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Preventing financial stress on expecting parents

I can see how having children can be the most rewarding and life-fulfilling experience for parents. Spending time with my niece and nephew and seeing them grow gives me great joy and insight into parenthood.

Starting a family or a growing family brings a roller coaster of emotions and financial stress as parents assess the upcoming changes in their life and finances. I’ve recently met with a couple expecting their first child and they are confused about how to do this and what financial support is available to them. Additionally, while focus is on immediate income and expense needs, other financial considerations such as superannuation and insurance can get left behind.

Should planning for a baby start after conception?

From my experience expecting parents tend to focus on the cost of having children in the sense of preparing for the babies arrival, prams, cots etc. – and longer-term education costs. In reality though, the most significant cost of having children is the loss or reduction in employment income, during both the initial maternity/paternity leave and also via reduced working hours over the longer term.

From a planning point of view, it’s important for a couple thinking about starting a family to know what that future cash flow shortfall will look like. This will show how much a couple will require to save in cash before the baby is born in order to get through the child-raising year without having to drastically change their standard of living.

The government provides a range of financial support initially which can supplement or replace reduced cash flow. Note that this is only very short term and it is important to discuss with your partner what happens after these payments stop.

Parental Leave Pay

The government offers 18 weeks of minimum wage payments (currently $740.60 per week) to the main caregiver of a new baby.

To be eligible, the primary carer of the newborn must have worked 10 out of the 13 months before birth (or adoption) of the child and at a rate of least 330 hours over the 10 months (equivalent to approximately one day per week on average). Have individually earned less than $150,000 in the last financial year.

Don’t worry, dads or partners are not forgotten!

Dad and Partner pay

The government offers two weeks of minimum wage payments (currently $740.60 per week) to the dad or partner of the primary carer.

Any initial financial stress is generally forgotten by parents as the majority of conversations I’ve had with clients is about their child’s achievements. I’ve often heard how sleep-deprived new parents are once their baby is born and planning for the new one’s arrival by removing some of the financial stress will help a couple to focus on caring for the newborn.

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.

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Credit Card 101

Credit cards have long been helping people pay for things they need or want. You may be very familiar with them or you may be a newbie in the world of credit who is contemplating applying for your first card. Effective utilisation or misuse of credit cards can make or break your financial well-being.

Before we go through the complexities of credit cards, you must first understand what credit is. Credit is the means to borrow money/access goods or services with the mutual understanding that you’ll pay later. Have you ever borrowed money from a friend for lunch or a colleague paid for your coffee because you left your wallet at home? That effectively is them giving you credit! Of course, with the intention and trust that you’ll pay them back later. We use credit all the time and credit cards are just one of many financial tools used to attain a set amount of credit, commonly via a licensed financial institution such as a bank.

One of the defining benefits of credit cards is the fees, charges and interest associated with using the card. Commonly there would be a fee to set-up the card which is generally charged annually, there are late payment and overdraw fees and also varying levels of interest depending on how you’ve spent the credit. There are often substantial fees associated with taking cash out using a credit card and in general, if you don’t pay off your card in full at the end of each month interest will be charged and backdated too!

Pros of credit cards

  • Easy to carry and use – Easily fit in your wallet, pocket or phone case!
  • Safer than cash – With the exception of contactless payments, it’s generally quite limited before you have to enter a pin for the purchase.
  • Buy now, pay later – Which is the one crucial benefit of a credit card. As of late, there have been a series of different options in the BNPL space but we’ll touch on that in a different session.
  • You’re protected – Fraud protection and monitoring are generally facilitated by the card provider and you’re generally not held liable if your card is stolen or misused.
  • Freebies! – Which to some is the one major benefit of using a credit card. Rewards and frequent flyer points are commonly associated with mid-top tier credit cards and the benefits can easily outweigh the associated fees if used correctly.

Cons of credit cards

  • High-interest payments – Credit card interest rates are applicable if you don’t clear the outstanding balance at the end of each month. These rates are generally much higher than a standard home loan or personal loan and it would be wise for any financial minded individual/family to avoid these payments at all costs.
  • The associated debt spiral – A common trap of the credit card is that you only have to miss one payment and interest will start to add up. Unless you pay off the FULL amount each month, interest will be charged on the FULL amount owing regardless if you’ve paid off half of the balance, 80% of the balance of 99% of the balance. If you get into the habit of not paying it off in full, your debt situation will quickly spiral out of control.
  • Additional fees – As well as interest there is generally annual fees, overdrawn fees or late payment fees. These can sting quite a bit and more importantly, you may have to pay interest on it!
  • Expensive to use abroad – Some cards are a bit friendlier and designed for travellers but most cards will charge excess fees when used in a different country than its origin. Often an additional 1-3% of fees on each purchase which can add up whenever you decide to go on a nice holiday!

To conclude, there are a ton of benefits in owning a credit card, such as flexibility with managing your cash flows and access to additional free benefits. But this can come at substantial a cost if not managed correctly and you can easily fall into financial stress if you get silly and spend on things that you cannot afford!

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.

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How interest rates affect asset prices

How the level of interest rates impacts the prices and value of assets has probably not been high on the topic list for discussion at most barbeques over this summer, however, there is an argument that they should be, due to the potentially greater effect on absolute return over the investment horizon.

Around the developed world, central banks have decreased interest rates in the hope this will provide a stimulus for economic growth and prosperity, since when money is cheap, folks will borrow and in Australia, folks have taken up the offering. This has led to people placing bets into the capital city residential property markets. The consequence of this has been the price appreciation of residential property in those markets which, unsurprisingly, always seems to be front and centre of discussion around the good ol’ BBQ.

Property prices have gone up, but how many people have mentioned that the value obtained by picking up a property at an elevated price has increased in the same proportion as the price paid for it? That perhaps depends on one’s perception of value, however, this demonstrates one-way low interest rates have affected asset prices.

In times like these, we need to remind ourselves that “if price is what you pay, then value is what you get.” Price is self-explanatory, the amount is advertised broadly and it forms the base on which your future return is calculated.  Value, however, is what something is truly worth or what you get out of owning the thing you bought. It follows that in order to maximise the prospects of a return on an investment, you always want to pay a lower price than the value you will receive from owning that asset.

So, how do interest rates exert influence on assets?

Primarily this happens through the use of the present value calculation which is a valuation method applied to an asset to determine the intrinsic value of it. Essentially this calculation is used to come up with how much in today’s dollars is $10 worth in ten years. We don’t need to go into the mathematics of the calculation here however, we need to be aware that if interest rates are high, we can invest a lower amount of money today in order to obtain $10 in ten years. Conversely, if interest rates are low, we have to invest a higher amount today in order to obtain $10 in ten years’ time.

To put this another way, when interest rates are low, the present value of a future $10 is high.  When interest rates are high, the present value of a future $10 is low. When coupling this mathematical concept with the fact many risk-averse investors have been pushed up the ‘risk curve’ in order to generate an income to support their lifestyle, you end up having asset prices elevated above their intrinsic value.  This is great for an existing owner looking to sell…not so great for a buyer.

Always remember, the higher the price you pay, the potential for a lower overall return…which should mean interest rates becoming something worth talking about around the barbie.

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.

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Here’s to a long life!

As more Australians are spending longer in retirement than previous generations, how are we managing our clients’ longevity risk?

As financial planners, we know the risk of clients’ outliving their retirement savings is very real, however, it’s also a risk that clients often prefer not to face up to. For me, the starting point for managing longevity risk is persuading clients to accept the possibility of outliving their money and then providing them with the strategies, portfolios and behavioural skills to set them up for success.

Behaviour changes: We spend much of our time encouraging clients to understand and appreciate that there is a real risk they’ll outlive their money. When there is an understanding of various trade-offs, most clients need to consider that it’s easier for them to make informed decisions and take ownership of their actions.

Portfolio risk: The portfolio needs to be aligned to the client’s risk tolerance. However, in the case of retirees, we need to be cognisant of the impact a loss may have. The desire to generate healthy long-term returns is also important, so the risk/return trade-off takes on a different meaning for a retiree.

Legislative risk: Social security benefits (i.e. Centrelink) can make up a significant portion of a client’s income and can’t be dismissed. Consideration of tax implications on a client’s finances is also fundamental as we know, tax and social security rules change often, so it’s important to be aware of the impact changes have on a strategy and adapt accordingly.

Strategy and products: Using a range of products can make a strategy more robust and flexible for the future. Providing an element of guaranteed income, whilst maintaining access to capital, is nirvana to some clients, particularly if it also provides an uplift in social security benefits.

We approach client’s longevity risk in a number of ways, however, the most effective strategy is regularly talking to our clients about this issue during regular review meetings, revisiting potential outcomes and empowering the client to make smart decisions for the long-term.

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.

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New Year’s and the resolutions we make

New Year’s has come and gone, and we have moved into the 20’s. I’m of the school of thought that the decade doesn’t begin until next year, but it doesn’t seem to make sense does it, since the teens are finished.

Every year on January 1, people all over the world make lists of New Year’s resolutions. Being human, our lists are often lengthy and one of the most common resolutions is to get fit or lose weight, probably exacerbated by the Christmas pudding that we have all indulged in. So, we rush off to join the gym and we sweat it out regularly for a while. Gyms love January 1.

As the weeks roll on, into February and March, our attendance at the gym begins to taper off. Perhaps we are feeling a bit fitter and we have lost some of the weight. We then allow the other things in our life (and the little man on our shoulder who says it’s all too hard) to take over again which spells the end of our exercise regime.

It doesn’t matter what our resolution for the new year is – what matters is how we apply that resolution to our lives. I’ve changed the way I make a resolution by just picking one thing. This year it is that I will tidy up. It’s pretty broad isn’t it – but it covers lots of things including my:

  • House
  • Kitchen cupboards
  • Financial life
  • Mind
  • Golf
  • And so on

I just have to remind myself constantly that this is the goal that I have set myself for 2020, and I have made a good start. But I have to work at it. The kitchen cupboards won’t stay tidy unless I make them that way and be consistent about putting things away in their proper place.

It is the same with anyone’s financial life.  You won’t save money or keep proper control on your spending unless you have a plan to keep it tidy. The work that you put in now on planning and budgeting will pay off for you in your later life, that is retirement. If you want to be able to do things in retirement, you need to have the plan in place now so that you can achieve those dreams. The consequence of doing nothing is being restricted in retirement, and perhaps being restricted to living off the age pension.

Give one of our friendly financial advisers a call to assist you to put your plans in place to tidy up your financial life. We are good at it and we can make a difference for you.

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.

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Tips to fund your child’s education

Funding your child’s education expenses and fees can be costly. The money you spend funding your child’s education could be one of your family’s biggest expenses.

Research conducted by The Australian Scholarships Group (ASG) on education costs, provides some context. The research is based on a child starting pre-school today and suggests that opting for the private school from Prep-Year 12, will set you back a $367,569 per child. Even if you decide on a government school for primary years and private for secondary, you will still need to come up with $244,822.

For most families, the time when kids are starting out at school comes when household budgets are already stretched with mortgage repayments, bills and living expenses. This means that some forward planning is required to make sure you have enough money to give you, and your children, the full array of options for education.

Here are 5 tips…

  1. Planning is important – have the discussion with your partner, do your research and estimate how much it is going to cost you.
  • Open up a dialogue with your partner about what you want your kids’ education to look like. Is it through Private or Government schooling? Do one of you want to send them to the school you attended as a child? Does your child have any special needs? The sooner you have these conversations the better.
  • All schools have websites. Check out those that you’re interested in. Most should include information about fees and advise you whether there is a waiting list.
  • There is a heap of great resources out there to help you on your way. The ASIC Money Smart website and the Australian Scholarship Group’s online calculator are a couple to try out.
  1. Start saving early!
  • Like any other long-term savings goal – the sooner you start, the better! The best time to start saving is when your child is born or possibly even earlier. Make a budget and decide how much you can put aside each week. Look to increase the amount each year to ensure you’re keeping pace with inflation.
  1. Structuring things right for tax
  • If one member of the couple isn’t working and staying at home to look after young children or working part-time, chances are their marginal tax rate is low. Therefore, holding investments or savings accounts in their name may be of benefit as the assessable income for tax will be much lower.
  1. Once you have a little bit of savings behind you, look to get that money working harder for you.
  • An investment in blue-chip Aussie shares and managed funds can be a great way to accelerate your savings. Bear in mind that these investments are riskier than leaving your money in the bank and that you won’t get rich overnight. A 7 year plus timeframe is appropriate.
  • If both parents are working and earning solid incomes, Investment bonds can be tax-effective for investors with a marginal tax rate higher than 30%, as long as certain rules are followed. Within the bond, your money is pooled with money from other investors and a portion of the pooled funds is then invested in the investment options such as cash, fixed interest, shares, property, infrastructure or a range of diversified investment options, with risk levels ranging from low risk to high risk. The value of the investment bond will rise or fall with the performance of the underlying investments. An investment bond is designed to be held for at least 10 years after which you can withdraw tax-free! You can make additional contributions over the life of the insurance bond. To make the most of the tax benefits, each year you can contribute up to 125% of your previous year’s contribution.
  1. Saving via an offset account against your home loan can provide other benefits.
  • Another simple, but potentially effective way of saving for education costs is through your home loan. An offset account allows you to make extra repayments into a bank account attached to your home loan. It operates much like a normal bank account with some special features. For example, the amount you have in the offset account effectively reduces the loan balance the bank uses to work out the interest payable on your home loan. For example, if you have a home loan of $300,000 with $100,000 in an offset account, the bank calculates interest based on only $200,000.

My advice is to start early, work out how much you will require for education costs, how much you will need to save to get there and then select the appropriate savings vehicle. Seek the help of a good financial planner to set you on the right path

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.

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The Afterpay Christmas

Are you being smart this silly season? Shop now, enjoy now and pay later.

This Christmas will be a bit different for many Millennial and Gen Z’s globally. The buy now, receive now and pay later revolution has taken the world by storm. Afterpay is just one of the buy now, pay later service companies and it already has over 6 million active customers with 15,000 new accounts opening daily and over 40,000 retail businesses from clothing, travel, experiences and health are offering this type of layby service[i].

What are the benefits of buy now, pay later?

Unlike layby where a customer puts goods on hold that they could not otherwise afford. Buy now, pay later allows customers to receive their goods with a small down payment and future interest-free instalments. The majority of the purchase is other people’s money, but you’re not forced to save and wait.

The service is “free” to the consumer but the costs associated are priced into the product as the service company takes a small cut from each transaction. Retailers pay for the service.

Why would a retailer allow this type of payment?

Retailers want to do business and have seen an increase in average basket size and people shopping more frequently. It’s estimated that retailers have seen more than a 25% increase in transaction values[ii].  Or put another way, users of this payment service are spending more money than they have.

Here are 3 tips to help you avoid a small initial late fee and spend 25% less this Christmas

  • Use cash to pay for Christmas gifts
  • Get your family, friendship group and workplace to embrace Secret Santa. It’s the idea of only gifting to one person
  • Set dollar limits in addition to Secret Santa

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.

[i] 2019 CEO and CRO Presentation (afterpay touch)
[ii] FY2019 Results Presentation (afterpay touch)
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Westpac Bank Controversy (WBC)

AUSTRAC has recently begun civil proceedings against Westpac Bank (WBC) in relation to the alleged contraventions of its AML/CTF obligations. In particular, AUSTRAC has accused Westpac of $23 million breaches, including a small number of transactions that appear to be linked to child exploitation in the Philippines.

Although difficult to estimate, it is expected, WBC will receive a large fine well in excess of what CBA was given earlier his year.

Since the announcement on 20th November, Westpac’s share price has fallen approximately 7.5%.

Despite the immediate issues facing the company, it is still a good cash generating business and there may be future opportunities that warrant further investigation and as the old saying in financial services circles goes, ‘don’t try and catch a falling knife – let it hit the floor and then pick it up.’

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.

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Protecting your Super – changes and impacts

Whilst many Australians hold only one super account, there are many who hold multiple. Across the board the balances in these super accounts are often smaller and/or the account is no longer receiving contributions. The member is sometimes unaware that they have insurance cover within their super.

The Federal Government introduced the Protecting Your Super (PYS) Package Act on 1 July 2019. The PYS package is designed to protect members with smaller super balances from having their benefits eroded by fees and insurance premiums. Some of the key reforms covered by the package include:

  • Super accounts with balances under $6,000 that are inactive for a period of 16 months, i.e. they have not received any contributions or rollovers, will be closed;
  • Exit fees on super accounts will be banned. This means you can rollover or transfer your super to a different fund without being charged a fee;
  • Super accounts with insurance that have been inactive for 16 months will have the insurance cancelled unless the member opts-in to keep it.

Whilst on the whole this will help protect the consumer, you need to be aware of these changes as non-response to communications may result in a loss of benefits to you.

If you are impacted by the above you will receive correspondence from your superannuation fund explaining the options available.  If you receive this communication it is important that you read and action any requests.  If no action is taken and this relates to insurance, your policy will be cancelled and you will be left without cover.

If you have any questions or concerns regarding these reforms or the communication you have received please contact your adviser who can provide guidance.

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.

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Navigating the finances of aged care

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.

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