debt and in the early days of a loan the interest cost eats up a huge amount of each repayment, so making some extra payments can have a huge impact in getting the loan paid off sooner.

However, while it is true that most people want to pay off their home loan as soon as possible, or at least before they retire (so they don't have to fund loan repayments out of their retirement income), it's not true of all mortgages. In particular many people will borrow to invest in a rental property, and, at least in Australia, most of the long term benefit of this type of investment is expected to come from eventual capital gains, rather than the rental income. For example, rent yield is taxable income, but at around 3%-4% of the value of the property, it will be less than the tax deduction provided by the interest on the property loan (say 8%). This means that you will be losing money on the investment property on a cash flow basis, at around 4% of the property value each year (this is known as "negative gearing"). But this interest is tax deductible, so 30%, 40% or more of this amount is effectively being paid from money you'd otherwise lose to income taxes anyhow. The payoff comes (hopefully) when the property is eventually sold for a capital gain. As the Capital Gains Tax rate for assets held over 12 months is half the normal marginal income tax rate the total return on the investment property (rent plus capital gains) can be slightly less than the interest cost and you will still end up ahead due to the tax savings. Many property investors therefore choose to use "interest only" loans for the purchase of investment properties, and would choose to use any spare cash flow to pay interest on an additional investment property rather than pay off principal on one of their investment properties. Not to say that this is the best option for all investors, or even most real estate investors, but it just goes to show that paying off the morgage as fast as possible doesn't apply in all situations either.

Enough Wealth

It's been very windy and rainy in Sydney for the past couple of weeks - good for breaking the drought that had reduced the dam level to below 40%, but causing some localised flooding and power outages for around 30,000 houses last week. Today I had to visit a local shopping mall to return some library books that were due. It seems that everyone wanted to go shopping today - the car park was full and it took 15 minutes to find a parking space. When I was leaving a short while later the traffic had gotten even worse. It took 52 minutes to get from the top level of the car park down to the exit! While I was at the library I had to argue about some fines that computer system said were due on the books I returned. Even though we had borrowed them three weeks ago and they were due back today, the computer system had the wrong borrowing dates for them, with one of the books allegedly borrowed back in March! We'd checked that we had no outstanding books or fines when we borrowed these books three weeks ago, so I was certain that they weren't overdue. The librarian agreed to "waive" them $11.20 in fines, but the fine will be recorded as "waived" on their system. In future I'll keep the docket that get printed when we borrow books so I can prove when the books were borrowed.

Enough Wealth

Here's an

example of how easy it can be to be scammed out of a large amount of money unless you're very, very careful. A Queensland lost over $1.3 million in legal fees, administrative charges and local taxes to forward a friends inheritance to Australia. They seem to have been reasonably careful checking out the bona fides of the scammers, flying three times from Australia to Europe where they had meetings with a range of people posing as government officials and providing authentic-looking forged documents. I'm just amazed that when large sums of money are involved people still try to handle things themselves. If I was in this situation the first thing I'd do was randomly select legal professional out of the phone book and get them to check things out thoroughly.

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AMP has released their new Superannuation Modelling tool, and I must say that it looks quite cool. You just enter your current age and amount of your retirement savings, your salary (to calculate the employers 9% SGL contribution), and any extra contributions (via salary sacrifice or undeducted contributions). You then pick your preferred asset mix and it display a dynamic graphic of your projected situation at age 60 for three scenarios - poor, average and strong investment performance. You can then play around with the slide bars to change your retirement age, contributions or asset mix to see what the effect it has on the projected outcomes. The only odd thing was the projected outcomes for a poor market, where the best results were obtained for the 100% conservative and 100% growth options - the various other mixes of defensive and growth assets all produced lower projected outcomes in this situation. This seems to conflict with the theory that you get lower risk and better returns from a diversified mix of non-covariant asset classes compared to investing 100% in any particular asset class.

Enough Wealth

Just as well I don't need to use credit to buy anything, Citibank just sent me a letter advising that the APR on Redicredit accounts is being raised from 11.99% to 16.5% I'm sure it was only a few months ago that they lowered the rate from around 13% in order to tempt their customers into using Redicredit to make purchases that they might otherwise put on a credit card or use a personal loan to finance. Although there are no annual fees or cheque book charges for using the Redicredit account, the higher interest rate means that I'll only keep this account open for use in an emergency.

Enough Wealth

An article in today's

SMH shows that the expected boom in superannuation contributions is occuring. Under the rules announced for the introduction of the "Simpler Superannuation" reforms to the Australian retirement savings tax laws, there is a one-off window of opportunuity to contribute up to $1m into your superannuation account before 30 June 2007. This is to "compensate" for the removal of age-based contribution limits with a flat limit of $50K pa of pre-tax (concessional, aka undeducted) contributions and $150K pa of after tax contributions. The new maximum contribution amounts will be indexed to increase in $5K jumps to keep pace with inflation.

This got me thinking about what the maximum amount that can be accumulated during your working life be under the new "Simpler Super" rules. Unlike the model of a minimum wage worker I posted a couple of days ago, this model has to make a few "bold" assumptions:

* the maximum contributions are made each year from age 18 to 65 ie. $50K pa pre-tax contribution via the SGL and salary sacrifice, and $150K pa of undeducted contributions. Although the $50K pre-tax and $150K undeducted contribution limits could easily be reached by a middle-aged, upper-management employee this is unrealistic for the under-30s worker. So this contribution rate would require some outside source of income. For example rich kids with an inheritance or a trust fund. I'm not fussed that very few people would possibly meet this requirement, we're just looking at what the extreme case could be under the new Superannuation rules.

* undeducted contributions aren't taxed on entry into a Superannuation account and pre-tax contributions are taxed at the concessional 15% rate

* the superannuation account is invested in a high-growth asset mix, achieving a real (inflation adjusted) net return (after fees and taxes) of 5% pa average for the 47 year investment period (up to age 65)

So, how much would this theoretical "rich kid" accumulate in their Superannuation account by age 65? Just over $37 million in today's dollars! And this amount can be withdrawn tax-free as a lump sum or a pension after age 60 (when "retired"). And this amount is per person, so a rich couple could accumulate a total of $74 million in this tax-sheltered environment.

As there is no gift tax in Australia, I imagine many rich households will be gifting $150K pa to each of their adult kids each year to put into their SMSF. The main downside of implementing such a strategy would be the legislative risk involved with locking this investment away until age 65. There could easily be further changes to the tax treatment of superannuation in the future.

Enough Wealth

After reaching a high of over 20% annulualised return on investment (XIRR) my "Little Book" portfolio of US stocks suddenly plunged to have an XIRR of around just 7% last Friday. Although the stock market had been in decline for a few days, the magnitude of this plunge seemed too large compared to the wider market and NASDAQ index, so I looked at each stock in my portfolio this morning. It turns out that one of my sotcks,

EPIQ, had done a 3:2 stock split last week, which my google spreadsheet doesn't take into account. I'll have to have a look at my formulae and work out how best to adjust for stock splits without causing problems. I may have to create an new column to hold the original number of stocks purchased as well as the current holding. Anyhow, in the meantime just take the performance figures quoted in the side bar with a grain of salt

The other concern was why the price of my newest purchase, AVCI, had suddenly dropped the day after I bought it ("just my luck" I thought) - it turns out that there was a special $2.00 dividend, and the stock went ex-dividend the day after I'd bought my holding! This will be a pain as I'll have to pay income tax on this unexpectedly large dividend, but it's much better than a loss.

Enough Wealth

At the risk of losing some readers, I'd like to post my views on the dangers of succumbing to "magical thinking" when analysing the performance of your investment strategy, or when deciding on making a particular investments.

In my view investing should be a rational, logical process in which all available (at a reasonable cost in money and time) data is analysed. This data includes historical investment/asset class performance (return and variability), known constraints (tax laws, how credit ratings and borrowing limits are calculated and used, details of investment fees etc), and well-tested investment hypotheses (such as benefits of diversification, effects of asset allocation on return and risk, efficient frontier, etc.). There's enough uncertainty introduced into the investment decision making process via dodgy annual reports, truly random events, and investor herd psychology without making your own thought processes more 'messy' than need be.

It is also beneficial to bring a historical context to your analysis by reading up on previous booms and busts (the "madness of crowds"), scams and schemes (eg. Mr. Ponzi, Bros. Hunt) and so on, so you can avoid making mistakes that so many others have made before you.

What isn't useful is to indulge in what is known as "magical thinking" - that just by really, really wanting something to be so, it will become so. This covers a wide range of common practices, some obvious and some not so obvious. To go through some that I think are likely to hurt you investment performance:

* Prayer. Although it does no harm for a devote person to pray for financial success in general terms, praying for divine intervention when your forex trade is rapidly heading south seems to me to be a recipe for disaster. Just as it seems silly when players on both sides of a football match pray to win their match (although praying not to get hurt during the match seems OK). Better to try to be objective and know when to cut your losses. This isn't to say that there's no place for faith in investing - your beliefs may place valid constraints on your investment choices eg. not investing in unethical businesses, how you choose to distribute your wealth to charity etc.

* Positive thinking. A positive attitude and an acceptance of some risk will probably help you grow your investments in the long term. But thinking that positive thoughts alone can "make" good things happen won't. I'd put the "Law of Attraction" in the same category as talking to your houseplants to make them grow. It might make you feel better, but is unlikely to improve you net worth. (I'm tempted to say it's a total waste of time, but, like many beliefs, it's strength lies in the lack of any testable hypothesis).

* Looking for the secret to success. Many people will try a succession of different investment theories - going from charting (with a vast array of potential "indicators" to work through before admitting defeat), through to theories based on some measure derived from 'fundamental' analysis (the "Zulu" principle, "Dogs of the Dow", PEG, High Dividend Yield, High Growth, Small Cap, Large Cap, Emerging Markets, BRICs, whatever). While I'm sure many of these techniques work for some investors some of the time, it's very hard to tell if any of these successes are due to a real "insight" that will provide you with outperformance in coming years, or were just a random event. It will be a bit late to decide in 20 years time that the various methods you experimented with didn't work after all. And bear in mind that some techniques may be legitimate, but only if you have access to the correct data and the necessary computational tools and techniques. For an individual investor, the cost of getting the required data and time to do the required analysis or calculations may be disproportionate to the absolute gain that can be produced, given the amounts that are being invested. On the other hand, if the techniques and tools will be applied repeatedly to improve future results, it may be a reasonable investment in your investor education.

* Other irrational techniques. This would cover a whole range of common inputs into peoples decision making such as Astrology, Numerology, Feng Shui, urban myths. It's important to try to differentiate genuine underlying principles (bearing in mind that they may still be based on historical evidence and not apply in the future) from "rules of thumb" that are really just over generalisations. Sometimes its hard to tell the two apart.

Enough Wealth

After the recent announcement of a 5.3% rise in the NSW minimum wage to $531 a week a thought occurred to me - just how muxh would a person who worked for the minimum wage all their working life end up with in their retirement account? A few assumptions to start off with:
* the person is starting working full-time today at 18 yrs of age, and gets paid the adult minimum wage.
* the person never gets a pay rise or a promotion beyond the changes in the minimum wage
* the minimum wage from now on only rises in line with the CPI and not the average wage (this is very conservative, as the minimum wage generally rises at least as fast as the average wage in NSW)
* the person works fulltime until they retire at age 65
* the person manages to contribute $1000 pa ($2.74 a day) into their superannuation account from their take-home pay (in case this seems a big ask for someone on the minimum wage, bear in mind that you can earn an extra $100 a week just doing a paper round for 2 hours in the morning before work, 5 days a week).
* they get the 9% compulsory SGL contribution paid into their account by their employer each year. The current 15% contribution tax rate applies to this contribution.
* current rules apply, so they get the governments $1,500 co-contribution each year.
* their contribution and the co-contribution increase each year with the CPI
* their superannuation is invested in a high growth option that returns an average of 8% net over the 47 years they are working. Inflation averages 3% over this same period, so they get an average net real return of 5% pa
* There is no tax payable when they withdraw their superannuation balance when they retire at 65 (ie. the new Simpler Super rules still apply).

So, what amount of money (in today's dollars) would this person end up with when they reach 65?

$881,862 in today's dollars! ie. the equivalent of nearly 32 years wages.

If they withdrew this money as a tax-free pension at the rate of 5% of the balance each year (so if they kept the same investment mix during retirement the real value of the fund should be maintained indefinitely) they would receive a pension of $44,093 pa, or 160% of their pre-retirement wage (and tax free!)

Of course this scenario won't apply to most people starting work today - they can expect so time unemployed or working part-time. Some people starting work at 18 will die before reaching retirement age, or suffer permanent disability well before they reach 65. But the point is that the current superannuation system will "look after" the lowest paid workers very nicely, assuming they work full-time until 65 and also make their own $1000 pa contribution into their retirement fund rather than just rely on the employer's SGL contributions. (And assuming they don't select the "capital stable" or "conservative" investment options in the retirement account).

If the same person didn't put in the extra $2.74 per day that entitled them to the maximum $1500 government co-contribution they'd end up with "only" $407,099 at retirement, and at 5% withdrawal rate would receive a tax-free pension equivalent to 73.7% of the minimum wage (plus by entitled to receive the old age pension, assuming it is still available in 47 years time.

Enough Wealth

I've been posting about investment topics that appeal to me, and outlining my current strategies and tactics. But I realise that this may not be terribly relevant to someone just starting out. So, what would I do if I in my early 20s and was just starting out, knowing what I know now?

1. Draw up a budget and spend less than I earn, so I'm able to put a savings plan into effect. Save up and pay cash for car, holiday etc. than is within my means. Brown bag my lunch, have a 'free' mobile on a $10-$14 a month plan. Don't use SMS, WAP or other services that cost a fortune. Don't waste money on designer clothes or trendy footwear.

2. Have my salary paid directly into an online savings account that pays a high interest rate and allows me to make bill payments via BPay. I have my salary paid into a savings account with Qantas Credit Union which doesn't charge an account keeping fee, provides a free cheque book, provides free ATM access using any bank's ATM machine, provides free online payments via BPay and online transfers to other financial institutions. I can also make a certain number of deposits via Westpac branches for free, which is vital when I receive some income via cheque. The credit union also has a high interest rate online savings account that can be linked to the main savings account. I get all my dividends paid into this account electronically, which makes it easy to keep track of dividends for my annual tax return.

3. Make an undeducted (ie. out of my after tax income) contribution of $1000 pa into my superannuation account (this assumes I'm earning less than $28K so can get the maximum co-contribution of $1500. If I earned more than this, but less than the $58K cut-off, I'd contribute a smaller amount that entitles me to the maximum possible co-contribution. To work this out I use the calculator provided by the ATO

here.

4. Shop around for the best superannuation fund - one with low admin fees, no contribution fees, and suitable investment options. eg. An industry super fund or perhaps a Vanguard Super fund.

5. Invest my super in the high-growth options. With 40 or more years for the investments to grow I'd put 50% in domestic equities, 30% in global equities, and 10% each in real estate and bonds.

6. If investing in real estate I'd save 20% deposit to avoid having to pay mortgage insurance. I'd buy my own home before any investment property so I can qualify for a first owners grant and get stamp duty concessions. I'd check out the property cycle for my city to make sure I'm not buying at the top of a boom phase. A couple of years after prices have dipped in real terms and stabilised is a pretty good time. I'd get a price guide for the suburb I'm looking at (cost around $30) to know what similar properties have sold for in the past year. I'd always inspect a property several times before making an offer. I'd never believe a real estate agent that says he/she has other interested parties coming back later today to make an offer. In fact I'd always check everything that a real estate agent tells me. And I'd make sure I get a building inspection done before exchanging contracts.

7. If investing in stocks, I'd start out investing in index funds. If I wanted to invest in managed funds, I wouldn't pick last years best performers as they seldom stay top for many years in a row. I'd pick ones with low ongoing fees and invest via a discount broker that rebates 100% of the initial fee. If I wanted to invest directly in stocks I'd make sure I diversify by buying 10-12 stocks in different sectors. I'd know that I have to spend time reading and understanding the annual report for each company, comparing basic fundamental ratios to what is reasonable for the sector. I'd be wary of any "bargains" as there's often a reason the market has priced stocks at a discount or a premium. I'd ignore any broker "research", tips, investment newsletters, or investment magazines. But I'd read many investment books, investment magazines and the investment section of newspapers to get an understanding of investment principles and strategies. I'd bear in mind that you can't believe everything you read - be it investment advice in magazines, or the "hard facts" reported in annual reports.

8. I'd read up on asset allocation, the efficient frontier, the history of investing (eg. tulip mania, southsea bubble, UK railway boom, hunt brothers silver corner etc.), and historical average returns and variability of the various asset classes.

9. When my income moved into the higher marginal tax rates I'd look at salary sacrifice into superannuation of any money I wished to invest until retirement age. For shorter investment periods (or to have some money available in case of emergencies or changed life circumstances) I'd use a margin loan (with a modest LVR of less than 50%) to negatively gear a stock portfolio. Where the dividends are less than the tax deductible interest charged on the margin loan balance I'd reduce my taxable income (at the top marginal rate) and 'convert' it into tax-deferred capital gains, that are only taxed at half my marginal tax rate when gains are realised.

10. I'd continue to invest in my education and cross-skill into areas that are in high demand and well remunerated.

Enough Wealth

I don't know if was the fact that I lost almost $3,000 trading forex in the last month, or because stock market and real estate gains had boosted my net worth by around $90,000 in the past two months (at least on paper - the recent stock market downturn may change things a bit!), but in the past week I've suddenly decided to go out and spend significant amounts of money on some "nice to have" items that have been on my wish list for several years.

Item #1 - a new TV antenna/mast for $780:

I'd bought a digital TV USB adapter at Aldi for around $100 before I'd bought my new Dell PC. The new PC had enough 'grunt' for the Digital TV adapter to work (it hadn't worked on my old laptop), but our TV signal at home is rather poor (the analgue CRT TV has a lot of 'snow' and ghosting) so the Digital TV adapter could only lock in on signals for channels 7 and 28. The other free-to-air channels (2, 9 and 10) were not being picked up at all. So I arranged for a TV antenna specialist to drop by on Friday and quote for a new antenna, 14' mast and patch panels in our lounge-room and breakfast room. All up a new antenna installation will cost $780. Which is a bit more than I'd hoped, but not too bad if I amortise the cost over ten years (only $1.50 a week). The TV software running on the PC allows me to record HD digital TV shows, so we'll probably get a lot of use out of this setup.

Item #2: A $1,200 water bed mattress:

I had a water bed in my 20s and 30s and it was very comfortable, with no pressure points and constant temperature all year round. When I got married we needed a matress for the Queensize four-poster frame I'd bought (but never setup), and DW was adamant that we get a standard mattress. After 8 years it's now time to replace that matress and we've decided to go with a water bed matress this time. The main reason is that my eczema has been getting worse for the past few years, and a recent visit ($200!) to a specialist confirmed that a water bed would be a good way to minimise exposure to dust mites (which I'm highly allergic to). The tricky bit will be getting the water bed mattress to fit inside the four-poster bed frame. Although the wood slates can be removed so the water bed pedestal and base board will fit inside the frame, the frame is 155x200cm internally, and the water bed matress is 154x204 cm. I'm hoping that the baseboard can just have a few cm lopped off the end and the water matress will quish in to fit OK. We'll see how this works out when the water bed is delivered next weekend...

Hopefully that will be the end of "big ticket items" until I replace the pool fencing in the Spring.

Enough Wealth

Here's the latest round-up on how the various PF (Personal Finance) bloggers who post their Net Worth each month are progressing.

Late June (just before the new financial year starts) is when my company does it's annual salary budget. Unless you're getting a promotion, have done an exceptional job, or were recently employed and just coming off your probationary period the salary review tends to be a somewhat disappointing experience. The default rise is a "cost of living" adjustment, which is allegedly based on the previous 12 months CPI increase. Given that inflation for the past year has been around 3%, and the fact the the

NSW minimum wage was just increased by 5.3% (from $504 to $531 a week), this year's standard rise should be around 3%-4%. Last year I got the default rise (3.5%), and I expect about the same this year, as I'm in the same role and already had a large rise two years ago. Anyhow, although a big rise would be a nice surprise it wouldn't have a material impact on my net worth. After all, a 5% salary increase this year is equivalent to my net worth increasing by just 0.35% - even less after tax! However, it would increase the value of my accrued annual and long service leave (around 16 weeks altogether) and compounds with any future rises - ten years of 3% increases leaves you in a much poorer position than ten years of 4% rises. Ah well, I'll find out the good (or bad) news in a couple weeks time... It's a bit like waiting to open a Christmas present.

Enough Wealth

As the end Australian financial year draws to a close on 30th June, it's time to make arrangements to pre-pay up to 12 months interest on my margin loans. I owed $116K to Comsec, so I prepaid the next 12 months interest on $100K of the balance. I also took up the option to capitalise the prepaid interest. I had some other funds sitting in online savings accounts, so I used that money to repay the remaining $16K of variable rate margin loan. This will mean that I don't have to make monthly interest repayments on the Comsec account for the next 12 months.

I expect I'll soon receive the paperwork to prepay interest on my other margin loan account with Leveraged Equities. I currently have $150K prepaid with them, which I'll reduce to $140K as I have around $6K sitting within the cash management account in my LE due to recently selling my Qantas shares. I'll put that money towards the interest prepayment, so I'll only have to come up with another $6K for the interest prepayment. This will leave only a few thousand dollars of margin loan debt requiring monthly interest payments.

One benefit of making the interest prepayment is that you get a slightly lower interest rate than the monthly variable rate (but this is offset by the opportunity cost of the prepaid interest amount for an average of 6 months). But the main benefit is that you bring forward the tax deductible interest expense by 12 months, so you gain an extra tax deduction the first year you do this. However, each subsequent year you are simply using the prepayment of the next year's interest to substitute for the current year's interest (that was prepaid the previous tax year). At some time in the future you have to unwind the prepayment arrangements by having a year with no tax-deductible interest payment, or possibly a series of years with slowly decreasing interest deductions. I plan to schedule this to occur when I'm retired and over 60. At that time (under the new Simpler Super rules) I'll be living off tax exempt Superannuation pension income, so the tax I pay on any dividend income from my margin loan portfolio will be very low, so getting the tax deduction for interest payments will no longer matter.

Anyhow, interest prepayment on margin loans is just the "icing on the cake" - the main benefit of using margin loans is to get a bigger stock portfolio, but have tax deductible interest payments slightly larger than the dividend income from the portfolio. This basically means that you have no net taxable income from the stock portfolio, and instead only make capital gains on the portfolio. If the gains are on assets held more than 12 months before sale, the applicable tax rate is half your marginal tax rate.

Enough Wealth

Now that our Self-Managed Superannuation Fund (SMSF) has been setup and the initial $200 contribution was processed OK via the ANZ V2 bank account, I'm starting to plan what asset mix the SMSF should contain, and what specific investments to make when our retirement savings are transferred into the SMSF next financial year. One complication of using a SMSF is that it will pool the retirement savings of DW and me, although the balances are reported indivdually based on each members contributions.

We currently have separate accounts with BT Employer Superannuation, and have slightly difference asset allocations in our accounts. Luckily our personal asset allocations are close enough to be able to get by with one asset mix that will suit us both in the SMSF:
Au Shrs Int Shrs Fixed Int Property
Overall 48.82% 39.33% 2.19% 9.67%
Me 48.11% 40.46% 0.59% 10.83%
DW 52.64% 33.18% 10.81% 3.37%
SMSF Plan 50.00% 40.00% 0.00% 10.00%
Another consideration with the SMSF will be ensuring that the investments are easy to monitor and can automatically provide the required transactional details to the SMSF administrator. eSuperFund (the administrator of our SMSF) can access transactional data for any investments done via the e*Trade brokerage account that was setup for out fund. Therefore I plan on buying any individual stocks using e*Trade and to also make mutual fund investments via e*Trade. Fortunately e*Trade rebates 100% of fund application fees (typically around 4%), so there's no issue with investing in mutual funds via e*Trade.

As the whole point of shifting our superannuation from BT to a SMSF was to save on fees we'll probably invest mostly via the CDF Australian Index Fund (which has a MER below 1%) and Vanguard Index Funds - Australian Shares Index , Global Shares Index, Property Securities Index. However, Vanguard charges around 0.90% MER on the first $50K invested in a fund, 0.60% on the next $50K, and 0.35% on any amount over $100K in that fund. Putting all our SMSF investment in just the Vanguard LifeStrategy HighGrowth fund would reduce the overall MER from around 1% to around 0.50% initially, and it would trend towards 0.35% as our SMSF value increased over time.
Fortunately the Vanguard LifeStrategy HighGrowth fund has an asset allocation close enough to our desired mix:
Au Shrs Int Shrs Fixed Int Property
HighGrowth 48.00% 32.00% 10.00% 10.00%
A Projection of our SMSF Starting Balance, Contributions and ROI shows roughly how much the fees will be over time:
Assumes
10% pa
'000 '000 '000 '000 Fees as Fees as
FinYear Start Add Earn End % of SMSF % of ROI
2007/2008 $360 $54 $36 $450 0.57% 7.15%
2008/2009 $450 $54 $45 $549 0.53% 6.49%
2009/2010 $549 $54 $54 $658 0.50% 6.02%
2010/2011 $658 $54 $65 $777 0.48% 5.66%
2011/2012 $777 $54 $77 $909 0.46% 5.38%
2012/2013 $909 $54 $91 $1,054 0.44% 5.16%
2013/2014 $1,054 $54 $105 $1,214 0.43% 4.98%
2014/2015 $1,213 $54 $121 $1,389 0.42% 4.83%
2015/2016 $1,389 $54 $139 $1,582 0.41% 4.71%
2016/2017 $1,582 $54 $158 $1,794 0.41% 4.60%
2017/2018 $1,794 $54 $179 $2,027 0.40% 4.51%
2018/2019 $2,027 $54 $203 $2,284 0.39% 4.44%
2019/2020 $2,284 $54 $228 $2,567 0.39% 4.37%
2020/2021 $2,567 $54 $256 $2,877 0.38% 4.31%
2021/2022 $2,878 $54 $288 $3,219 0.38% 4.26%
2022/2023 $3,219 $54 $322 $3,595 0.38% 4.22%
2023/2024 $3,595 $54 $359 $4,009 0.37% 4.18%
2024/2025 $4,009 $54 $401 $4,463 0.37% 4.15%
2025/2026 $4,463 $54 $446 $4,964 0.37% 4.12%
It's interesting to see how large a chunk of the annual investment earnings are being consumed by fees, even in this low fee arrangement.

Enough Wealth