Finance Q&A - Aug/Sept

Finance Q&A - Aug/Sept
Our financial guru Cat is once again with us this month. Cat has the ability to help with all those things to do with money, savings, home loans and all the kinds of things most of us wish we were more interested in or knew more about but just don't have the time to look into or quite frankly hate the thought of.

So if you have a question for Cat, go to



Finance Matters Forum

Dear Cat,

I am unemployed, but budget my money very well from week to week. Can you please advise, while I am still looking for work, how to get greater benefits from savings as I eventually want to save a deposit for a home. Any tips?

Thanks,
TJ.

Hi TJ,

Good for you!!!!!!!! Being able to save while you're looking for work is a phenomenal achievement.

Keeping your savings in a standard bank account won't be doing you any favours. Most banks pay around 0.1% interest on your accounts - so that means that if you have been able to save $1,000, you will earn a whopping $1.00 in interest over a year. Pretty generous huh?

You haven't said how much you've managed to save so far, but generally speaking, if you have $1000 saved, you can begin a regular savings plan into a whole range of managed funds. Most funds allow $1,000 initial contribution, plus regular contributions (deducted from your bank account) of as little as $100 per month. If you can save $50 per fortnight, this is achievable.

The managed fund options can range from conservative funds (mainly cash and fixed interest) through to aggressive funds with high investment in overseas and Ozzie shares. Which fund is best for you depends on your circumstances and what we call your risk/return profile - are you comfortable with risk, or are you a little on the conservative side? Are you an experienced investor or just starting out? You also need to take into consideration the time frame you are looking at - e.g. It's important you don't invest in 100% shares if you're only looking at investing for 12 months - if you decide to be aggressive, you need to be prepared to allow time for market fluctuations to even out over time.

Your circumstances play a big part in this as well - are you single, married, have kids, likely to have big expenses in the future? The best advice is to get advice. Even if you're just starting out in the big bad world of investing, it's important you start off on the right foot, in something that's going to be appropriate to what YOU need, not just what is the flavour of the month.


Hi Cat,

I am paying off a mortgage of approx. $80K with an estimate valuation of $250K on my own home and $100K on an investment property with an estimated valuation of approx. $160K.

I work full-time and would like to know whether it is possible (and worthwhile) to refinance the investment property for the full valuation and use the difference to pay off some of the mortgage on my own home?

Thanks,
Alice.

Hi Alice,

Strictly speaking, the Tax Office considers that if your investment loan is increased to repay a home mortgage, the interest charged on the investment loan, for that portion, would not be treated as a tax deduction, as the money has not been used for income producing or investment purposes.

However, stay tuned! A test case has been put forward to which the ruling has found in favour of the investor. The ATO however is appealing this decision and the outcome is expected in the next few months.

As far as your options for loan structure and composition goes, we recommend you speak to a mortgage broker in this regard, to ensure that the loan(s) you have in place is the most effective for you, in both structure, and options available. i.e. - extra repayments allowed, fixed rate vs. variable, redraw facilities etc. It is important that your loans are structured in such a way that is right for your needs, and not just what is most attractive from a tax perspective.


Hi Cat,

I am about to retire and will receive a relatively healthy super pay out when I do. I am nervous though that my wife and I will not have enough to make ends meet for the rest of our lives. We own our house and have two cars. I thought it might be a good idea to sell our house and move into something smaller in a cheaper area.

Can you please give us some advice on best options available for retirees?

Thanks,
Frank

Hi Frank,

I can understand your nervousness, making the transition to retirement is a huge change.

One thing we all must do upon retiring is realistically evaluate our needs. This isn't always easy, as the move from a steady income and an idea of our expenses, to having to provide income from other sources and re-evaluating our spending habits and needs can be harrowing.

The first step is to evaluate what you need - you have two cars, will you still need two cars in your retirement? Another question you have asked is should you move to a smaller house in a cheaper area - this is a lifestyle choice. I always tell people to be realistic, but be happy. If you are happy where you are, and are content in your current home, then this should be your aim. Unless circumstances dictate otherwise, there is no point moving to somewhere where you won't be happy. Unfortunately I have seen a few of my clients make that decision to move to a smaller home, in another area, and are utterly miserable and wish they'd never moved.

Another area to evaluate is your budget. A budget is essential at any stage of your life, but this is even more the case when you retire. You will need to re-evaluate ongoing costs. For example, you will no longer have the same costs for petrol or public transport to and from work every day, but if you intend to travel, you will need to take the travel costs into consideration in your budget. Another area is lifestyle - are you going to spend more time on the golf course, tennis court, take up some hobbies you have neglected? If so, how much will these extra activities cost? Of course ongoing costs such as electricity and gas will still arise, but will there be a difference to your heating bill for example if you are home more often.

Often after doing a comprehensive budget, you find that your income needs aren't quite as great as you anticipated, and as such, the income needed to cover your lifestyle will also be lower than you expect. As far as how much do you need, it all depends on individual circumstances, some people can live quite happily on $25 000 per annum, and others on $60 000. It really does depend on your circumstances, and lifestyle choices. This income can be sourced from your superannuation, non-super investments such as shares and managed funds, and one area that a lot of people underestimate, is Centrelink entitlements. The maximum Age Pension is close on $18 400 per annum for a married homeowner couple, if you think to how much capital you would need to generate this income each year, that is quite a substantial area to consider.

Once again, the best advice is to get advice from a professional Financial Planner, who understands your needs and lifestyle choices. A Planner can assess where you are at, find out what your objectives are in line with your risk tolerance, and develop a plan specifically designed for your particular circumstances. Not every strategy is suitable to everyone, and it is vital you see a Planner to establish the best strategy for YOU.

Most importantly enjoy your Retirement - you have worked your whole life, now is the time to enjoy yourself!!!!!!!


Cat,

I need some help fast! I have some shares with Coles Myer and I bought them two years ago for $7.56. Now they are really low at $5.80. I need to get some money and I want to sell my shares but I don't want to sell the shares while they are so low.

Can you recommend another way for me to get my hands on a few thousand dollars rather than sell my shares?

Linda

Hi Linda,

If you really don't want to sell your shares, there are alternatives available to you for accessing money at short notice. For example, you could get a personal loan (we suggest you look to a Bank first, their rates are usually lower than other loan providers). Banks allow personal loans for any reasonable personal purpose. It pays to do your homework on these, as rates can vary quite substantially between providers. If you need funds quickly, most banks can approve and fund a personal loan within 24 hours.

Another alternative is to look to establishing a temporary overdraft on your bank account. This means that you are able to overdraw your account to a specified amount. Rates are usually similar to those of personal loans, and Banks usually have similar criteria for approval. One consideration with an overdraft is that the limit will remain in place, even after the loan is repaid. However be aware, some banks charge for the facility even if it's not being utilized. I must warn that with this type of facility, you must be disciplined, and make sure you don't go on a spending spree, just because the facility is there. If you're not a disciplined person, the best approach is, once it's repaid, have the facility removed so you're not tempted.

Yet another alternative is to apply for a credit card, or, if you already have one, apply to have your limit increased. I must admit I'm not a big fan of this option, as rates are usually much higher than personal loan or overdraft rates - usually higher by 5 or 6%. Again, you must be disciplined, and once the amount you use is repaid, have the limit reduced to it's original level, or if it's a new card, reduce it to the lowest limit (usually $500) to make sure you don't get yourself caught in the credit card trap.

Should you decide to sell your shares, as shares are liquid in nature, you will normally have your funds within 4 working days. By selling shares at a price lower than what you originally paid for them, you will crystallize your loss, however, from a tax perspective, this loss can be used to offset other capital gains made. If you have no capital gains in the financial year you make your loss, the loss can be carried forward indefinitely until such time as you have a capital gain, and be used to reduce the tax payable on the gain at that time.

You haven't said what you need the money for, or how much you need. An alternative for selling shares or borrowing money is, if it's not urgent to have the funds now, perhaps you could set aside a certain amount each week to save up the money, rather than selling your shares or borrowing, and paying interest.

Whatever you decide, make sure you do your homework first, and not lock yourself into a facility that may not be right for you.


Remember: If you have a question you'd like to ask of our financial consultant and guru Cat, go to


Finance Matters Forum



Cat is a representative of Winchcombe Carson Financial Planning.



MORE