06 Aug 2019
As parents, we all dream about leaving a legacy for our children. Whether that’s in the form of passing on the family home, or another valuable asset, we typically want them to get a head start in life.
Some people take a different approach to leaving a legacy though.
While life insurance is a vital part of a robust financial plan, some women hold onto it much longer than is necessary. Their children may have left home (no longer financially dependent). Yet they hold onto their life insurance so they can leave the proceeds to their children. However, this may not necessarily be the most effective approach.
The sharing economy has taken off over the past few years, giving people new ways to earn an additional income.
Have a car and some spare time? Drive an Uber. Possess a unique skill and have some extra time? Perform tasks as an AirTasker. Vacant property collecting dust? Rent it out on AirBNB.
In fact, AirBNB is one of the most popular ways to generate additional income in the sharing economy, with spare rooms and holiday homes being put to use.
Before you list your property on AirBNB, here are so pro’s and con’s that you should be aware of.
03 May 2019
The Little-Known Super Tax That Could Cost You Thousands… And What To Do To Avoid It
The superannuation system in Australia can be quite complex. To make things worse, politicians like to tinker with the system, which keeps us on our toes. The unfortunate thing about this is that for the average Australian it can become quite challenging to stay up to date with the rules, regulations, and taxes.
One tax that you need to be aware of though is death benefit tax.
29 Apr 2019
If you are a business owner, here are a few considerations you need to be aware of.
Your Business Is Only As Valuable As Someone Is Willing To Pay
If you’re planning on selling your business to fund your retirement, you need to remember that any asset is only as valuable as someone is willing to pay for it. Your business may be going well now and it may even see it’s value increasing over time, however, it doesn’t take much for an industry to be disrupted and for business values to plummet.
Think about taxis. A few years ago, a taxi licence in Queensland could be sold for $530,000. Then along came Uber. Now, they are valued less than $150,000.
Imagine if this happened to your industry.
27 Mar 2019
Many people will say that they are dreaming of retirement, but some are not taking the necessary action to make it a reality. In fact, there are not too many people who know the answer to a straightforward question: How much income do you need in retirement?
Let’s take a look at what the Association of Superannuation Funds of Australia (sometimes known as ASFA) thinks is a reasonable amount to live on in retirement and compare it with my own experience as an adviser. I’ve worked with many people who are planning for retirement and you may be surprised to see how different my number is to ASFA’s…
If you had to ask married couples what causes the most friction in their relationship, finances would be at the top of the list. Some people may have been financially abused in previous relationships, while others have been taught by their parents to keep things separate. Despite this, there are some concepts around handling your money in a relationship that you should know so that you can effectively run your household.
25 Jan 2019
When it comes to planning for your retirement, you need to start when you’re young. That’s why it’s called investing for retirement – it’s something that you work for years to achieve before you reap the benefits. However, there are two questions that commonly arise:
1. When should you start planning for retirement?
2. How much do you need for retirement?
When Do You Start?
The simple answer is: as soon as possible. When you start earning a salary, it’s recommended that you start putting money away immediately. Remember the story about the tortoise and the hare? The tortoise beat the hare in a race because the hare did nothing and relaxed for hours. Meanwhile, the tortoise made slow and steady progress – and won the race. If you spend too much time putting your retirement savings off, it might be too late when you start.
How Much Do You Need?
Answering the question of how much you need for retirement requires you to do some calculations. First, ask yourself what standard of living you expect. Do you want to move to a smaller home? Will you want to travel abroad once a year, or do you want to be able to visit your kids in another state over Christmas and for their birthdays?
Next, estimate your expenses during retirement. Remember to factor out certain expenses that won’t be relevant by that time – for example, will your mortgage be paid for? Will you be living somewhere more affordable? If you’re paying school tuition now, you won’t have to factor in that expense at a later stage.
Your expenses should include enough money to maintain your home, health insurance and medication, travel expenses, basic living necessities such as clothing and food, utility bills, hobbies, and entertainment. You can calculate it annually, to give you a lump sum of how much you need for retirement per year, or monthly if that’s easier for you. Lastly, add inflation costs to your calculations.
Investing for your retirement might be a pain in the neck now, but you’ll be happy to have put in the effort when you’re living out your dream lifestyle. Start as soon as possible, calculate realistic expenses and remember, be the tortoise!
Despite interest rates being low, debt stress is at record highs. Banking data shows that on average Principal and Interest repayments currently take up 42% of household income. As a result, banks are becoming concerned about what will happen when rates start to rise?
Increasing pressure from APRA and the Royal Commission, have made the ability to refinance loans considerably harder. Clients that have never had an issue obtaining a loan in the past are being heavily scrutinised and even having their applications declined.
Banks appetite for Interest Only loans have also decreased significantly. Many clients are finding that when they try to extend their Interest Only (I/O) term, that the banks are not accepting their request. If you have an investment property, paying principal and Interest (P&I) payments can have a significant impact on your cashflow and wealth strategies.
To make things worse, most banks have also changed the way they assess applicants ability to afford the loan (Serviceability). Instead of relying on an average living expense formula for couples and families, they are now wanting to see your personal bank statement transactions and a accurate budget.
If you’re like most people, you spend pretty much what comes in and your budget is set based on your bank balance. If interest rates went up you would just adjust your spending. Unfortunately, this type of budgeting is going to make it very tough when you apply for that next loan.
What can you do to prepare?
To ensure a smooth transition to Principal & Interest Repayments or rollover to another Interest Only period the following tips might help;
- Make a budget that proves you can afford P&I repayments with a 2% interest rate rise. Make sure its comprehensive, and don’t forget to include things like your drivers licence renewals and an amount for when your fridge blows or when you need to replace furniture. You might not need it this year, but next year you might.
- Stick to the budget. The banks review 6 months of transactions and if you broke the budget, they will know. An easy way to do this is by opening separate bank accounts for your discretionary spending. For example, Groceries, Gifts, leisure / entertainment, children, etc.
- Don’t leave it to the last minute to renew your Interest Only term. Speak to your broker or your bank, at least 3-6 months before the Interest Only term finishes. This will ensure that you have time to review your options and adjust your budget before you need to apply. It will also give you time to sell if affordability is an issue.
- If you do have to change to P&I, review the viability of your investment strategy. It may no longer be the best option, especially if you still have debt on your principal residence.
Puddle 2 Pond Financial is a Financial planner Nowra and has been in operation since 2012. We see clients at our office in Nowra and provide a mobile service in the Illawarra and Wollongong region. We specialise in helping clients with budgeting and implementing strategies so they stick to it. If you’re a little overwhelmed and would love some help, give us a call on 02 4424 0479 …. We’d love to help.
26 Jun 2013
Once it was something that only happened to other people, but in these challenging economic times, redundancy is fast becoming something a number of us may experience, so it pays to be prepared.
Redundancy can be a time of confusion. On one side a person is faced with losing a regular income and on the other they may receive a substantial payout – both present problems to be managed and both may present opportunities as well.
Facing redundancy can be an extremely stressful time, but before rushing in and making any decisions, it’s important for people to take stock of their current circumstances, immediate needs and plans for the future. Making the wrong decision can impact a person’s financial situation for years to come.
There are good redundancy stories. We all have a friend who was able to pay off their mortgage with their redundancy package and then land a better job a few weeks later. The loss of an old job may be the jolt a person needs to start a new career or be enough to energise a person to start their own business.
But for every positive experience, there are many that don’t go so smoothly.
Whatever the situation, it’s important to seek financial advice before any major financial decisions are made.
So, what can an employee expect to get? In redundancy, a person is entitled to receive any outstanding holiday pay, long service leave and other entitlements, as well as a payment as compensation. The payment will vary between employers and awards, but for example, could include four weeks pay up front, plus two weeks pay for every year of service.
One of the first questions a person may ask is, “Will I qualify for any Centrelink assistance?” This will depend on a person’s assets and assessable income. There are also waiting periods that need to be served before a person may be eligible for Centrelink assistance. This is one area where advice is crucial.
There are a number of factors to consider if redundancy is looming. One of the first things people should consider is preparing a budget – how much do they have in savings, what are their debt levels and how will they meet living and other major expenses. Answering these questions, will give a person a better idea of what to do with a redundancy payout.
A labyrinth of taxation rules surrounds redundancy payouts.
No matter how much a person receives, some of the money will go in tax. The good news is that redundancy payments are taxed at a lower rate.
It can get complicated, but generally, payments made under redundancy or early retirement schemes will have a tax-free portion (which can’t be rolled into superannuation) and an eligible termination payment (which may, in some circumstances, be able to be rolled into superannuation if certain criteria are met, otherwise must be taken as cash). Currently, $7,350 of the payment will not be taxed, plus $3,676 for each completed year of service.
Eligible termination payments are payments that exceed the tax-free portion discussed above. If certain criteria are met, the payment can be rolled into superannuation, deferring tax so that initially only 15 per cent tax is payable as the money enters the fund. Otherwise, the payment must be taken as cash with tax paid immediately.
The amount of tax a person has to pay also depends on how much of the payment relates to employment prior to 1983, the amount of the payment and a person’s age.
Accrued annual leave and accrued long service leave will generally be taxed at 30 per cent, even if a person is normally on the highest marginal tax rate.
Superannuation payments may have two components, preserved benefits and non-preserved benefits. Preserved benefits must be invested in an approved fund and generally can’t be accessed until 55 years of age. Non-preserved benefits can be taken in cash, with the tax rate dependant on the amount of the withdrawal, a person’s age and financial circumstances. But superannuation funds should only ever be accessed as a last resort.
Also, for those people who have insurance cover under their employer super scheme, it’s important to review arrangements as many insurance benefits could cease on termination.
What to do with a redundancy payout will have a lot to do with what stage of life a person is at.
Someone with a family will need to consider how they will meet all their regular responsibilities until alternative employment is found. While it may be tempting to pay off the mortgage, it may be better to wait and do this when employment has been found, just in case the funds are needed in an emergency.
A person nearing retirement will have to consider whether they can afford to retire. Those aged 55 can access their super funds as a lump sum if they choose to retire. Alternatively, they may be able to access their superannuation without retiring as a non-commutable income stream. A person should also contact Centrelink to find out what social security benefits they may be entitled to.
Even a young person without financial and personal commitments should think twice before spending their payout, as there is always a risk that employment may not be found as soon as expected.
There are many issues surrounding redundancy and each person’s circumstances will be unique, so it’s crucial to seek professional financial advice before making any decisions with what could be one of the largest lump sums a person will ever receive.
Amanda Pond is an Authorised Representative of AMP Financial Planning Pty Ltd, ABN 89 051 208 327, AFS Licence No. 232706.
Any advice given is general only and has not taken into account your objectives, financial situation or needs. Because of this, before acting on any advice, you should consult a financial planner to consider how appropriate the advice is to your objectives, financial situation and needs.