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Coal Coast Mag - How to stash your cash... Your money questions answered

Should you make it a priority to pay off my mortgage before everything?

The debate over the best place to stash your cash is one that is hotly contested, with most people claiming that the home mortgage is the be all and end all. Whilst there is some merit in this, it’s important to look at the big picture before switching on auto-pilot and directing all your hard earned savings onto your mortgage, without a second thought.

Generally when interest rates are high, your best bet is to reduce your mortgage as quickly as possible. You know how it works; the larger the balance and the longer you leave it, the more interest you repay the bank - but current market conditions have changed the game. Interest rates are at their lowest levels in decades freeing up cash flow which can be used for investment opportunities.

Take Josh and Jenna, they are both 40 years of age, employed and earn $90,000 and $75,000 respectively. Together they have a $600,000 home mortgage with an interest rate of 6.00% (conservative long term average rate). They have $750 and $500 per month in surplus cash flow (after minimum principal and interest repayments) and are funnelling this combined amount to make additional monthly repayments onto their mortgage.

Rather than directing their combined $1,250 per month to their mortgage, if they went with a different strategy and made salary-sacrifice contributions into Super via their employer, at age 65 Josh and Jenna would be $149,786 better off with an additional $708,193 contributed to Super which far outweighs the home loan saving of $563,406.

This scenario assumes a modest annual investment return of 7% pa and captures just how generous Superannuation tax breaks can be. Josh and Jenna will not pay income tax on the portion they salary sacrifice into Super but pay a super contributions tax of 15%.

This strategy becomes even more compelling if Josh and Jenna were to come into a higher income bracket and earn $150,000 each. In this case they would be approximately $210,494 better off collectively. However, this strategy becomes less beneficial the higher the interest rates rises. The break-even point in this scenario would be an interest rate of around the 8.5% pa mark which is a far cry from the 3 and 4-point-something mark we are seeing at the moment.

So why aren’t we all feverishly salary sacrificing every last cent into Super? Before you jump in there are a few things to consider to determine whether this strategy is the right one for you. 

Firstly, there are contribution rules to minimise the pre-tax income directed to Super, which depends on your age and your income level.

Secondly, for most, the security of having a fully paid off home generally provides peace of mind, whilst freeing up income for any big monthly repayments, bills and other expenses. Accessibility is also a big factor - once you direct the benefits into your Super fund you usually cannot access it until age 65.

It all comes down to your individual situation and personal preferences. You must factor in your age when making a decision and give thought to how important it is to preserve your cash, whilst weighing up how disciplined you are. By putting your long-term goals and objectives down and considering what is most important to you, the decision can be made a lot simpler.

In answering readers' questions the advice is of a general nature and is not a substitute for personal financial advice from an independent adviser.

May 2019 e-newsletter

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April 2019 e-newsletter

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March 2019 e-newsletter

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Coal Coast Mag - How To Manage Your Money... Your money questions answered

I am on the verge of retirement and am worried about how to best manage my finances after I stop working. We are mortgage-free with no dependents living at home. What should I consider?

Retirement, or what we prefer to call the ‘Post Work Reward Phase’ should be an exciting and worry-free time in your life. Prior to making this significant shift, it pays to plan for the future to ensure this phase comes with as little stress as possible. The earlier you start preparing for life after work, the more options you have to set a course that suits you and the lifestyle you envisage.  

Leading up to this time, it is important to take stock on the assets and structures you hold, what you will likely need and have a rough estimate on what you will look to spend year on year. There are some simple calculators on the MoneySmart that provide a meaningful output for reflection. Based on these outcomes, you may decide to alter your retirement plans, and consideration may be given to actions such as a savings plan, sale of a lifestyle asset (downsize home), adjusting your expectations and or timeframe. The key is to be as informed as possible, early. 

What we believe is most important in retirement planning, is making sure your finances are structured in a way that meets your needs and provides the best outcome for you and your family. There are a number of significant opportunities for pre and post retirees to take advantage of structurally, such as maximising Superannuation, with a view to establishing tax free pensions. If one is considering changing their home, other more recent rules concerning superannuation contributions may also be a consideration. Ensuring tax is minimised, and administration of one’s financial life is as simple and efficient as possible is a further key benefit for most retirees.

There are many other important elements to consider, such as Centrelink and the Age Pension, Downsizer Benefits, Aged Care, Estate Planning, Super Income Streams, Taxation and the list goes on. We personally believe this pre-retirement phase is one of the most important times to get expert attention from a Financial Adviser, as strategic advice can have an extensive long-lasting impact. 

I have almost saved enough for a house deposit, and am unsure about what I should be looking for in a mortgage. Any tips?

You have been saving away your hard earned money and you have almost saved enough for a deposit – congratulations! Choosing your new home is obviously the major decision from here, but taking the time to select the right mortgage is almost as critical because if done well, you could save tens of thousands of dollars or you could pay out the loan years earlier!

A lot of people start by approaching the bank that their parents signed them up to when they were kids. Whilst this is convenient, it can be a mistake as the bank will recognise your loyalty and decide that as you are already with them, they don’t need to pass their best rate on to you. The other problem with this approach is that you are putting the cart before the horse. You are far better off to determine what functionality you need in your loan and based on this, you can select a lender that offers this at the best rate.

The challenge for a new home buyer is navigating the minefield of banking jargon to understand what suits your situation and ultimately what is going to save you the most interest - Variable rates, fixed rates, P&I, interest only, offset and redraw can all benefit the customer in the right situation but everyone’s situation is unique and therefore the most suitable mortgage will vary from person to person. Research some of these terms or speak to a mortgage broker who can help you to get an understanding of what type of loan would be best for you.

In answering readers' questions the advice is of a general nature and is not a substitute for personal financial advice from an independent adviser.

February 2019 e-newsletter

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January 2019 e-newsletter

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Coal Coast Mag - Be Cash Smart... Your money questions answered

How much would you recommend putting away in a rainy day fund? Any tips for saving smarter and faster?

As much as we may try to predict the future, life always comes up with a way to throw us an unexpected curveball. Although you might not know what form your next unanticipated expense is going to take or how much it will cost, rest assured it's going to come at some point. With this in mind, a basis of a good financial plan is setting aside money for a rainy day fund. 

As to how much to set aside, this will vary depending on your lifestyle, monthly costs, income, and dependents. Our general rule of thumb is to have access to at least 3 months’ worth of living expense inclusive of mortgage repayments or rent, with 6 month’s being the ideal number. 

In regards to saving smarter and faster, the first port of call is having an intimate understanding of your living expense and how much you can realistically set aside. If you have a savings goal and timeframe in mind, its best to work backwards, and calculate what you will need to put aside to achieve it. Once you have set a realistic number, the easiest way to commit to a savings goal is to set up a regular direct debit shortly after your pay cycle into an account that is more difficult to access than an everyday bank account.

As to where to save, this is very much dependant on your savings objective. If it’s a short term saving goal, an interest bearing saving account is appropriate. However, if you have a longer term saving objective, consideration could be given to a low-cost diversified investment or even your superannuation fund. This will give your savings the best opportunity to compound and grow for your future benefit.

Should I be contributing to my own super account? How do I ensure my super account is best suited to me and what should I look for in a super fund?

Even with a lot of change in the superannuation space it remains the most effective place to build long term savings. No matter our clients ages and stages in life we recommend they pay particular attention to their superannuation fund, because at the end of the day almost 10% of your hard earned income is being contributed into it! We recommend consideration be given to making contributions to bolster the balance and to ensure that it is set up and structured appropriately.

The Superannuation System is very complex and navigating the endless number of super funds on offer is very difficult. Some key elements to look out for when reviewing your fund is the fees they charge – both administratively and for investment management; the investment options available and the amount of risk you are taking on; the performance of your investment over a 5 year plus timeframe; and the insurance you hold (if any) and the premium charged. Your employer will more likely than not, give you choice of fund, which means you can choose any super provider on offer in the marketplace. They may, however, also have a default fund they recommend. Best to compare apples with apples and understand the benefit of joining an employer default fund before you consider moving.

To ensure your superannuation balance is healthy when you are eligible to access, which can be as early as Age 60, we recommend making contributions ongoing over and above the statutory amount from your employer. These contributions are received into your superannuation fund pre-tax via either a salary sacrifice payment or deductible contribution (if you are self-employed), and are taxed at 15% on entry which for most is well below their marginal tax rate. If you are earlier in your working life, we would generally recommend committing to a more modest contribution amount, but leading to your retirement date, maximising your contributions into your superannuation fund can make a huge positive impact. 

In answering readers’ questions the advice is of a general nature and is not a substitute for personal financial advice from an independent adviser.