This week, I received the dreaded email – ‘Sue, it’s your turn to write the adviser article.’ My mind was a total blank, until I read a story posted on Facebook, that made me think.

The story was about a man who had been on the brink of suicide, at age 65. He felt like a failure and indeed, had failed with many things in life. At retirement he had received a cheque from the government for $105.00 and he again felt that he was a failure. Something stopped him, and instead he wrote down what he had accomplished in his life. It made him realise that he still had more things that he wanted to achieve in life, things that he hadn’t done. He knew that there was something that he could do very well, and that was cooking. He borrowed against his retirement cheque to buy some chicken that he fried up and sold door to door. Do you know who it was? Yes, none other than Colonel Sanders of the 11 different herbs and spices recipe, the founder of what is now Kentucky Fried Chicken (KFC).

When he died, at age 88, he was a billionaire.

This story made me think about how much we hold ourselves back from achieving things, whether at work, financially, or life in general. We are masters at hiding the truth from ourselves. We will all have heard stories of people on their death beds, concerned about how much money they have. Let’s take a dose of cold hard reality here – we can’t help that person with their financial state at that point in their life, but we can help the family that they leave.

What intrigues me is why we don’t address these things in life while we can? Are we afraid to seek help from someone such as a financial adviser? Why would anyone be afraid of coming to see an adviser? We don’t judge people, but rather assess a situation and provide strategies to deal with it. Once it starts to fall in place, people can expect an immediate improvement in their overall financial situation, and probably their state of mind as well. I have come to the realisation that it isn’t so much that we are afraid of baring our financial situation to, possibly, a complete stranger, but that we are afraid to admit to ourselves that we haven’t done as well as we would have liked. So, we take the ‘do nothing’ option. Face your fears people! What are you waiting for? Come and see us – you don’t need to know what a P/E ratio is, or anything about the stock market, or even how much money you spend [although it does help to have some awareness]. We can work out the things that you don’t know and we can help you to understand some of the terminology associated with finance.  While I can’t turn you into an instant billionaire, I can certainly make improvements for you and your family.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.

It is a common dilemma for Australians all over the country. Do you use spare money to pay off your mortgage and reduce debt? Or do you invest it somewhere else in the hope of boosting returns and improving your overall net worth?

Making a decision based on numbers alone is relatively straightforward (I’ll show you this soon). However, it is not that simple. For all of us, there are other considerations that come into play, including our emotional response to money and security. Let’s take a look.

If there were a simple answer, it would be this.

It may be worth investing if the ‘after-tax return’ you get on your investment is greater than the interest rate on your mortgage.

Let’s say, for example, that the interest rate on your mortgage is 5 per cent, with your investment returns 7 per cent at after tax and other costs. Financially, you are 2 per cent ahead. You could reinvest this money or even use it to pay down your mortgage – helping you achieve both goals.

Of course, this approach depends on your personal income and the marginal tax rate you pay. In the table below, you can see how much investment return you need for this strategy to make sense. If, for example, you earn the average Australian full-time income of $81,530 (with a marginal tax rate of 32.5 per cent), you need 7.4 per cent pre-tax from investment to achieve an after-tax return of 5 per cent.

Can you see what this table shows us? The higher your income, the more you need to make on your investments in order for this strategy to work.

There are other things you need to consider such as the impact of variable interest rates and the actual return of the investment. But it does give you a general idea of where your money might be better off.

Some other reasons people choose to invest their money instead of paying off their mortgage include diversification and accessibility.

Some people worry about having all their money tied up in their home. What happens if prices fall dramatically? We can’t predict the property market but diversifying investments can offer some protection.

Another consideration is accessibility. You need a lot of money to buy a property. Investing in shares or managed funds, on the other hand, requires much smaller amounts. It’s also generally easier to get your money out when you need it.

Reasons you might pay off your mortgage instead of investing

· Peace of mind: The emotional aspect of investing is just as important as the numbers. If your number one goal is the security that comes from owning the roof over your head, then that’s what you should do.

· Pay less interest while getting a guaranteed return: Additional money you pay into your mortgage reduces the interest you’ll need to pay and the duration of the loan. Plus, it acts as a guaranteed return. If the interest rate is 5 per cent, you’re effectively getting a guaranteed 5 per cent return on any extra money you add to your mortgage.

· Build equity: The more you pay off your loan, the more equity you have in your home. Coupled with capital growth over the long term, you can borrow against this equity in your home to build a larger property portfolio.

At the end of the day, we all want to sleep easy at night. For some of us that means feeling comfortable with our financial decisions. If your focus is debt reduction, then go with paying down your mortgage. On the other hand, if your goal is long-term wealth creation and the numbers stack up, then look to invest your money at an appropriate level of risk.

Australia’s household debt to income ratio is currently at 190% which is among the highest in the world. This number is a far cry from the debt to income ratio from nearly 30 years ago which stood at around 56%. The rapid increase of household debts can be attributed to a rise in mortgage debt which has been brought on by Australian’s looking to purchase their own home or investment property. Other reasons as to why we have seen a sharp increase in the debt to income ratio is that over the last decade we have been given easier access to credit, built a reliance on credit cards and experienced lower mortgage interest rates.

Facts About Australia’s Debt to Income Crisis

The recent property market boom has resulted in many Australians borrowing higher amounts with wage growth not keeping up with rising housing and living costs.

• Lower interest rates have been a key factor in growing debt. When credit is offered at a lower rate, borrowers want more of it.
• Whilst some developed countries have seen a decrease of debt to income ratios since the Global Financial Crisis, Australia’s debt levels have increased to record levels.
• The Reserve Bank of Australia is carefully monitoring the levels of residential lending, and the risks associated with high household debt. Further cash rate cuts may be required as the outlook for household consumption has slowed.

Managing Your Debt

If you are having difficulties managing your debt, here’s a few tips to keep in mind:

• If you have multiple credit cards and other personal loans, you should consider consolidating your debts into one loan account. If you have equity in your home, you could consider refinancing the debts at a reduced interest rate.
• Create a budget and have the discipline to stick to it.
• Set up a savings account and try to contribute any surplus from your budget for upcoming expenses. This may assist you to avoid using a credit card or drawing down on other loans to cover expenses.
• Resist the urge to splurge on credit cards!

Please contact us today for a confidential, cost and obligation free discussion about your lending needs.  We would also be happy for you to refer your family or friends so we can assist them in creating a cost-effective home loan which suits their needs.

Any supporters of the Aussie Test Cricket team who watched the recent Headingly Test would have felt like they were on an emotional rollercoaster akin to the uncertainty, fluctuations and volatility that financial markets can deliver.

When the English captain J. E. Root fell to N. M. Lyon (aka the ‘Greatest of All Time’) on the 3^rd ball he bowled that day, The Ashes were all but retained, but alas it was not to be. To be fair, it was an outstanding game of cricket in anyone’s language…probably one the Aussies let slip through their fingers, but hats off to B. A. Stokes who played one of Test cricket’s all-time mighty innings under intense pressure to keep England ‘alive’.

What does Test cricket have to do with dividends?

Well, dividends can provide certainty of returns…unlike that damn Headingly Test.

Dividends have been, are, and always will be an important component of portfolio construction because:

• They provide a reliable source of returns from Australian companies year-in, year-out.
• The amounts paid are not impacted by the current level of the share market.
• The dividend yield can act as a ‘safety net’ in times of volatility.

A source of reliable returns

Over the long term, returns from equities come from capital growth and the dividends paid along the way.  Below is a comparison of the returns from those two sources over the last 20 & 40 years:

As can be seen from the table above, dividends have provided more than half of the returns over the last 20 years, and 40% of returns over 40 years.  When you include the benefits of franking credits to those who can receive a refund thereof, the importance of dividends is paramount.

The level of the share market has no impact

While capital returns are affected by share market movement, dividends are dependent on the underlying earnings of a company, not the fluctuation of the share price.  The amount of dividends paid and ratio of profits paid out as a dividend is decided solely by the company’s Board of Directors.

Since the dividend is a reflection of the company’s profitability and not the current share price, it is important to remember in periods of volatility and negative share price performance, dividends received from quality companies with the right fundamentals should not vary greatly from one period to the next.  The chart below demonstrates the deviation away from the ‘standard’ returns from both sources:

From the above we can clearly see the returns achieved from dividends hardly fluctuated over that 20 year period.  This is further highlighted in the chart below:

The returns from dividends, as evidenced by the orange bar, are not impacted by volatility and fluctuations of the share market.

The safety net effect

Short term share price movements over 6-12 months are generally a reflection of the mood of investors based on predictions of economic growth, interest rates or inflation…or what seems to be more common lately, a tweet from ‘The Donald’!

With the benefit of hindsight however, more often than not these events which have created the mood swings that led to large declines in share markets have turned out to be not as bad for markets as we thought at the time.  Take the war with Iraq as an example.  At the time, there were many predictions of ‘doom-and-gloom’ and an impending global recession which caused panic selling even by companies demonstrating the strongest of fundamentals.

Once panic subsides and some normalcy is restored after such an event, the companies with a reliable and predictable growing earnings and dividend stream experience the quickest rebound in their share price.  This is because rational long-term investors are attracted to quality companies at the right price.

Conclusion

Never underestimate the part dividends play in the performance of your investments.

Here’s hoping the last 2 Tests of the current Ashes series provide the Aussie Test team with a healthy dividend.  After Headingly, one suspects they’re up against it…

We’ve seen global markets correct as global growth wanes under pressure of protectionist political policies and an escalating trade war with China and the United States. The fear of a global recession pushed our Australian stock market lower.

Has this market volatility scared you?

Rewind a few weeks and the Standard and Poor’s (S&P) Australian Stock Exchange (ASX) 200 closed at a fresh record high surpassing the closing price reached on 1 November, 2007. Our asset allocation strategy provides our clients with the comfort of knowing that a vast majority of their investments are not exposed to the Australian stock market.

Firstly, we assess our clients’ risk tolerance and understanding of the risks associated with investing, then allocate a risk profile (such as Balanced) based on this assessment. Each risk profile divides our clients’ money up between defensive and growth asset classes to produce a diversified portfolio. Defensive investments include cash, term deposits and fixed interest investments (government and corporate bonds). Growth investments include Australian shares, international shares, property and infrastructure.

Effective asset allocation not only provides protection when markets correct but also offers opportunity to maximise returns. I often say to my clients that defensive investments can be compared to shock absorbers of a car as they smooth out the bumps in the road.

As a financial adviser I have yet to come across anyone who actually wants to move into aged care.

The prospect of moving out of the family home and leaving behind the comfort and familiarity of one’s home is truly daunting. It’s always a step closer to ‘the end’ as no one ever moves from aged care back to home. As a result, many people simply do not wish to discuss the subject…until they have to.

Many of the conversations I have had regarding the finances of an elder family member follow an ‘incident’, such as ‘Dad falling over in the bathroom’. It then becomes glaringly obvious that the individual simply cannot remain in the family home.

In such a scenario, planning how to fund the upfront and ongoing costs associated with moving into aged care is often ‘done on the run’, which is unfortunate because it’s a ‘financial labyrinth’.

Typically, people tend to only plan for upfront costs (which usually range anywhere between $300,000 to $1,000,000). However, there is a myriad of ongoing costs that can run into the tens of thousands of dollars per year as well as the ever-increasing costs associated with moving into aged care.

As you may be aware, a Royal Commission into Aged Care was commissioned in October last year and is currently hearing submissions. Some of these are truly heartbreaking. The Commission is due to hand down its recommendations early in 2020 and if the recent Hayne Commission into financial planning is any guide, regulation and compliance in the sector will increase, followed closely by expenses.

I’d encourage people to have the conversations about aged care and if necessary, speak to your Investment Collective adviser. We can help.

When should I seek a financial planner?

Who should see a financial planner?

• “I don’t have any money to invest so there is no point in my seeing a financial adviser.”
• “We manage our own finances so we don’t need to see a financial planner.”
• “We struggle to make ends meet so we haven’t got any spare income to do anything else so we won’t be seeing a financial adviser.”
• “I’m only in my 20s, 30s, I don’t need to see a financial adviser.”
• “It’s too late for me to see a financial adviser as I’m retiring in 6 months’ time.”

All of these thoughts are far from the truth.

When should I seek financial advice?

There is a general perception that financial planning is only for people who have money to invest. That if I don’t have any spare cash and I’m having difficulty in making ends meet, financial planning is not for me. Having a personally tailored financial plan will assist you in every facet of your financial lives regardless of your current financial situation.  In fact, your financial plan will help you achieve other personal goals simply because these goals are planned for.

Your financial adviser will fully assess your current financial situation. This means that the adviser will be obtaining information on your earnings, what it costs you to live, the value of all your assets including superannuation, and of course, what you owe.  The adviser will also assist you in identifying what you want to achieve, both now and into the future.  We consider your life risk requirements so that your family and wealth are protected in the case of death, serious injury or illness.

Once the data has been collected and analysed, the adviser will write your financial plan.  The plan will include a summary of the current situation and this in itself can be an eye-opener for the client because many of us do not take stock of our overall financial picture.  Taking into account your goals and objectives and the things that have been identified during the collection and analysis step, the adviser will make recommendations to improve your situation and to help you to meet the goals you have identified.

Sometimes the recommended strategies can be confronting, but always valuable.  For example, if cashflow is a problem for you, the plan will include budgeting advice and strategies.  If you have surplus funds for investment, the plan will include recommendations as to how those funds should be invested.  If you are nearing retirement, the plan will address streamlining and consolidating your financial affairs ahead of retirement and strategies to maximise potential Centrelink payments.

If your superannuation investment option does not match the risk profile identified during discussions, there will be recommendations to adjust the investment option. If you have debt, there will be advice as to how best to manage that debt and if a restructure is required, the plan will address that point.  If your life risk protection is inadequate, we will include recommendations to bring this protection to the correct level.

Your financial plan will also contain information on any ongoing costs you may incur if you accept the proposals, and there will be comparisons and projections between the current situation and the recommended strategies, including current and future costs.

To answer the question posed above as to when you should see a financial adviser – the answer is – as soon as possible!

For young people, a tailored financial plan will set them on a path to growing their wealth, perhaps via a savings plan.  For pre-retirees, it is essential that you consult with a planner to ensure that what you have worked a lifetime for will support you in the way you want during retirement.  Centrelink payments and health care cards are very important and this is a major part of the planning for those either in or nearing retirement.

If our recommendations are accepted and you proceed with the plan, we manage the implementation of the plan and if there is an ongoing component, this activates. Centrelink management is part of the ongoing work and it can be invaluable to retiree clients to have this onerous task managed.

Beginning the process of seeking financial advice is very simple.  It is a matter of contacting either our Rockhampton or Melbourne offices with a request to see an adviser.  Your meeting confirmation includes a list of things to bring with you to your meeting and from there the adviser will lead and guide you through the process.

What are you waiting for?

I’ve been a financial adviser for about twenty years now. I still get a ‘buzz’ out of making a positive difference in people’s lives by helping them achieve what’s important to them. The foundation blocks of my own understanding of financial planning were taught to me by my parents. They didn’t call it financial planning of course. It was just about how they conducted their own lives and the advice they would give to my siblings and I. Advice that was underscored by their own actions. They worked hard, they never spent more than they earned and they invested for the longer term in ‘real assets’ that they understood. Perhaps not all that ‘sexy’, but it worked for them. I assumed all parents were like mine, teaching their kids the basics of financial planning. Of course, many parents were like that. But not all. And if kids weren’t learning it from their parents, they certainly weren’t learning it at school.

Last year I had the opportunity to revisit my old secondary school, Mazenod College in Mulgrave, Melbourne. It had been decades since I was last there and the facilities the current students body enjoys are far and away better than in my day. Instead of a footy field that turned into a quagmire during winter, the boys make use of a ‘synthetic’ footy field. There’s state of the art cooking facilities to rival the MasterChef set to teach the boys how to cook. However, what doesn’t seem to have changed much is the curriculum. Financial planning 101 still doesn’t get taught.

I think this is a material shortcoming in the education we’re providing to our children. We teach them a trade or a professional, but we provide them with virtually no tools to help them manage their own money and achieve financial independence.

So, in the last few months I started doing my little bit to remedy this situation.  I’ve started seeking out opportunities to present my version of ‘Financial Planning 101’ to secondary school students. To date I’ve presented to students at Huntingtower School and St Michael’s Grammar, both in Melbourne. My version of ‘Financial Planning 101’ includes the financial process as we deliver it here at the Investment Collective; a consideration of what really drives residential property prices; basic investment principles, as well as ‘4 easy steps to becoming a millionaire’. This last topic garnered particular attention.

I reckon that if one or two kids comes away with a heightened curiosity and an interest in their own financial planning, I’ve achieved something!  I get a lot of personal satisfaction out of it, and am keen to continue, so if you’d like me to present to your school, please drop me a line at robert_syben@investmentcollective.com.au.

If one of your new financial year’s resolutions is to start paying off your home loan as quickly as possible, here’s a few tips to get you on your way.

1. Interest rates are at record lows due to the consecutive RBA cuts in June and July. Most lenders have passed on the reduction in their home loan rates.  One strategy to pay off your home loan faster would be to maintain the repayments which applied before your lender reduced their rates in June and July.

2. If your lender didn’t pass on the full rate reductions, contact us to refinance with an alternate provider with a lower rate/ongoing fees than your current loan. Some of the lenders on our panel are offering owner/occupier principal and interest rates as low as 3.29%.  If you are not considering refinancing, at a minimum, you can ask your lender if they will match the rate, or reduce your home loan interest rate and/or fees.  Your bank may be willing to reduce your home loan rate and ongoing costs as an alternative to losing your loan to another lender.

3. On a principal and interest loan, in the first five or so years, most of your payments go towards paying off the interest. If you are able to make additional payments during this period, or at any time during the loan term, this will reduce the interest payable, and decrease the lifespan of the loan.   If you receive a bonus payment from your employment, or a tax refund, resist the temptation to splurge and put it to work for you by making an additional repayment on your mortgage.  If you are able to increase your regular repayments, this will save you thousands over the life of your home loan.  For example, by paying an extra $100 a month, a typical $400,000 home loan could be reduced by nearly 3 years, with a saving of almost $30,000.  Before making additional repayments, check if there are any conditions or limits on extra payments.

4. One of the quickest ways to save on your home loan is to make more frequent payments. If your home loan is on monthly repayment, switch to a fortnightly repayment.  Split your existing monthly repayment in two, and make these payments on a fortnightly frequency.  You won’t notice the difference in your cash flow, but it will save you time and money on your loan.  Repaying your home loan on a fortnightly basis means you are effectively making 13 monthly payments every year.

5. If you have an offset account with your home loan, ensure that your savings and ongoing salary are deposited into the account. An offset account can accelerate paying out your debt as the balance will reduce the interest payable on your home loan.

6. Be disciplined with your discretionary spending! Every dollar you save by cutting back on some of your luxuries can be put to work by making additional repayments on your mortgage, and saving you more in interest repayments over the life of the loan.  I’m not suggesting that you adopt a monastic existence and abandon all of your pleasures, but as an example, if you reduce your daily take away coffee consumption by 1 cup a day, you will easily achieve the previously mentioned saving of almost 3 years and $30,000 on a $400,000 mortgage!

Please note this article provides general advice only and has not taken your personal or financial circumstances into consideration. Please contact us today for a confidential, cost and obligation free discussion about your lending needs.  We would also be happy for you to refer your family or friends so we can also assist them to locate a cost-effective home loan which suits their needs.

One of the hot topics from the ATO during this busy tax season is travel expenses claims for individuals and businesses.  As an individual, you are entitled to claim any work-related travel expenses you incurred during the financial year.  This can include accommodation, incidental expenses, air, bus and taxi fares, road tolls, parking fees, car hire charges and meals (if your travel is overnight).  The exception to this is you are not able to claim the travel between your home and work.  If you have to travel between different work sites or offices you are able to claim that.  It is vital you keep receipts to justify your claim and if you are travelling overnight a travel diary is recommended.

For a business, the travel expense debate can be more complicated.  In order to establish if a business can claim the travel expense, you need to understand whether the travel was necessary to earn an income.  For a business, this means there must be a direct link between the travel and the earning of business income.  Again, documentation is the key.  There need to be accurate records of what meetings were attended and what was discussed.  You can do this by keeping a diary entry of the meeting or even a follow-up email with the person you had the meeting detailing the points discussed.  The three main items that can be claimed are travel, accommodation and food.  Speak with your tax professional but it may be a better option for business owners who are also employees to be paid a travel allowance.  This allowance is then tax-deductible and the employee are able to claim a tax deduction against the allowance.

It is also important that only the business-related expenses are claimed if the business owner combines the travel with a holiday.  Say for example the owner attends meetings that will mean they are away from home for three days but they decided to extend that stay for a further two days as leisure it is only the expenses relating to the first three days that will be claimable for the business.  In this case, the travel to and from will need to be apportioned as business and personal.

The ATO publishes a list of reasonable amounts that can be paid for the travel allowance based on where the employee is travelling.  This list will include those three main components of travel, accommodation, meals and incidentals.  This list is based on what the employee would earn and where they are travelling to.  It is also accompanied by a list of high-cost country centres, also tier 2 country centres and cost categories for overseas travel.

The overwhelming message from the ATO is record keeping is vital in making any claim as an individual or a business.  Always talk to your tax professional about what records you need to keep and try and do this before 30 June each year so you are not missing out on deductions you may not have kept receipts for but have incurred.

Please note this article provides general advice only and has not taken your personal, business or financial circumstances into consideration. If you would like more tailored advice, please contact us today.