Investing - Other

In this section, some other investment topics are discussed.

• Investing for children
  • Shares
  • Managed funds
  • Bank accounts
• Other (to be completed)

When thinking about investing for your children, options include buying shares for them, investing in a managed fund, or setting up a specific bank account for them.

While it sounds like a great idea to setup investment accounts in your children's name, be careful as the government has put tight tax rules on such accounts, to discourage adults from using these accounts as a tax dodge.

Contrary to popular belief, children can actually own shares in their own name. A lot of brokers will not open an account in the child's name though as they cannot legally prosecute a child under 18 years (e.g. if an account was not paid). What brokers will normally do is allow you to trade on your account but register shares in the child's name. Consider this carefully as there may be difficulties if changes need to be made requiring a signature, such as a change of address form.

The majority of people tend to register in their name with the account designation as the child, in this case the legal owner is the parent for taxation purposes.

The Australian Foundation Investment Company publishes a useful brochure which covers some of these issues. Taxation implications are covered by a taxation determination from the Australian Tax Office.

Managed funds normally require $1,000 for the initial investment but many will then accept lower amounts on a monthly basis making these accounts easier to contribute to than direct shares. Example funds with low initial investment requirements include those from Members Equity Bank (registration cannot be in a minor's name).

Currently several banks have great bank accounts for young children and offer high interest making these very worthwhile options. An example is the Kids Bonus Saver account from BankWest.

If you have any other good investment strategies for kids, please share them!

Investing - Managed Funds

Managed funds are a simple way of investing in the sharemarket without having to decide which shares to buy. They are basically a collection of many individuals' money into the same investment scheme and, as the name suggests, managed by investment professionals, often referred to as Fund or Portfolio Managers. (If you've heard the term "Mutual Fund", don't get confused - this is an American term for the same sort of vehicle but is not a term used in the Australian market.)

Such funds offer a great way to start investing with a minimal amount of money. Managed funds typically provide you with an easy option of adding to your initial investment at frequent intervals, as opposed to say shares where the cost of trading is higher so not so easy to add small amounts to your portfolio on a regular basis. They are a great way to save for your future, require very little ongoing effort, and in most cases you can opt to have funds transferred into your fund automatically every month. By adding to your investment regularly, you’ll sometimes be buying more units at a lower price, sometimes less units at a higher price but by adding frequently this will enable you to be "dollar cost averaging".

For the services of your fund manager, you will pay a management fee (typically a percentage of your portfolio value) but if this enables you to have money where you can’t easily touch it and it’s gaining in value (which you would expect over a long timeframe) it’s worth the cost and also it takes the stress and the emotion out of your investment decisions. As the fund manager is not emotionally involved, they are in a better position to accurately evaluate the situation and make the correct decisions and you are paying for their expertise.

Before choosing a fund to invest in, do your research and read the prospectus, compare the fund's past performance and look at the fees they charge comparing different funds. Don't jump from fund to fund because the top performing fund of last year is not necessarily going to be the top performing fund the next year. You can also reinvest your distributions thereby growing your units held.

It is also worth noting that managed funds, because of their size, often have opportunities open to them that otherwise would not be available to you as an individual investor. They will use many different brokers to buy/sell their shares therefore enabling them to have varied research and opportunities that will arise such as Placements and IPO's giving them good opportunities often not available to retail investors (only sophisticated or Institutional Investors).

It is also worth talking to your accountant about taxation implications of being in managed funds, as you are likely to incur capital gains each year as well as a capital gain liability at disposal (assuming your fund makes money over the time you hold it).

Pros

• Leverage buying power of large investment pool
• Does not require you to make investment decisions yourself
• Easy to make small, regular additions to your investment
• Good long-term prospect of creating wealth

Cons

• Management fees can be high (watch out for additional fees above certain performance benchmarks too)
• You have very little control over the investment decisions being made
• Tax effectiveness is questionable in some cases

Summary

Managed funds offer you a way to invest in the sharemarket without you doing all the hard work They offer a good way to invest on a regular basis at low cost You pay a fee for the management of your investment

Investing

Once you've escaped from a dependence on credit and start having surplus funds from every pay packet, you can start to think about investing the surplus to help you become financially independent. The form your investing will take depends upon many different factors, including the amount of money you have available to invest as well as your tolerance for risk.

In this section, you will find investment information about the following different avenues of investment:

• Shares
• Managed Funds
• Property
• Superannuation

Calculators - Debt Consolidation

The idea of consolidating personal loans and other debts into your mortgage was the big thing in the early 2000s, with the banks pushing this as the solution to your debt problems. It's worth remembering that banks and other lenders make money out of your debts, so why did the banks seek to push this idea to the masses under the banner of helping you to reduce your debts?

The basic idea is this: the interest rate on mortgages is the lowest of all debt products, so why not move more expensive debts (such as credit card balances and personal loans) into the loan with the much lower interest rate? While it might sound like the lender is being a knight in shining armour and coming to save you, realise that you will be increasing your long-term debt, increasing your total interest payments on your mortgage, and increasing the overall share of lending taken by your mortgage provider.

We've already looked at debt consolidation on the Common Mistakes page but the consolidation story is not necessarily a bad one - it does, however, take great self-control on your part to really make it work for you. Let's look at an example to illustrate the good and the bad of this approach to reducing your debts. Suppose you have a $200,000 mortgage against a property worth $300,000 so you have plenty of equity against which the bank will be happy to increase your mortgage for the purposes of debt consolidation. We'll assume your mortgage interest rate is 7% and the mortgage has 25 years to run. You are about to purchase a car for $30,000 and the dealer has offered you a car loan at a rate of 11%, repayable over 5 years. Should you roll this debt into your mortgage rather than taking out the more expensive car loan? It sounds obvious that you should, since your mortgage interest rate is much lower...

Your current monthly repayment on the mortgage is about $1400 and the total interest payable over the loan term is $224,000. The car loan repayments would be $650 with a total interest amount of just over $9,000 over the five year term. Now, suppose you put the $30,000 cost of the car onto the mortgage instead so the mortgage increases to $230,000 - the minimum monthly repayment only increases slightly to $1625, so it 'feels' like you're $400 or so better off by using this method ($650 for the car loan option against an increase in your mortgage payment of only $225 or so) - but remember the mortgage is over a much longer term and, as a result, the total interest payable increases astonishingly, to $258,000 - an increase in interest of more than the cost of the car!

The trap is in not paying additional repayments on the mortgage to cover the additional $30,000 car cost, lured by the minor increase in the mortgage monthly minimum repayment amount. If you can pay an additional say, $600 per month off the mortgage for five years then you will have made the most of the consolidation by actually only paying 7% interest on the car-related portion of the loan. Needless to say, most people do not do this and it is in this way that the banks pocket massive amounts of additional interest for consolidated loan amounts. The worst part of this is that the additional interest is likely to be payable against depreciating assets such as cars, general consumables (from say a credit card balance), etc.

The following calculator allows you to work out whether to consolidate or not and warns of the extra interest you may end up paying if you do consolidate but don't increase your monthly payments to clear the extra debt you've rolled into your mortgage. Enter your existing mortgage details then enter in each addtional loan you're thinking of rolling into the mortgage. The calculator will then show you the interest you will pay if you leave the loans separate and compares it to the total interest payable on your mortgage should you choose to consolidate.

Mortgage Details
Mortgage amount		Interest rate		Term (months)
Personal Debt Details
Loan 1 amount		Interest rate		Term (months)
Loan 2 amount		Interest rate		Term (months)
Loan 3 amount		Interest rate		Term (months)
Press to see the consolidated and unconsolidated costs of these loans
Costs without consolidation
Mortgage:	Total cost		Total interest
Loan 1:	Total cost		Total interest
Loan 2:	Total cost		Total interest
Loan 3:	Total cost		Total interest
Total debts:	Total cost		Total interest
Costs with consolidation
New mortgage amount		Interest rate		Term (months)
Total cost		Total interest		Extra interest

Calculators

In this section, you will be able to see the true cost of credit using the calculators provided. These calculators will make the interest you're paying seem more real and the give you the knowledge to see a way out of debt. By making the costs real, it will hopefully be another factor in enforcing the belief that you need to do something different and that you can do something different. As Bob from 'The Biggest Loser' said "I decided to stop trying to lose weight and do it" - this is a great change of mindset enabling him to go from not succeeding to seeing losing weight as the only acceptable outcome. The same can be true in getting your finances under control - stop trying to save (and making excuses for not doing so) and start doing, the outcomes and rewards will be very different. You will learn here:

• How credit card debts spiral out of control and how "minimum payments" benefit the lender, not you.
• How making additional payments makes a huge difference in the time taken to pay down a debt (and reduces the total interest bill astonishingly).
• How to avoid the common mistakes when consolidating personal debts into your mortgage.

Calculators - Credit Cards

Credit cards are one of the most convenient ways of paying for everyday items, yet they have quickly become one of the most problematic financial devices for many people. The ready availability of large credit limits and the relatively low 'minimum payments' have lured people into large levels of debt at high interest rates. A card that is paid off in full every month is a useful tool and a good monitor of your spending. If you cannot pay it off then you should really consider whether you'd actually be better off without a card.

Think of the real cost when using your card, impulse buying at sales and then paying high interest rates (typically 15-20% pa) on those items is not worth it. Remember when the credit card issuer offers you a higher credit limit that all they're trying to do is earn more interest from you in unpaid balances, they're not doing you any favours.

Prepare yourself for a shock! Suppose you have an outstanding credit card balance of $5000 (this is less than the Australian average balance, by the way) on a card with an annual interest rate of 18% (this is a fairly typical rate, even though the base interest rate is currently very low, and reflects the higher risk attributed to credit card repayments). On your statement, there will be a phrase like "your minimum payment will be 2% of the balance or $10, whichever is higher" and it is often the case that, unless you specify otherwise, the card issuer will only take the minimum payment each month. So, how long do you think it will take to pay down the $5000 if you stick with the minimum payment (the maximum of 2% or $10) each month (and also do not add any further spending onto the balance)? A couple of years maybe? Five years? Not quite - it would take over 46 years, with a total interest bill of almost $14000!

The calculator below lets you do the numbers for yourself - based on your credit card balance, its current interest rate and the minimum payment amount. Enter these values into the fields on the left and press the "Calculate" button to see the total amount of interest you will pay and how long it will take to reduce your balance to zero. You can use the calculator in a number of ways:

• To work out how long it will take you to pay off a balance using the minimum payment method (preferred by your credit card issuer!).
• To work out the reduction in the amount of time (and interest) to pay down your balance by paying off more than the minimum amount each month - to do this, enter the amount you can afford to pay every month into the "Minimum payment ($)" field and see how this affects the time to repay the balance. In the scary example above, paying $100 per month off (instead of the 2% or $10 minimum) reduces the time from 46 years to under 8 years (and reduces the interest bill down from $14000 to about $4000)!

Balance:	$				Interest charges ($):
Annual interest rate:	%				Number of monthly payments:
Minimum payment:	%				Number of years:
Minimum payment:	$

Budgeting - The Basics

Let me ask you - why do you think you should create a budget? Think about it for a moment. Some excellent reasons are:

• So that you can clearly see where your money is going - this probably sounds obvious, but do you really know where all of your weekly/monthly spending actually goes? I can guarantee that after creating your budget, you will find surprises!
• So that you can see where money is being wasted - without a budget (and hence not knowing where your spending is really going), you can't identify where money is being wasted or could be put to other, better uses.
• So that you can think about financial planning - it's hard to plan if you have no facts to base the plan on, so a budget (even a very simple one) gives you a basis to build a plan for your financial future.

Create your first budget

The first step is to create a simple budget based on your current income and expenses. Try using a simple method of recording this information to start with (otherwise, if it's over-complicated, you'll be more likely to give up on it or use complication as an excuse to give up), maybe just a basic Excel spreadsheet (see the Example section for some simple starting points). You must truthfully review your current situation, you're only hurting yourself by under/overestimating the real picture.

Start with a very simple budget

Make sure you remember to include all of your 'income', so don't forget any bonuses, tax refunds, interest, dividends and so on. Hopefully by the time you've created your first budget you can answer that most important question - "am I spending more than I earn?" (i.e. do my expenses exceed my income?)

Use the budget

With a budget in place, you're in a position to review your spending. Split your expenses between essential and luxury items and decide what you can do without from both lists (are all the 'essentials' really essential?). Eliminate the expenses that are not required by making adjustments slowly but regularly. Update the budget every week or month to see how you're decisions are affecting your bottom line. For the essential items, it's worth reviewing whether you can reduce those expenses by getting better deals - common 'essentials' that are worth researching for better deals include:

• Mortgages - if you're a homeowner paying off a mortgage, then one of your biggest expenses is likely to be interest on that mortgage. So, review your mortgage to make sure it's at a competitive interest rate and doesn't burden you with unnecessary fees. Often all it takes is a call to your bank to say you're thinking of moving to another lender for them to offer you a reduction in rate or removal of monthly fees.
• Phones - most people are on a phone plan that is not optimal for their needs, so use one of the online phone plan comparison sites to make sure you're getting the best deal based on your typical call patterns. (Be careful of exit costs from your current plan, but sometimes they're worth paying if you can secure a much better ongoing deal elsewhere.) This applies to both landline and mobile phones, as well as internet access!
• Utilities - shop around for other gas/electricity providers, you might get a cash bonus and/or reduced rates by moving to a new company, but always be careful of terms and conditions (especially signing long contracts).
• Insurance - never pay your renewal until you've asked the insurance company whether they can do a better price. Savings of 10% from a short phone call are common, not a bad return on your time when you add up how much you spend on various insurance products over a year (house contents, buildings, cars, life insurance, etc.).

Review outgoings to make sure you're getting the best deals on the everyday essentials

Hopefully by now there is some money left over every week/month after covering all expenses out of your income.

Cut your expenses until your income exceeds your expenses!

With surplus funds every week/month, you are now in a position to improve your financial future, by being able to save rather than spend. Some ideas for getting started include:

• If you have outstanding debt, use some of your surplus to reduce it as quickly as you can. Always pay down the debt with the highest interest rate first (maybe a credit card balance or a personal/car loan), but repaying extra on your mortgage is also fantastic saving. To illustrate this, imagine your mortgage is at an interest rate of 7% - to beat this, any investment you make using your surplus needs to make at least 10% to do better (since you need to pay tax on any interest or capital gains you make) and very few low risk investments will achieve this.
• When you get paid, automatically transfer a certain amount to a saving/investment account. You know how much you can afford to save thanks to the budget you have, so make the effort to save regularly and watch your savings grow quickly over time thanks to the power of compounding.

One last thing that should always be part of your budget is some amount set aside for charitable donations. Don't say you can't afford to donate anything, because it's not true. That single coffee bought every day for a month would easily cover a child sponsorship through World Vision for example. Giving is more rewarding than receiving and there are always those worse off than yourself. Even the tax man will reward you for it as all charitable donations (of over $2 to registered charities) are tax deductible!

Start planning

With a budget in place, you can plan for the future based on that budget. Now is probably a good time to speak to a financial planner. Don't make the mistake of only thinking planners are for the rich, as most people will benefit from good advice and the cost of that advice is likely to be much lower than the benefits you will receive. A financial planner will be able to offer you options to save on tax, make the most of your investments and suggest longer term plans to achieve your financial goals. The planner will benefit greatly from the work you've already put into your budget and you should also be prepared to let them know any current saving plans you have as well as what your ultimate financial goals are (e.g. retire by 55, own a holiday house, be debt-free by 45, etc.).

Explore the benefits of using a financial planner

When planning, it's important to be realistic but also to have an attainable dream, whatever that might be for you. Think both short and long term and remember to enjoy the fruits of your labours. Plans for the next 3-6 months will help you focus on the near term, with longer term plans (say, 5 years) being useful for the bigger picture ideals (such as a new house, major holiday or other lifestyle change). Having attainable goals will help you stick to your budget and other financial plans as there is some sort of reward coming if you do do. Of course, there will be times when you stray from the plan as not everything is foreseen - but learn to take the setbacks in your stride, remember the long term goal and adjust to get back on track.

Summary

Create a simple budget Review your spending to identify savings Pay off debts for good Save and invest Have short & long term goals (and reward yourself along the way)