Borrowing to Invest – Why You Should Be Reducing Your Debts Now

By Jason Fittler

I was surprised to learn how much gearing or borrowing was in the market prior to the GFC, in a Bull market you expect that investors will fall to the allure of quick money to be made through gearing. What is more surprising is the number of investors still actively undertaking a gearing strategy.

We are now in a period of flat growth in the share market and in the property market.

As such borrowing will simply reduce the return on your investment.

Paying down debt should be number one priority for any serious investor in this market. Let take a look at some of the issues;

1. Negative Gearing – this is where you make a loss from the investment and then use this to reduce your tax bill. It is called negative for a reason; it simply does not make sense. You lose money to save tax, paying tax means you’re making money. DO not be afraid of paying tax. In the current economy with high interest rates this loss will be larger but there is no capital gain to offset it. If paying less tax is a prime motivation of choosing an investment then the only person making money is your realtor.

2. Gearing should only be used in periods of high capital growth (Bull markets), in Bear or Flat markets which we are in now gearing compounds the losses you will make year to year. Bear markets can last 10 years; as such you should look to reduce your gearing at the start of the Bear market.

3. Fees – your adviser will make fees on the value of your investments and on your loan. As such selling part of your investments to pay down the gearing level will also reduce the fees you pay.

4. Interest Rates – for margin lending the current interest rate is 9.5%, the average income for a diversified portfolio is around 6.5% per annum. As such you would get a better return on your money by paying down your loan. Remember we are not expecting any capital growth.

At present I expect that we will see little growth in the Australian Share market for at least the next 3-5 years and the housing market for the next 8-10 years.

As such to improve your overall return look to pay down your loans.

For more information please call me on (07) 4771 4577.

Compounding

By Jason Fittler

To make money you need to understand the power of compounding, let's take two examples.

Example 1

Invest $12,000 once a year at a rate of 8% per annum for 10 years.

Result - $173,800

Example 2

Invest $1000 per month at a rate of 8% per annum for 10 years.

Result - $183,350

No extra work, but more money.

End of lesson.


ELB’s...The Secret to Wealth

How to have $1,000,000 at retirement.

By Jason Fittler

I often hear people tell me what they would do if they won the lotto or somehow received a large amount of money. They talk about how much easier life would be if they just had more money or got lucky. I call these people the “Have When’s”. These people all have two common problems. The objective is too large, they are unable to see how they would be able to obtain great wealth and they are not prepared to do what is necessary to achieve their goal.

“There is no victory without sacrifice”

Like everyone one else, my goals seem insurmountable, until I discovered ELB’s. Extraordinary Little Bits, ELB’s break down a large task into small manageable bits.

Let’s say you would like to have $1,000,000 in retirement, you are currently 40 years old and have around $100,000 in your super fund and a mortgage of $250,000. How can you be debt free and have a $1,000,000 to retire on?

The magic of ELB’s

To pay out your home loan over 20 years at an interest rate of 7% you will need to pay $24,000 per annum off the loan. To save $900,000 inside of your super earning 8% you need to save $23,000 per annum. In short you need to save $47,000 per annum. In Queensland the average annual salary is $61,500 after $12,500 goes to the tax man you will be left with $49,000. The task still looks insurmountable?

Let’s break it down; you have a couple of decisions to make. No one said it would be easy.

1.    Get a higher paying job.
2.    Both husband and wife work.
3.    Back grade your house.

For now I will go with example two, both husband and wife are working.

Step one salary sacrifice into super, as detailed above you will need $23,000 going into super for the year or $11,500 each. On $61,500 salary your employer will have to pay $5500 so both husband and wife, each need to salary sacrifice $6000. This will reduce your take home pay to $45,000 per annum. Or a household take home income of $90,000 per annum. Step one is complete, stick to the above plan and you will have your $1,000,000 in retirement. Keep in mind that $1,000,000 will provide you a super pension of approx $90,000 for 25 years.

Step two, pay out the house. As detailed above you have a $90,000 take home income. To pay the loan out you need to put 26% of this towards your home loan. Leaving you $66,000 per annum to live off, anyone who thinks that this would be a problem needs to trim some fat. As such step two is done and the above objective has been achieved.

ELB's breaks down a big problem into small manageable parts. By focusing on these smaller goals we can achieve our dreams.

The catch is you will need to make some hard decisions, this is where most fail. Will you?

Let’s take the ELB’s one step further with the above example. Paying out a $250,000 loan over 20 years at 7% will cost you $215,179 in interest. By increasing your payments to 30% of household take home pay or $30,000 per annum you will pay the house off in 12 years and save $100,000 in interest. If you then continue to pay the $30,000 per annum into savings at 8% you would have an extra $300,000 in retirement. Again ELB’s at work.

If you employ ELB’s into your life there is one golden rule. Never go to bed without taking at least one small step towards the end goal for that day.

Good luck.

Like help with your ELB's? Give us a call (07) 4771 4577.

How Much Wealth You Accumulate Depends Largely On How Much You Spend

Spending Patterns

By Jason Fittler

Why is it that we spend more money on our loved ones at Christmas? Why not buy our loved ones presents whenever the mood takes us? Simply put – conditioning.  We are told each year that we should buy people presents on their birthdays and Christmas, eggs at Easter, flowers on valentines day and gifts on Mothers and Fathers day.

Do not get me wrong, I am not saying we should not buy presents for family and friends but merely pointing out how we are conditioned to spend. Some people find comfort in buying new things others relieve guilt from not spending enough quality time with their family by purchasing them presents. Whatever the reason, all of us have a spending pattern. What is important is to identify this pattern and control how we spend our money.

Accumulating wealth depends largely on your spending patterns, those who spend more each year than they earn will quickly go broke.

Since early 2000 this was the case for most Australians and Americans, this is why lending climbed to new levels and personal households debt levels climbed. When an economy bottoms (much like we are about to experience) you see the effects of living outside your means. Those who adjust to the new economic constraints, will survive, those who do not, will go broke.

The important thing is to change your spending patterns and not dip into your savings to prop up your lifestyle. Downturns in the economy can last many years, and will consume all of your savings. Most importantly make sure you continue to invest, it is true that in economic downturns, investments are cheap. This is due to people selling assets to maintain lifestyle.

Things to look out for in an economic downturn.

1.    Higher interest rates – when the interest rate moves up increase your payments to the bank by the same proportion.
2.    Holidays – take a look around the world, during these times you can normally get cheap flights. Also look to go to countries with devalued exchange rates. (The USA comes to mind right now)
3.    Gifts – buy quality not quantity.
4.     Food – cut out the junk, you will save money and weight.
5.    Credit Cards – pay them out each month or cut them up. It is not a time to live on credit, the interest will kill you.
6.    Motor Vehicle – think repair instead of new. If you must buy, second hand will save you thousands.
7.    Media – do not spend because the media tell you the economy is recovering, they do not have a clue.
8.    Investing – continue investing, assets you buy now will be the ones that look after you in retirement.

Our wealth is directly in proportion to our spending or saving habits, never lose sight of this. Long term care and attention to your spending habits will provide you with a wealthy retirement.

My favorite saying is “Look after the pennies and the pounds will take care of themselves”

Have a good Christmas.

Timeless Principles: Seven Cures for a Lean Purse

By Matthew Smith

The gathering of wealth is but one facet of life that many individuals have sought to achieve from the time of antiquity and which still continues today. Individuals seek to accumulate wealth for a variety of reasons; one of which would be considered the most wise and noble is to provide a secure income for your family.

A problem that is prevalent in the vast majority of households in our modern society is that niggling 'want' for a more secure and comfortable lifestyle for our family. This 'want' boils down into a need for ever-lasting financial security.

Most individuals see the best way to solve this problem is by seeking increases in their salary or wages. This misconception, along with another, is that high income earners are definitely wealthy - these are both common fallacies among the vast majority. An increase in household income is fantastic but it will not ultimately solve your problem.

The doctor or lawyer may have a large home and drive a much fancier car than the school teacher or carpenter, but, the same problem arises with higher income earners as it does with lower income earners. The higher income earners generally become higher consumers…it is likely that the more you earn the more you will spend.

The vast majority of households don’t yet understand that the income they earn does not belong to them. It belongs to the grocer, petrol station and butcher and so forth.

To provide a solution to this problem is easier than you may think. To gain financial security you must learn and embrace the rules that govern money. These rules are timeless principles and are adapted from the novel 'The Richest Man in Babylon', which also gave cause for this piece to be written.

Timeless Principles: Seven Cures for a Lean Purse

Cure 1 - Pay yourself no less than 10% of your income
This is where the bulk of your wealth will be created from. Paying yourself no less than 10% of income and saving it for investment will reap untold rewards. By living on 90% of your current income you will not notice a difference in lifestyle. Never stop paying yourself no less than 10% of your income first.

Cure 2 - Control your expenses
By controlling your expenses you are able to identify your needs from wants and take charge of your outgoings.

Cure 3 - Make your investments work for you
Once your investment starts producing income let it multiply by re-investing the income and watch your investments compound over time.

Cure 4 - Consult wise men so you do not lose your savings
You do not seek out the advice of a taxi driver to complete your income tax return; you seek the knowledge and advice of an accountant. You are wise to seek the counsel of individuals who are knowledgeable in handling money.

Cure 5 - Own your own home
By owning your own home you have the cheapest form of housing available. Apart from insurance and taxes, it is far cheaper than renting a home.

Cure 6 - Ensure an income for your retirement and that of your family
You will not be able to work forever. You should focus on working and saving hard to provide a passive income for your retirement. The earlier you start the greater the compounding effect will be.

Cure 7 - Increase your ability to earn
By increasing your knowledge you will be better equipped to make wiser decisions in regards to your investments. Never pass on an opportunity to expand your knowledge. Educate your children on these rules from a young age so that the next generation may out perform the previous.

Those who are wealthy and are financially secure simply know and understand these rules that govern money, and more importantly…obey them.

Want to know more... please give me a call on (07) 4771 4577

A New Year and a New Plan

By Jason Fittler
 
An old saying which has always proven to be true is, “People never plan to fail they merely fail to plan.” With the New Year now upon us there are many of you who have made New Year resolutions, most will never follow through on these, as you most likely have failed to plan how you are going to achieve this result.

First things first, hang tough... determine your resolution, your plan. Then, tell as many people as you can your New Years financial resolution. The more people you tell the more committed you will become to achieving the resolution. Next; set about planning how you are going to achieve this goal and finally take action.

Improve your budgeting

Below I have attached a very simple budget spread sheet, this is not meant to be a complete all encompassing budget spread sheet. I have made it very simple for one main reason - to make sure you take the time to complete it.

Click here to download Simple Budget Spread Sheet

I find the biggest problem with people preparing a budget is that it gets all to hard, this one is designed to get you started on achieving you New Years resolution of better money management straight away. If you would like a more detailed analysis, then give us a call and we can organize this for you.

First the instructions

1.    Only put figures in the yellow sections.
2.    Get a copy of the following bills: Rates notice, insurance notice, Electricity, Telephone, Internet, Loan repayments, Pay TV, Rent, other regular bills.
3.    Get a copy of your most recent pay slip and details of any other income.
4.    In the yellow box under income put in your net pay details, if you get paid weekly only fill out the weekly section, if fortnightly only fill out the fortnightly section.
5.    In the Yellow box under expenses do as above for your expenses. Please note that if you have multiple expenses under the same heading such as loans, add all of the monthly repayments together and enter as one payment.
6.    By now you should see figures in the blue section on the Spread Sheet this is OK.
7.    Take your electricity bill, these normally are billed quarterly, look at the date on the bill and enter this in the yellow section of the spread sheet under electricity. As this is a quarterly bill you will need to put the same figure in four times to correspond to the quarters you pay these bills.
8.    Rates - do the same as for the electricity bill but this will be charged half yearly. Make sure you only have two entries under Rates.
9.    Insurance – this would normally be an annual payment take your last bill and put the amount in the month you paid it last year.
10.    Repairs – these are any one of repairs which you know you will have in the next 12 months, such as car service, replace a fence etc. If you have any of these place the expense in under repairs.

That’s it.  Now you should have a very basic cash flow statement, in the very bottom box it will show your net cash flow for the month, if positive it is a surplus if negative it means that you are spending more than you make.

What about entertainment and general living expenses? I have only covered fixed costs, these are expenses which you have to pay. The rest are a variable expense, which means that these are ones which you can reduce if you want to. Here is where you can improve your financial position, you do this by reducing your variable expenses or putting this money to better use. For example paying down loans, paying out credit cards or investing in growth assets.

If you have a surplus net cash flow each month but no extra cash at the end of the year then I would say you are wasting a lot of money each year, with a little care and planning you could put this money to better use.

This time next year you will be either wondering where the money has gone or be sitting down and reviewing your 2010 budget.

What’s your plan?

Until next week.

Click here to download Simple Budget Spread Sheet

 

Financial Strategy. Do You Have One?

By Jason Fittler

Strategy; everyone knows the meaning of the word but few people have a clear and concise strategy of how they will live their life and achieve their goals. When it comes to financial matters most people’s strategy is as follows:

“Make as much money as possible, buy the best lifestyle possible with the money you have. Retirement is too far off to worry about”.

Creating wealth is not about how much you make but in fact more about how much you spend and what you do with your surplus income. Everyone knows the story of the Hare and the Tortoise, but when asked what the moral of the story was most will say, “Slow and steady wins the race”. This could not be further from the truth, the Hare lost the race because he did not use his time efficiently, he had no strategy.

An effective strategy is what allows you to win and achieve your own personal goals. An effective strategy is one which needs to be reviewed constantly to make sure it is still effective when circumstances change.

When you are looking to Grow your Wealth, you need a strategy.  Without this you will be lost. So where do you start?  Below are a few ideas to get you going.

1. Budget, spend the time and work out a budget. This does not need to account for every dollar spent but should detail how much surplus money you would like to save each month. Remember a budget is about things you will not buy. For more details on budgeting go to archive articles on the website.

2. Decide what is the most effective use of the savings
, pay down debt, investments or put into super.

3. Look for professional help, you will need a coach or someone to help you set and maintain your goals. Look for an advisor whose income is directly related to your investments growth.

4. Review your strategy regularly
to make sure you are still on track or review when there is a change in your circumstances which will affect your surplus. I would recommend at least every 6 months.

5. Know your end goal
, write it down and place it somewhere you will see it every day.

Here is the key; there are two types of people who will read this email. The first group will read this and understand the advice but will not actually go and write down their budget or goals. I will guarantee that this group will be no better off next year then they are this year.

The second group will right now set a time to sit down review their budget and write down their strategy and goals. I will guarantee that these people will be better of financially in 12 months. Unfortunately only around 2% of the population falls into this category.

Which group do you fall in?

Give us a call... we can help. Ph (07) 4771 4577

Are You Wealthy? Take 5 Minutes to Find Out.

By Jason Fittler

Being wealthy means a lot of different things to a lot of different people. But you can in fact pin point the moment when you officially become wealthy.

You no longer need to work to maintain your lifestyle.

For the average Australian worker this would mean when your passive income is above $70,000 per annum. So let see if you are wealthy!

1. Add up your total assets; include family home, cars, boats, investment properties, share holdings, managed funds, cash, superannuation, value of business and anything else of significant value.
2. Subtract any debts being credit cards, overdrafts, home loan, investment home loan, margin loans and personal loans.
3. Subtract any assets which are not income producing being family home, cars, boats and any items which are for personal pleasure.
4. Multiply the total by 4%.

If your answer is over $70,000 congratulations you are in the wealthy category. If you are way over, you need to start thinking about generational wealth. More on this later.

If your answer is below, then there is still some more planning to be done. So get on to it now, if you need help call us. Phone 07 4771 4577

Insurance – How Much Should You Have

By Jason Fittler

So you don’t need insurance.  It’s a waste of money, or you can’t afford the premium. Do you have excuses why you have enough insurance or don’t need it? Yes. Then read on.

Insurance is a very important part of growing your wealth
. It saves you when things go wrong. Ever had a car accident?  Did you plan to have an accident. What would have happened if the car wasn’t insured? Glad you had the insurance?  Happy to renew the insurance the following year?

What if you’d been personally injured in the accident?  Your car would be repaired… Would you be? How would you make house payments, car payments, buy food pay for medical expenses?  I guess you could always sell the car once it was repaired.

Insurance is the safety rope which stops us from falling back into poverty and hard times. Could you imagine taking your kids out of their school because you couldn’t afford fees?

Try explaining to them that although you insured the car you didn’t insure their lifestyle.

Think it’s time to start looking at Life, Total and Permanent Disability (TPD), Trauma and Income Protection?  But how much do you need? Let take a look.

Income Protection – most policies will pay you 75% of your current income. You need at least a policy which covers you for 2 years and has a 30 day waiting period. Most super funds will do this.

Trauma – At least $100,000 worth and you should have your children covered as well, they can be covered on your policy.

Life and TPD insurance – To work out how much you should have, multiply your gross income by 16, add to this the amount of your home loan, personal loans and credit cards. This is the amount of Life and TPD insurance you should have. Looks high, give us a call and get a quote. Life and TPD is generally cheap for the cover you receive.

Before you do anything contact us first to make sure you understand the benefits and pit falls of the different type of insurances and to make sure you get the best value for money.

Interest Rates... Should You Have a Fixed or Variable Rate Loan?

We have seen a lot in the media over the past couple of weeks regards the affordability of homes Australia wide and more so here in Townsville. With house prices on the rise and interest rates steadily moving up it is important to make sure that you get the right loan for you. The banks have done their best to confuse us all, and shopping for a home loan is like shopping for a mobile phone.

When looking at a home loan, the biggest issue is the interest rate should you go fixed or variable. (do not forget to add in any extra on going fees when calculating the overall rate) It is a common mistake to think that the lower the interest rate you have, the less interest you'll pay. Time will determine how much interest you pay. Below are a couple of tips when choosing a home loan for you.

1. How quickly do you intend to pay off your home loan? The faster you pay it off the less you will pay in interest. If you intend to pay off you loan as quickly as possible always look at a variable rate. Why? Interest is calculated on the daily balance of your loan, if you are making extra payments and making these weekly of fortnightly you will pay less in interest even if you are on a higher rate.

Budgeting Tips - 6 Things to Spend LESS On

We have regular requests from clients about budgets. Can we help them do up a budget?  The money just runs out… They can not make ends meet.

The trick in preparing a budget is not what you decide to spend your money on but what you decide not to spend your money on. When you are preparing your household budget write down those things which you can live without and do not allocate funds to them. You will find out very quickly if you stop wasting money ends will meet.

Here are a few items which we could all spend less on.
1. Junk food – who knows you may see your toes again
2. Alcohol – we all need a little but know when to stop.
3. Petrol – try walking or riding a bike to the shops the environment will love you for it.
4. Lunches - Buying lunch every day? Take some time and make your own.
5. Trashy magazines – a wise man once said that everything you do either makes you smarter or dumber; I am yet to see a magazine which makes you smarter.
6. Interest - Pay out your credit card before you pay interest.

I am sure if you are honest with yourself you would be able to find a few more things which you really do not need.