26 Giffard Street
Williamstown 3016
Ph. 03 9397 7275
Fax. 03 9397 1734
Mobile. 0428 310 165
Email. reidcont@tpg.com.au
ABN: 65 111 801 079
www.reidconsultants.com.au

1st May 2006

The Basic Structure

Life Stages Wealth Creation strategies are all based on an underlying structure, irrespective of what stage in the life cycle you are. The generic strategies are then built on that structure according to your needs at the various stages. Each of us are different and where one person may be young, single and upwardly mobile, another of the same age may be married with kids and a mortgage. We still get to the same end point, we need to live now and we need to plan for our future.

What is the Structure?

It is based around seven key steps required that we all need to consider to secure our future. These are:

1. Have a Plan - this includes a Budget
2. Build Savings – save first and spend later
3. Invest Smarter – understand Risk versus Return and time frames
4. Minimise Tax – to your overall benefit
5. Reduce Debt – particularly ‘bad' debt or consumer debt
6. Protect yourself and your family and asset – Insurance required
7. Take time for Yourself and your Family – fit and healthy and work balance

Why should I give any thought to this now?

Established fact, over 70% of Australians will rely, either in part or entirely, on the government aged pension in retirement. This pension is designed as a safety net, set at 25% of the average weekly wages, 25%, being approximately $13,000 per annum for a single and $22,000 for a couple per annum. The Association of Super Funds of Australia (ASFA) December 2005 survey found that a modest lifestyle costs $17,826 for a single (Housing – ongoing only – not including repayments) and a comfortable lifestyle costs $34,560. It is a significant difference in lifestyle to that afforded by an aged pension. The earlier you establish this structure based on these seven steps, the greater chance you will be on of the 5% of Australians who can afford to retire financially independent.

Have a Plan

This is perhaps the hardest step of all, setting down on paper what you want to achieve during your life, now, next week, next year and into the future. Most people can plan for specific major events like a wedding or a holiday, but do not take the steps to continue that into the future for the most important part, their lives. I spent some time detailing what is required in the Feb '06 Newsletter, refer to that again and start the process if you haven't already.

A Budget is an integral part of this process, you need to know where you are NOW, what your income is and what you spend it on. Break up the expenses according to categories to help you understand what money you have left after essential payments are made to live. Separate these into what can be called Fixed Expenses, being those that you are legally committed to, and Flexible Expenses, those that you have some control over. We will further break these down as well so to help you understand what are Essentials and what are Lifestyle expenses.

An example you could use for Expenses:

From this, you can see what you are committed to and what choices you have been making. There may be room to reduce some of the Fixed and some of the Essential expenses, consolidating debt, reviewing phone plans or insurance providers etc. However for most people, it is the Lifestyle expenses that bear most scrutiny, what re you spending now that is not benefiting you in the long term?

Build Savings

The easiest way to save, even if it is $5 a week, is to divert money directly from your wage before you get it. Most companies offer a salary direction plan where you can set up a number of bank accounts so that your salary is transferred into these amounts automatically by the amounts stipulated. Care needs to be taken so your money is not lost in bank fees.

Working with what your Budget highlighted earlier, it may be wise to separate your net wages into four different accounts, one to cover the Fixed Expenses, another to cover the Essential Expenses, the third to your Savings Account and the remainder becomes your Lifestyle Expenses that you use for these purchases. This does two critical things, it gives you a mechanism to save money and it clearly shows you what you can spend on Lifestyle type purchases. We combine this with eliminating your Credit Cards, tear them up unless you are very disciplined with their use. You need to get into the habit of only spending what you can afford, that is what you have in your Lifestyle Expense account and have saved from past weeks or months. Use an EFTPOS account so you can track what it is you spend.

The principle is Save First, Spend Later. The older generation knew this, perhaps because there were no such beasts as credit cards freely available nor were there such undisciplined lending practices as there are now. It may be that they grew through the depression years and the war years, but they had the habit of only buying when they could afford to buy and had saved already.

Invest Smarter

Having all your surplus cash each week just being put under the bed is better than spending it, but in time the value of that cash decreases (due to inflation and cost of living rises). Having that cash sitting in a cheque account at a local bank is better again, but unless it is earning interest at least as high as the CPI figure, you are still losing future purchasing power.

Investing smarter is about getting your money to work for you, growing on a daily basis at a return and risk level you are comfortable with and that is aimed at achieving your goals. This is the area of Asset Allocation investment strategies, where the five main forms of Assets all bear different returns based on their risk. For instance, Cash at the Bank is seen as a very safe environment where it is very unlikely that you will lose your investment or cash, consequently as the risk is low, so is the returns, perhaps on a cash management account, 1 to 2% above CPI. Fixed Interest investments, being government bonds and company debentures, mostly secured earn 2 to 3% above CPI, again a relatively risk free investment. The Property market has been very strong in Australia over the last decade, however most expect this to be flat for the next few years. It can return a negative amount, on average every 14 years or so. People investing in the Sydney market are feeling this now. Australian equity or share market is a more volatile market, a negative return every 4.3 years but returning 6 to 8% above CPI. The last form is International Shares, again moving up in terms of risk or the possibility of a negative return but mostly generating higher returns.

It is critical that you understand what your risk profile is, that is where you can be comfortable to be able to sleep at night understanding the potential consequences of your investment decisions. There is little point taking on a higher risk than is necessary unless you can afford to lose the money. Having an understanding of where you are in achieving your goals, what do you need to further generate and how long your investment time frame is are all key components in the equation.

Minimise Tax

Was it Kerry Packer that once said, every Australian has an obligation to minimise the amount of tax they pay as the government just wasted the money? The crucial point is that you need to take advantage of legitimate tax deductions available, time your income and expenses to your benefit if you are able to affect the timing but more importantly your focus should be to maximise the net after tax returns available. Strategies undertaken can include investing in companies that pay fully franked dividends, negative gearing investment assets where it makes sense, salary sacrifice into superannuation etc.

Any investment made that just seeks to minimise tax or reduce tax where the underlying return or risk does not make sense should be avoided at all costs. Fancy heavily promoted tax schemes, particularly prevalent around the financial end of year, need to be very carefully considered before taking them on. Make sure you understand what the underlying return will be and the likelihood of that return before you sign on for such schemes.

Reduce Debt

Debt is a two edged sword, the press over the last few years have taken to describe debt as either ‘good' or ‘bad'. This means that there can be benefits gained by taking on debt that support an investment strategy and is used to increase your assets and wealth or to produce income. It is a gearing strategy where you use other peoples (banks) money to increase the returns you would otherwise receive. The critical element is that the after tax return, including capital growth, needs to be more than the interest cost of servicing that debt. This is regarded as good debt.

Conversely ‘bad' debt is that where the purchases made using that debt are lifestyle purchases, literally valueless the day after they are purchased. Purchases of fancy large plasma TV's on credit card or store cards where the purchase cannot be paid off by the next cycle and interest costs start hitting or purchasing holiday travel, accommodation and expenses on credit card or personal loans are examples of bad or consumer debt. These need to be reduced as soon as possible.

Using debt facilities well can increase your wealth and prosperity as well as provide a convenience. Interest free terms offered by such retailers as Harvey Norman is a good deal as long as the purchase price is not inflated or you could not do better elsewhere or by negotiating down. It is only a good option if you pay the amount when it is due. Otherwise these types of offers may end up with you paying 25% interest rates. The up to 55 days interest free period for credit cards is also useful, again as long as you pay the balance in full by the due date.

Protect Yourself

This is an area where Australians are vastly underinsured. The concept of ‘she'll be right mate' and ‘it will never happen to me' may be true for some, but the chances of a major event happening in your life are high. Everyone will die at some stage, no-one passes through life alive at the end. The issue is to find the appropriate level of cover and type of insurance appropriate for your life stage. I have not met many people who say, I don't care what happens to my family if I die.

Research suggests that only 4% of families have sufficient life cover. 60% of families do not have sufficient life insurance to cover their family for one year. While insurance is a grudging purchase, the fact that at a cost of 1 to 2% of our income, we can purchase sufficient high quality insurance cover. Build in the cost into your budget and obtain the cover required for your life stage and your family. We nearly automatically insure the car and the house and contents, why do we not cover the most important assets, ourselves and our families? It may be a distrust of insurance salesmen, but you can find very ethical and professional insurance agents and financial planners who can provide for your needs.

Health insurance, life cover, total and permanent disability and trauma cover are the essential insurances needed for both the main income earner and non-income earner if you have a spouse looking after children. Income protection is also needed as an essential cover. The fact that most people will be in severe financial difficulty if they are out of work for three months with no income coming in highlights the need for income protection.

Take Time for You and your Family

This is finding the balance between work, yourself and your family. It is keeping fit and healthy, exercising regularly, taking holidays to unwind and re-energise and connecting again with your family. It is about getting home in time to read stories to your children, or about making the time for an evening with your partner. Your goals and budget need to incorporate this element as an important component. It does not need to be expensive, it could be as simple as a walk in the park once a week, or a camping trip each summer.

What does it cost?

Firstly

• your time and effort to consider what you want for your future for yourself and your family.
• you will need to dig up some financial information, income details, pay slips, superannuation statements, etc. and work out what your income is currently spent on – a budget. There are a number of web-site budgets easily available ( www.choice.com.au – under money and Rights, has a free online calculator).
• you will need to list down what financial assets and liabilities (what you own and what you owe).
• you will need to consider what lifestyle you want to lead now and in the future based on your current and expected future income.

Secondly

• you pay for my time and expertise. If it involves a mortgage re-finance, then any upfront commission due from lenders is deducted from that investment. All fees are clearly stated upfront and agreed on before we proceed.

What do I need to do now?

Simply contact me for an initial discussion, dig out the financial information so I can get an overview of where you are at and decide how I can assist you and your family.

This first discussion is at no cost and is obligation free. It is done so that you can be comfortable with me as a person and professional and that the service I provide is what you are after and need to do for the future. It will enable you to see what benefits are possible and for me to see if I can assist and be able to set the framework in terms of the time it will take and the cost.

What difference will it make ?

Compare the lifestyle of retirement at 65 or older and surviving on the government aged pension, which is set at 25% of the average weekly wage, perhaps supplemented by some superannuation income (but not enough) compared to the possibility of retiring early or retiring on a comfortable retirement income stream of 50% to 70% of your current income levels.

Can anyone achieve this?

It depends on where you are now financially, what choices you need to make, how long you are going to continue or need to work for and what stage you are in the life cycle. It is possible to increase your wealth or lifestyle at almost any stage, whether it is sufficient for what you desire is the question to be answered. We can map out and model the possibilities and options available to you.

Give us a call – 9397 7275

- Helping People through Finance