January 2019 e-newsletter
Keep updated, informed and entertained with commentary on industry news, interesting lifestyle pieces, testimonials and engaging factual information in the areas we specialise in.
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.
'Rentvesting' - Entering the property market without sacrificing your current lifestyle
After a number of years of property price growth, purchasing in a centrally-located or sought-after area is very much out of reach for the average working millennial. Instead, many are opting to rent rather than buy as it means not having to compromise lifestyle. But for those who are still eager to enter the market, there is a way to get the best of both worlds.
‘Rentvesting’ is the term coined for when you purchase a property for investment purposes in an affordable location and continue to live and rent in the area of your choice. An example of how the market is evolving, it is a wealth creation strategy that is popular due to the flexibility it offers in comparison to being an owner-occupier. It’s a tactic that overcomes financial hurdles and exorbitant property prices, because you can buy in a location that fits your budget rather than stretching yourself with loan repayments that restrict quality of life in the area you most enjoy.
Millennials are less interested in purchasing property in the outer suburbs having to either commute into the city hub or live in a less desirable area. Rentvesting works because even though you’re renting, the property you buy is an asset that’s growing in value and being paid off by your tenant (assuming you choose a smart location and interest rates remain relatively low). Not only that, but you’re gaining equity that can launch you into other property purchases down the track, including a home to call your own.
For Rentvesting to be further beneficial, If you are an efficient saver and your tenant is paying down your loan, you can invest your savings alongside the investment property and use what accumulates over the years for your future benefit.
In the past, the great Australian dream was to buy a home on a quarter acre block and then do everything you can to pay that down as fast as possible in the hope of living debt-free. Rentvesting is quite the opposite. It says we’re okay with good debt as long as we stick to our budget and keep using the money to invest further. You’ve got to have an open mind and be comfortable with debt. But while this strategy may appear ideal to many, it’s not suited to everybody and does come with some pitfalls they will need to be weighed up. Capital Gains Tax, not having the security of owning your own home, and risk the housing market doesn’t perform are a few.
To ensure you have the means to make ‘rentvesting’ work for you, for advice on good debt and other strategies that will allow you to maintain your current lifestyle get in touch with the team at The Wealth Connection.