A buyer's guide to ETF's & managed funds
Originally published by Spaceship Voyager
WTF is an ETF? And who manages managed funds, anyway? Here’s how to invest in shares without the gut-wrenching anxiety
Don’t let the lingo of share investments baffle you. Exchange Traded Funds and Managed Funds are both investment options which usually beat a bank’s measly term deposit rates.
Exchange Traded Funds - or ETFs - are a passive way to buy shares with as little as $500 and will perform in line with indexes like the S&P500 or the All Ordinaries Index. When the index goes up, so does the ETF. When it falls, so too does your investment.
Just like Managed Funds, ETFs are a simple way to invest in different asset classes without the hairy, scary challenge of picking individual stocks or assets yourself.
Both types of funds have their own risks but are an easy way to pool your individual smaller funds to take advantage of the higher returns from one larger investment portfolio managed by professionals.
ETF vs Managed Funds difference #1: ETFs are hot, hot, hot
The local ETF market grew from $27.2b in 2017 to $36.2b in 2018, and the EY Global ETF Report predicts ETFs will be larger than the active managed fund market by 2027.
Between 2017 and 2018, returns from Australian ETFs ranged from a 16.2% loss to a 30.1% gain, according to the 2018 Australian ETF Report from Stockspot.
ETFs are popular with individual investors - especially younger Australians - as they have the potential to earn a better return than cash or term deposits but with lower risk than buying direct shares.
ETFs allow investors to dip their toe into asset classes like shares, property or currency and be guaranteed a return that performs in line with whichever index the fund tracks.
Managed Funds, on the other hand, have been around for decades and tend to have more complex management and administration fees than newer, more nimble ETFs. Managed Funds also vary more widely in their offerings and tend to aim to outperform the market, rather than merely track along with it.
ETF vs Managed Funds difference #2: Structured differently
The biggest difference between ETFs and Managed Funds is how you buy and sell them.
ETFs are traded on the Australian Stock Exchange and you can buy them through an online broker and sell them during sharemarket trading hours. Just like real shares, an ETF will fluctuate in price during each day’s trading.
Managed Funds were historically accessed through a fund provider who will charge entrance, exit and management fees - along with a hefty premium for trying to outperform an index. Managed Funds usually have a fixed value at the end of each day, rather than an intra-day value range.
You can now buy listed Managed Funds like Listed Investment Companies and Trusts, Australian Real Estate Investment Trusts, Infrastructure Funds and Absolute Return Funds on the ASX, too.
Like all investments, the devil is in the detail and both ETFs and Managed Funds are considered by ASIC to be complex financial products which you should weigh up by reading the Product Disclosure Statement and understanding what the fees, terms and conditions are.
ETF vs Managed Funds difference #3: Not likely to outperform the market
A Managed Fund is usually constructed with the goal of outperforming the market through clever management - things like contrarian investing or value investing might inform the underlying approach to growing a Managed Fund. In reality, very few managed funds outperform the market.
ETFs, however, will probably not outperform the index they track. With fees and taxes to pay, an ETF is likely to slightly underperform the index it tracks.
Neither ETFs or Managed Funds offer a one-size fits all approach – each fund offering is different and will invest in different sectors. Your investment choice comes down to your time horizon, risk appetite and financial goals.
You can benchmark the return of ETFs against the relevant accumulation index over the same time period - Australian ETFs should have an ASX code you can enter in to see the performance over time. You can then Google the relevant accumulation index and see how the ETF performance compared over the same time period.
Oh, and it’s important to note that buying international ETFs as a DIY passive investor can be tricky if fluctuations in the Aussie dollar hit you or you get slugged with foreign tax.
Personal budgets & how to make one
Originally published on Kidspot
In an age of afterpay, apple pay and easy finance options, the idea of creating a simple household budget has gone the way of the dinosaur, as antiquated as an apron-wearing housewife stashing housekeeping money in the teapot for a rainy day.
“People are scared of budgets,” says Cath Armstrong, Cheapskates.com founder and author of Debt Free, Cashed Up and Laughing. “It’s just a piece of paper with some numbers written down. It can’t bite you, even if it does terrify you.”
Taking charge of the dollars and cents of everyday living expenses is the simplest path to financial security. One thing that will make you wealthy is spending LESS than you earn and the simplest way to do that is to budget.
Budgets are nothing more than a plan or guide to household spending. They are not a tool for punishment, deprivation or misery. “Budgets are about making sure what comes in is more than what goes out – once you’ve done that, it’s easy, people will wonder why they didn’t do it sooner,” Armstrong says.
The benefits of creating a household budget include:
Knowing exactly where your money is going.
Eliminating silly spending so there is more money for shopping, treats or even investments.
Less stress when the bills and credit card statements come in.
Creating a tool to help focus on long term financial goals.
GETTING STARTED: TRACKING
Before getting into the nitty gritty of budgeting, Armstrong suggests people start by tracking spending habits. “Too many people do a budget on paper that doesn’t work in reality because they don’t account for what they really spend their money on.”
Armstrong suggests tracking spending for a month (though even a week of tracking is better than not doing it at all).
“Take a little notebook or use the back of an old envelope stashed in your bag and write down every single cent you spend – if there’s $2 for a kids mufti day, write it down, if there’s 50 cents for chewing gum, write it down,” she says.
“How many of us have had a $50 note that just seems to disappear? Tracking your spending is the best way to find out where it went.”
At the end of your tracking period, work out what you spend in a week and times that by 52 and divide by 12 to get an accurate monthly average of your day-to-day cash spending. If the figure seems outrageously large, check the tracking notebook to work out which purchases are sending you over the edge.
STEP 2: THE EXPENSES
Tallying up the monthly, quarterly and annual bills that come into a household can be overwhelming, especially if you’re the type of person that simply throws bills away once they’ve been paid.
There’s no easy way to start, but Armstrong suggests buying an exercise book, which can be kept in a three-ring binder with plastic pockets to file bills. Then:
Write a list of all billers or expenses. Work out the average monthly amount to pay. “Ideally, you’ll have 12 months of old bills to look at so you can see exactly how much you have paid,” Armstrong says. If you don’t have the last 12 months of bills, you can simply estimate the expenses – but real data is better.
Draw up 14 columns in the exercise book. In the first column, list all billers or expense categories down the page. Label the next 12 columns across the page with the months of the year. Keep the final column free to calculate the “average monthly amount”.
If you have the last 12 months of household bills, write in the amounts you paid in which month. Once you have filled in the entire grid, calculate the monthly averages in the 14th This grid forms the backbone of your budget, showing you which months have the heaviest expenses and which months are light-on.
As household bills come into the house, file them near this exercise book and check that the amounts tally up with your estimates or last year’s figures.
Tallying up the amounts entered in the 14th column will tell you the averag monthly expenses. Hopefully, they match your income.
STEP 3: ADDING UP WHAT WORKS FOR YOU
It can be a good idea to get the whole family involved in a budget, and make sure all expenses – restaurants, medical bills, sports, gifts for friends and family – are accounted for. Remember, the more accurate the expense figures are, the better the budget will work as a planning tool.
Once you have a list of monthly expenses, tally that up against your monthly income. “Hopefully you’ll have more coming in than going out,” Armstrong says. “Sadly, that’s not always the case. Some people need to play around with the figures to make them work.”
Armstrong says it’s important for budgeters to cut back in areas that won’t impact on their lifestyle. “For me, I could never buy generic coffee because I love my coffee. For others, cutting out buying a coffee each day is the perfect way to save $3 a day.
“Budgetting isn’t about depriving yourself, it’s about planning how to meet your spending needs. It’s completely up to you to decide what those needs are. For some people, it’s paying off the mortgage in five years, for others it’s going on an overseas trip every year.”
STEP 4: KEEP THE CASH FLOWING
Managing the day-to-day spending in line with a budget outline isn’t always so easy, especially if you haven’t been honest – or accurate – in the 14-column budget planning grid.
Most households need a certain amount of cash to spend each week, while the rest of their money stays safe in a bank account waiting to pay the bills as they come in.
“The internet is a Godsend for budgeting. I get online once a week for 10-minutes and do all my bills at once. Having to line up to pay a bill is a nightmare – how many times have you walked out of the post office when the queue’s too long and then gone and spent the cash you were supposed to use to pay the bill?” Armstrong says.
Another stumbling block is accessing cash each week. “Too many people are tempted to take out cash from the ATM as they need it, blowing their budget,” Armstrong says. She suggests the old-fashioned envelope or plastic bag cash management system, which involves:
Accessing cash from your account only once a week or once a month.
Allocating budgeted cash into separate bags or envelopes – the petrol money will stay separate from the grocery money and spending money.
Leaving all credit cards and ATM cards at home, rather than in a wallet or purse “otherwise it’s too tempting to get them out”.
Carrying only the cash you need – preferably in its original bag or envelope – at all times.
STRETCHING THE HOUSEHOLD BUDGET
Armstrong has plenty of tips to save money on her website, but says stretching the household budget is not difficult once people become disciplined in the art of using the budget.
“If you know where your money is going, you know where it’s being wasted, too,” she says. Other hints for using a household budget to your advantage include:
Paying your bills at a set time every week or month so it becomes part of your routine. Kind of like cleaning your teeth.
Cut back spending that won’t impact on your lifestyle. For some, it’s as easy as planning two or three meals each week rather than throwing out food. For others it could mean buying generic products at the supermarket. Don’t scrimp on things that are important to you, though, or you’ll be attempted to abandon the budget altogether.
Factor in your spending weaknesses – whether it’s a splurge on the credit cards or relying on takeaway when you’re too tired to cook – and plan how you will overcome it.
Take little steps to improve your budget rather than great big hairy steps – if saving $200 a week seems too scary, start by trying to save $10 a week. The budget is the tool that allows you to tailor financial decisions to your own life and goals.
Finding your inner financial goals
Originally published on personal finance website Acreis
Budgets, savings plans and financial goals are something we should do – but, like eating vegetables, we don’t always do it or enjoy it.
Whipping out the credit cards to get through a short month is so easy, right?
Finding the motivation to take charge of our own finances – which makes it easier to afford those credit card payments – seems to run last on the To Do list.
Yet being in control of your economic destiny is the first step on the path to financial security. As circus master PT Barnum once said, “Money is a terrible master but an excellent servant”.
For some people, financial planning comes easily. For others the mere mention of the word ‘budget’ or ‘financial goal’ is enough to make them tear their hair out and go shopping to improve their mood.
No matter which type of person you are, motivating yourself to take charge of your finances isn’t as hard as you think. The motivation to look after money can only come from one person: you.
GETTING STARTED: WISHFUL THINKING
The sensible side of our brain knows that tackling financial housekeeping allows you to:
prioritise your financial commitments in a way that suits you and your lifestyle;
be less vulnerable to financial crises;
tailor your lifestyle to your hopes and dreams rather than lurch from week to week;
stay out of debt – or even get you out of debt;
explore more effective ways to spend your money.
But if you’re one of those laissez faire spenders that prefers to let life – and money – happen at whim rather than to a strict plan, what can you do to make your finances easy?
Motivational consultant Gary Haseldine, author of Imagination Power: Success Is Only A Thought Away, says your own mindset is the best tool to take control of your finances.
Whether you want to start saving for a house or have a simple desire to get your finances under control, it all starts with a little wishful thinking – literally. Imagining what financial security can bring to your life is the first step on the path to goal-setting.
Letting your mind wander into the realm of financial fantasy allows you to formulate goals in a non-threatening way.
“Those goals will be individual for everyone. Most of us think we don’t deserve money in our lives. We do. We all need it. We don’t all need a lot of it. But we need it,” he says.
FINDING YOUR FINANCIAL PATH: BE INSPIRED
Not all of us want to pay off the mortgage in five years or have a million-dollar share portfolio. Yet most of us would prefer our money works for us rather than the other way around.
Mental Resilience coach Kamal Sarma says the key to walking a secure financial path is to be inspired rather than motivated.
“The word motivation is usually driven by fear but being inspired is driven by caring,” he says. “For example, I want to look after my finances because I’m inspired to look after my kids rather than motivated by the disaster that could happen if I don’t. Finding what inspires you to look after the financial area of your life is the key – then you’ll stick with it.”
Inspiration is a powerful tool to start you on the first steps of a solid financial future. Inspiration is motivated by positive hopes rather than recoiling from what you don’t want.
Some ideas to stimulate financial inspiration could be:
a dream to start your own business;
a wish to live in your own home;
a goal to buy gorgeous antiques or artworks;
an aspiration to give up work and live from investments;
a hope to own the newest and best technology;
a yearning to travel the world;
a desire to attend university to study great thinkers;
a plan to buy a fast sports car.
FINANCIAL GOAL-SETTING: THE KEY
Once your mind has settled on its own inspired financial path, it’s worth creating a goal that will automatically take you there, according to Haseldine.
There’s no need to fidget with time-consuming income and expenditure plans if that’s going to turn you off the idea of looking after your finances.
Haseldine says goal-setting is the key to taking your economic life to a new and unexpected level. “Your mind doesn’t know the difference between a real or an imagined experience. A goal is what will trick your mind into acting in your own best interests,” he says.
Here’s how to do it:
Take a piece of paper, write today’s date on the top.
Create a goal that uses the positive, present tense and frame it as an affirmation. He suggests something like: “I am in full control of my finances. I seek advice from people with a proven track record of success and continue to put this into action.”
Haseldine says the art is in creating a goal specific enough to give you focus and impetus, but general enough not to thwart you. “Don’t get into the nitty gritty of a goal,” he says. “Just create a goal that is measurable and realistic.”
Decide whether you want to achieve your goal in a week, a month, three months, six months or twelve months. “Don’t set goals for any longer than 12 months or your self-image won’t let you achieve it,” Haseldine warns. “And don’t set more than one goal each day.” Write an end date on the top of your goal sheet.
Make sure your goal is just out of reach, but not out of sight. Work out which stepping stones are just right for you. Remember, baby steps are easier than giant steps.
Haseldine suggests writing the goal and saying it to yourself each day. It takes 21 days to form a habit and “eventually your subconscious will simply trick you into automatically working towards the goal”.
REWARD AND CELEBRATE SUCCESS
The path to success is not smooth and easy. “Most of us may only ever achieve 80 per cent of our goals, but it’s better than not setting them at all – then you don’t achieve anything.” Haseldine says.
“Havoc will happen and you will think it’s all going wrong – but don’t believe it. That’s just your old self-image trying to stop you from achieving success. Stick to your goals and you will get there.”
Haseldine and Sarma insist it is vital to celebrate and reward yourself as you achieve success. “Go out to dinner, buy yourself a small gift – do something to acknowledge how well you are doing,” Haseldine says. “You must always reward yourself, otherwise you will go flat and stop achieving.”
The other key to rewarding success is to continually set new goals. “Always create a new goal once you have achieved something – it will keep you going,” Haseldine says.
“In the end, it’s not money that will make you happy – it’s the goals people set and achieve for themselves.”
How to survive when your company cuts costs
Originally published in Sydney Morning Herald
“I refuse to participate in the global financial crisis, and so should everyone,” says Geoff Morgan, the founder of recruitment companies Morgan & Banks and Talent2, and job networking site linkme.com.au. “Unemployment is only at 5.4 per cent, which means 94.6 per cent of people have a job!”
Morgan, author of books such as Flourish And Prosper and Getting That Job, says a recession can stimulate business innovation, and now is the time for management and workers to show their mettle. “It’s incumbent on the boss to motivate and send the message that the company will survive regardless of the economy,” he says. Good managers will give their team tools and tips to think creatively and generate new business leads.
Morgan says those feeling less than enthusiastic about doing a job that two or three people used to do must change their mindset: “You want to be the employee who stands out, not the one they might choose to make redundant.”
Workers must still turn up to work early, come up with creative ideas and seize every opportunity to prove they’re an asset to their employer, even if they don’t feel like it.
“People who start feeling unmotivated need to start a fitness program or go for a walk or a bike ride and remember how lucky they are,” he says.
“They can always go and find another job. In these times, companies will always want the best people – they might tell you they aren’t hiring, but they will always take on an employee who can add value.”
HERE ARE SOME OTHER IDEAS FOR SURVIVING A GLOOMY OFFICE ENVIRONMENT:
1. It’s not forever
Stress is impermanent. Deadlines are impermanent. This too shall pass. The next time you catch yourself getting frustrated or stressed out, say to yourself: “This feeling will not last forever…” and simply get on with it.
2. Drink green tea and water
Hey, we all know coffee gets you through everything, but it can keep you feeling stressed and on edge. Green tea contains anti-oxidants that are said to lead to an increased sense of well-being and happiness. Drinking eight glasses of water a day cleans out toxins and impurities and helps your organs process all the junk. Change your drinking habits and see if it improves your mood.
3. Smile, you will make the world a better place
Smiling has been scientifically shown to trigger a chemical response that makes you happier. Yes, you can fake it ’til you make it. What this means is that the physical action of smiling makes you happier even if you have nothing to smile about! Try smiling and see how it changes your mind.
4. Embolden yourself to be your very best
When you get into a career there is a big temptation to start thinking about yourself and no one else. This self-centredness seems the right thing to do, but happiness experts believe serving others is the true key to success.
How debt builds wealth
Originally published in the Sun-Herald
Debt is the Dr Jekyll and Mr Hyde of wealth creation – it can tear apart your dreams of financial security or actually create it.
Most of us realise that credit cards or personal loans aren’t the most sensible way to pay for things, but going into debt can be the best way to build wealth. After all, a mortgage to buy your own home is a debt many people aspire to take on.
Using debt to build assets which increase in value – such as a home or share portfolio – makes sense. Borrowing to fund a new pair of shoes or pay off a huge mobile phone bill doesn’t.
Financial adviser and author Noel Whittaker says borrowing to build wealth is a sound financial strategy that most people don’t explore properly.
“If I said to you, ‘can you save $100,000 to buy some shares or a house’, you would say, ‘no, I can’t afford that’. But if I said to you, ‘could you afford a tax-deductible payment of $8000 a year to fund a share portfolio’, you might well be able to,” says the author of Controlling Credit Cards and Borrowing to Invest.
“Good debt is used to buy property and shares that increase in value over time. Bad debt is used to fund consumer things like holidays and clothes and things that decline in value.”
IS DEBT GOOD OR EVIL?
We all know about ballooning levels of personal debt and how scary it can be to open up a credit card statement when you’ve had a few impulse shopping moments. But when is debt truly bad?
Whittaker says anyone paying for a lifestyle costing more than they earn is at risk of being in bad debt. “You don’t have to borrow for personal, consumer things – otherwise you are on the slippery slope of spending more than you earn,” says the director of Whittaker Macnaught, a financial planning company.
That’s not to say we must live a hairshirt existence or banish all credit cards. “I use a credit card for the points and convenience but I don’t pay a cent in interest because I pay it in full before the interest-free period is up,” he says.
“Plenty of people never pay off their credit card and are happy paying interest to the banks. Personally, I’d rather use my money to build my assets.”
Whittaker says he has seen “truly desperate cases” of people with debts they cannot repay. “Most of us are not that desperate, but if you are, then see a debt counsellor who can make arrangements to stave off bankruptcy,” he says. “Most people simply need to turn over a new leaf and commit to getting rid of debt.”
FIRE AWAY AT BAD DEBT
Whittaker says a popular debt-reduction strategy is consolidating all debts into one loan and paying it off quickly.
“I only recommend this if people really are going to commit to changing the way they spend,” he says. “There’s no point consolidating a $5000 credit card debt if you will have another $5000 of credit card debt in four months time.”
He warns that debt consolidation can be explosive for people who don’t change their spending habits.
“Consolidate your debt only if you are genuine, otherwise you are simply taking on more debt for no good reason.”
He recommends the best way to attack debt is to:
Make a list of all outstanding debts (excluding any mortgage);
Attack the smallest debt first with all the spare cash you can muster;
Once the smallest debt is paid, use those same payments to attack the next one.
“If you do that, you will find you have more and more firepower to attack the next debt,” Whittaker says.
HOMES AND SHARES GET THE DEBT TICK
Whittaker says buying your own home is a sound strategy for future financial security. “Most people need to borrow to build their asset base,” he says. “If you know that Aunty Bessie is going to die soon and leave you $2 million, then perhaps you don’t – but most people need to.”
He says the optimum time to pay off a home loan is over 10 years – that way, the homebuyer pays the least amount of interest for the greatest possible gain.
“People should pay at least $8 per thousand dollars borrowed each month to cover interest and capital repayments,” he says. That means on a $200,000 loan, Whittaker suggests minimum monthly payments of $1600.
“The ideal is to pay $12 a month per thousand dollars borrowed, and that will knock the loan off in 10 years.” That would take repayments on a $200,000 loan up to $2400 a month – but after 10 years, there would be no more mortgage payments and that $2400 a month could be used to buy shares.
Borrowing to buy shares can be complex, but the interest costs are usually tax deductible against the income generated by the shares. “It’s not as hard as people think,” he says. “With the booming sharemarket and franking credits on the shares, it’s almost impossible to be able to negatively gear shares at the moment.”
And there lies the risk. “With property and shares booming, there is a risk of a market fall,” he says. “Borrowing always entails a risk – you could lose your job, the market could crash or things can go wrong. Most people are predicting there will be a negative year at some time, but who knows when?”
Over a decade or more, housing and shares have proved to grow in value. “Even in the 1987 stockmarket crash when the market fell by 60 per cent, the people that owned shares at the beginning of the year still had 10 per cent gains.”
MAKING DEBT WORK FOR YOU
SAVE AND PLAN YOUR SPENDING: Using lay-by and interest-free periods can be a better way to pay for large purchases than simply whipping out the credit card.
ARRANGE YOUR DEBT EFFICIENTLY: Always have a gameplan and don’t have a punter’s mentality. Whittaker recommends lining up your debts from smallest to largest and using all your firepower to pay off the smallest debt first.
PAY THE RIGHT DEBT FIRST: Debts should be paid off and prioritised according to the highest interest rate. The higher the charges, the quicker you want the balance down.
MATCH YOUR CREDIT CARD TO SPENDING STYLE: If you are a mad shopper who constantly carries credit card debt, ensure you have a card with the lowest rate of interest possible. If you can be a disciplined credit card user, aim for a card with a long interest-free period before you are hit with any charges.
DON’T CONSOLIDATE INTO A HOME LOAN WITHOUT CHANGING YOUR SPENDING: Rolling debt into a home loan or consolidation loan can be a great way to pay everything off at a lower interest rate – but make sure you increase your monthly or fortnightly repayments rather than drag out a $1000 credit card debt over another 25 years.
BORROW TO BUILD ASSETS: Borrowing to buy your own home and shares makes sense. But there is always a risk with borrowing – the market could crash, people lose jobs and things go wrong. Think about the risks versus the rewards before embarking on the journey.
Savvy credit card tricks for business owners
Published by ING Bank
Clever credit card usage can flip into highway robbery if you don’t watch what you swipe.
Plastic might be fantastic for tracking business expenses, but poorly planned credit card use can lead to high interest charges and expensive annual fees (even if you do love the rewards points, concierge services and insurance bonuses).
DBC Advisory founder Daniel Beydoun is a Certified Public Accountant (CPA) and a Chartered Tax Adviser and says credit cards are useful business tools for short term finance or helping businesses over a cashflow dip.
“However, if you’ve accumulated $20,000 in debt on which you are being charged 15% interest month after month, then you know you are doing the wrong thing,” he says.
So what do you need to know about choosing (and using) the right credit cards for business?
Have a head for business if you use a credit card
Just like credit cards for individuals, a business credit card allows for easy purchases online and over the telephone and are pretty much vital for spending on travel, entertainment and incidental office expenses – they can even be used to get cash out at ATMs.
If your business is a company, partnership or trust, a business credit card should be in the name of the business entity.
Sole traders can use their own name on a credit card, but the Australian Tax Office recommends keeping business-only accounts and credit cards to make record-keeping simple.
The cheapest credit cards for businesses to use are likely to be ‘no frill’ cards without all the bells and whistles of airline points or insurance bonuses.
Many business credit cards allow multiple staff to have their own credit cards, with different spending or expense limits, depending on seniority.
This can streamline expense and petty cash processes and give greater control over the team’s spending – but make sure you have a published expenses policy clearly outlining what’s considered a business expense.
Managers or owners should always monitor monthly credit card transactions to control expenses and pay off balances each month.
What to weigh up when using credit cards for business
There are four main costs and benefits of credit cards to weigh up:
1.The interest rate
These vary in line with the market, but typically no frill cards charge at the lower end of the market compared to reward-led cards that charge higher interest.
2. The annual fee
Most cards and banks charge annual fees across different banking packages in different ways, making it hard to compare apples with apples.. Check the actual cost of the annual fee or package before signing up.
3. The interest-free period
Many cards offer a ‘grace period’ such as 30-days or 55-days where no interest will be charged, provided you pay in full within the interest-free period. This can be complex, as it typically applies to certain billing periods and may exclude transactions like balance transfers or cash advances. Check the fine print.
4. The bonus offers
Whether it’s gold, platinum or black, reward credit cards offer all manner of enticements: frequent flyer points, loyalty points, shopper concierge services, cashback bonuses and insurance.These bonus offers usually come with a higher annual fee and/or higher interest rates.
About record-keeping and credit cards
Credit cards are a convenient way to manage business expenses and easily see what type of categories you are spending on.
Credit card statements can be a valid record for tax purposes, eliminating the need for shoeboxes of receipts, provided the statement has all the information contained in a tax invoice.
The Australian Tax Office says credit card statements can be kept digitally or as paper records, but ideally show the full detail of transactions, including:
· the seller's identity,
· the seller's Australian business number (ABN),
· the date the invoice or purchase was made,
· a brief description of the items sold, including quantity and price,
· the GST amount (if any) payable.
All tax records should be kept for five years to remain valid in the eyes of the Australian Tax Office. In case of a tax dispute, the records sometimes need to be kept longer.
The grey area of business credit cards
While credit cards are convenient, they do come with some ‘grey areas’ around tax compliance.
For example, the Australian Tax Office says business credit cards should be in the business entity’s name but in reality many businesses use credit cards in the name of an individual and simply assign it to business use.
The other grey area is whether the ‘benefits’ of credit cards such as shopper bonuses, vouchers and insurance are subject to Fringe Benefits Tax.
“Receiving rewards (such as insurance or cash back) may be subject to tax but receiving points is not,” the Australian Tax Office says.
“The liability is calculated based on the value of the reward or benefit received.”
Avoiding mortgage mayhem
Originally published in Sydney Morning Herald
Finding the right mortgage is as challenging as finding a home you fall in love with.
There is no one-size-fits-all mortgage solution, with the range of loans and features on offer so vast that individuals must decide which features, interest rates and products best fit their lifestyle and financial goals.
Mortgages come in all shapes and sizes, from shared equity loans – where you pay a lower mortgage in exchange for sharing your capital gains with the lender – to mortgages that offer payment holidays for new parents.
There are Family Pledge mortgages that allow parents to help their children buy property without a deposit and Professional Package mortgages that offer discounts, flexibility and credit cards for one annual fee.
“Choose the loan that’s right for your circumstances, not the loan your family or friends recommend,” says Lisa Montgomery of non-bank lender RESI.
With tightening credit markets, the big four banks are tougher with their lending criteria and are may take time to approve finance.
“We are expecting more lenders will be demanding a 10 per cent deposit and genuine savings before they approve finance,” says Canstar Cannex financial analyst Frank Lopez, who rates and reviews mortgage products.
FIX OR NOT
The big question with a mortgage is whether to fix the interest rate or remain with a variable rate, which fluctuates with the Reserve Bank of Australia’s movements on cash rates.
The benefits of fixing a mortgage seem obvious – it offers the security of knowing what to pay for the fixed period and can safeguard against rising rates
The downside is fixed loans are less flexible, rarely allowing extra repayments which give borrowers an ability to build a tax-effective buffer against job loss or illness.
Plenty of homeowners were stung by fixing their interest rates as they worried about rates climbing.
Aussie Home Loans broker Duane Brown has encountered customers who fixed at higher rates only to want to re-finance to today’s lower rate loans but facing break costs of more than $45,000.
A variable rate mortgage might not offer the same payment security, but often comes with features like free account-keeping fees, the ability to use a redraw facility to withdraw extra equity if unemployment or illness means you can’t pay for a period of time and no fees for making extra payments.
Variable loans will also take advantage of falling interest rates, which some pundits are predicting will happen, and therefore make mortgage payments cheaper.
Interest-only loans – which charge monthly interest rather than principal and interest – offer cheaper payments than typical mortgages, but are best used by investors who want to negative gear their home purchase. The interest-only period only lasts for a certain period of time, and most lenders want to charge you a premium for these loans.
WHICH RATE IS GREAT
Montgomery says some mortgages offer a basic variable rate, others offer a discounted variable rate and then there are introductory rates and fixed rates.
All lenders are obliged to reveal their comparison interest rate (which is always higher than the “headline rate”) but borrowers need to check deferred establishment fees or discharge fees, which can be hefty additional costs that may not be calculated as part of the comparison rate.
“There are a couple of products out there that are offering an extremely low interest rate but revert to a higher rate – a big thing to watch out for,” Montgomery says.
The true cost of a mortgage is not just the interest rate, but the features and flexibility that can be bundled in to the loan that may save you money.
For example, it may be better to pay a slightly higher interest rate on a loan that offers no monthly fees, no extra payment penalties and free redraw and discharge fees. Only you – the borrower – can work out which mortgage ingredients will work best for you.
Lopez suggests the professional package mortgages offer great value, with interest rate discounts of up to half a per cent and features like fee-free transaction accounts, credit cards and redraw facilities for one annual fee.
But he says first home buyers might prefer a basic no-frills loan with a discounted interest rate that allows the cheapest possible repayments.
“Redraw, repayment holidays and flexible aspects of a loan are great but are you likely to need it in the first few years?” Lopez says.
“If you don’t need them, skip the features and pay less by going for a basic product.”
Moore suggests borrowers keep their eyes peeled for special offers, such as low interest rates or waived fees that banks and lenders offer as a promotion to gain market share.
REAL LIFE MORTGAGES
Choosing the right mortgage – and loan amount – can make all the difference to lowering the risks of taking on a 25 or 30 year mortgage commitment.
“Everyone’s worried about unemployment, so it makes sense to structure your mortgage carefully,” says first home buyer Cameron Jenkins, who bought a studio apartment in Rose Bay.
The public relations manager had a frank conversation with his boss before committing to the mortgage to make sure his job was safe.
“I also realised now was the time to build a buffer and pay more in advance so I have room to move if something goes wrong,” he says.
Jenkins weighed up the costs of renting in nearby Bondi versus buying a small studio apartment and made sure his mortgage payments were similar to rent.
“A lot of people were telling me to really extend myself on my first place, but I would rather be in a smaller place making the double the repayments,” he says.
Jenkins sourced his loan through Mortgage Choice, an independent broker that offers loans from a range of lenders.
“The broker did all the work because my loan was quite complicated,” Jenkins says.
“Most lenders won’t do loans for properties under 40 square metres, so I only had the choice of two lenders.”
Jenkins went with St George, who offered a basic variable rate with free redraw and no fees to make extra repayments.
Newcastle couple Matt and Tong West researched mortgages carefully before deciding to take out the Commonwealth Bank’s Complete Home Loan package, which offers a standard variable rate.
The couple went in to their local bank branch to apply for the loan, and found it quick, easy and painless.
“All we had to do is hand over what they asked for and they gave us unconditional approval very quickly – I was surprised because I thought bank service would be terrible,” Tong says.
The quick approval might have had something to do with the 35 per cent deposit the couple had saved towards their home, which cost under $500,000.
“We don’t want to live with lots of debt and have only one debt – the home loan – which we want to pay off as quickly as possible,” Tong says.
QUESTIONS TO ASK WHEN APPLYING FOR A MORTGAGE
What account-keeping fees are involved in the mortgage?
What is the comparison interest rate (and it never hurts to ask whether there is anything that might qualify you for a discount on that rate)?
Is there are Deferred Establishment Fee and how much will it be?
Can I make extra repayments at any time?
Will it be convenient for me to make mortgage repayments any way I wish, either by direct debit, over the counter or over the internet?
What will the break costs be if I re-finance in one year, three years or five years?
Can I fix a portion of the loan and leave the rest variable at no extra cost?
How long are you taking to process mortgage applications right now?
Can I pay weekly, fortnightly or monthly depending on what’s most convenient for me?
Are the repayments based on paying back a principal and interest loan or interest only?
What do I need to show the lender to prove my income and savings and have my application processed quickly?
10 steps to buying your first property
Originally published in Domain
There are serious incentives to snap up your own four walls and snare your first house, and not just because you want to start nailing in those picture hooks the landlord never allowed.
A calm head and solid market research may mean that even with sky-high property prices in most Australian capital cities, a first home buyer with a good credit rating can set their budget and find something they can afford as their home equity builds.
Real estate advocate Neil Jenman says it might take keen property hunting, but if a first home owner can snap up a property, they are better off paying down a mortgage than paying rent.
STEP ONE TO BUYING YOUR FIRST HOUSE: DECIDE HOW MUCH YOU CAN SPEND
RP Data’s Tim Lawless says the old rule of thumb about borrowing around three times your annual income is a good place to start when setting your home loan budget.
“For most people, the reality of what they can afford won’t necessarily be what they want,” he says. “But first home buyers need to be able to crawl before they can walk and really have to stick with what they can afford.”
Former real estate agent and author Neil Jenman suggests couples use only one partner’s income to pay the mortgage and ideally try to make extra mortgage repayments that are 4 per cent higher than those charged by lenders today.
“The bonus of paying the mortgage at 4 per cent higher is that you will pay your loan back in half the time if rates stay the same,” he says.
STEP TWO: DECIDE WHETHER YOU WILL TRADE LIFESTYLE FOR LOCATION
Most first home buyers have to compromise on location, simply because of affordability.
“Some are more willing to forego more of their income in mortgage payments to have the lifestyle they want in a better location,” Lawless says.
It helps to shortlist at least three to five locations and start following the market closely (see step 4) in those suburbs to get a good handle on prices and value.
STEP THREE: APARTMENT OR A HOUSE?
Should you buy an apartment or a house? Apartments can come with hefty quarterly strata fees, but are easier to look after than a house.
“Historically, houses have appreciated faster than apartments, because of their intrinsic land value, but I think we are coming to a time where a strategically located apartment will appreciate at a similar rate to a house further out,” says Lawless.
Cornish says selecting apartments that offer some sort of unique qualities such as size, character or good location can guarantee better long term capital returns than cheaper, generic apartments in large blocks.
STEP THREE: DO THE PROPERTY RESEARCH
“The real grunt work of research only begins when you’ve narrowed down your choices to certain locations,” Lawless says.
SQM Research property analyst Louis Christopher says a cheap research method is to do a weekly online check for properties in their price range and keep a detailed list.
He suggests recording the asking prices (you can phone the agent and ask for a price guide if it isn’t published) and how long it takes properties to sell. When they sell quickly, it is a sign prices could rise, but properties that take longer to sell could be asking too much.
Take note of the features of each property – the size, land size, condition, how many bedrooms and whether carparking is available.
You must also keep tabs on what the properties sell for, which are published in Sunday newspapers or can be bought through data agencies like Australian Property Monitors. You can phone agents to check on the selling price of properties.
STEP FOUR: FOLLOW IT UP WITH LEGWORK AT OPEN INSPECTIONS
It’s important to attend as many open inspections as possible for properties in your price range.
You are able to compare features accurately and make more detailed notes for research.
This might sound like a lot of work for nothing, but these notes will become your negotiating tool and could help you save five per cent or more when it comes to negotiating price – see Step 9.
STEP FIVE: GETTING THE FINANCE RIGHT
Banks and lenders want to see genuine evidence of savings and proof of income. RESI head of consumer advocacy Lisa Montgomery says first home buyers can prevent financing delays by being organised and presenting lenders with originals and JP-signed photocopies of letters, bank statements and payslips to verify their income claims.
STEP SIX: GET YOUR LEGAL EAGLES IN PLACE
Legal fees vary widely in cost, but a good property lawyer can save thousands by making sure you have the right titles and fully understand any conditions like easements or heritage listings that affect the property.
A good lawyer will also put pressure on lenders to ensure financing is in order and won’t delay settlement, as well as oversee any potential first home buyer grants and stamp duty exemptions.
You can find a lawyer through recommendations from friends and family who have bought property, or use a conveyancing firm. All lawyers should give you a schedule of costs in advance of doing any work for you so you understand the fees and charges involved, which can be thousands of dollars.
It helps to have a lawyer organised before you find the property you wish to buy, as you want to be able to exchange contracts swiftly and quickly to secure your home.
STEP SEVEN: BINGO! FINDING THE RIGHT HOME FOR YOU
After researching and attending at least five to 10 open inspections, it makes it easier to know you’ve found the right first home.
Well-prepared first home buyers “know” the property is right – it ticks most of the boxes and they can see the value equation stacks up.
Buyers who haven’t done the research risk buying on emotion or to suit an imposed deadline, and could pay over the odds for a property.
STEP EIGHT: NEGOTIATING PRICE
Finding the right home means forking out money – particularly for a building and pest inspection and a strata report (for apartments). Along with your detailed property research, the inspection notes become your price negotiating tools.
Real estate agents are highly skilled negotiators and love nothing more than insisting first home buyers pay full price for a property.
If you can successfully argue reasons to discount the asking price of a home – because you have good research detailing other recent sales – the agent is much more likely to accept a discount on price.
A building report could uncover flaws that the agent hasn’t taken into account in the asking price, or the agent and seller might be asking a similar price as renovated properties when the bathroom in your property of choice was built back when Noah was a boy.
A five to 10 per cent discount on asking price is not unheard of for a property that has been on the market for a few months and has building flaws.
When the market is heated, it is harder to negotiate a discounted price.
If a property is fresh to the market, and meets your criteria and you are happy with the price, it is worth getting your deposit cheque and signed offer to the agent as quickly as possible to beat other buyers. Just beware that you aren’t paying too much.
STEP NINE: GETTING THE KEYS
Exchanging contracts is an exciting day for first home buyers. But the party doesn’t really begin until settlement, which is usually six weeks from exchange.
Most first home buyers are unaware of the toing and froing that happens during the legal phase of home purchase – queries from buyers or sellers and financing delays can happen, especially if the bank’s valuation doesn’t match the selling price.
Before settlement day, organise a final inspection of the property to make sure it is in order and then insist the agent gives you the keys to your new house as close as possible to settlement time.
STEP TEN: MOVE IN.
Make sure you have great removalists who turn up on time and don’t break your favourite things. Break out the champagne. You’ve bought your first house.