Financial Planning – YPNT Hobart Jarrod Jeremiah – Complete Wealth Authorised Representative
Important information This presentation has been prepared by Genesys Wealth Advisers Limited ABN 20 060 778 216, Australian Financial Services Licence Number 232686 and Principal member of the FPA. Any advice contained in this presentation is general advice only and does not take into consideration the participants personal circumstances. To avoid making a decision not appropriate to you the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. Any reference to the participants actual circumstances is entirely coincidental. When considering a financial product please consider the Product Disclosure Statement. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.
Agenda • Budgeting and debt management • Growing your wealth • Protecting your wealth
Where are we now?
Debt
Source: Colonial First State
House prices
Life expectancy
Signs of our times
We’re older than we’ve ever been Australia’s median age is 37, compared to 29 in 1983. We’re living longer For those born today, the average life expectancy is 78 for males and 83 for females. We earn more Weekly earnings increased three-fold since 1983 from $323 to $1,256 gross (May 2010). Yet we can afford less Over 25 years housing prices have increased more than eightfold (from $60,000 to $500,000). Source: Colonial First State (Who We Are: A Statistical Snapshot of 21st Century Australia, McCrindle Research Australia 2008; Reserve Bank of Australia; Australian Bureau of Statistics).
and we save less
In 1975, on average, Australians saved 17% of their disposable income In March 2010, this has fallen to savings of just 2.47% But...this is an improvement from 2003 when, on average, Australians made a net withdrawal from their savings (-2.03%)
Source: Colonial First State (Reserve Bank of Australia). Chart data to March 2010.
Prepare a budget • • • • •
Set goals Determine your savings capacity Identify non-essential expenditure Prioritise repayment of non-deductible debt Budget spreadsheet
Two types of debt • Deductible (good) debt – ATO allow a tax deduction for the cost of debt if it produces assessable income for the taxpayer.
• Non-deductible (bad) debt – No tax deduction for the cost of the loan.
Deductible (good) debt • Used to acquire asset with potential to: – Grow in value – Produce assessable income
• Examples – Residential property producing rental income – Share portfolio paying dividends
Non-deductible (bad) debt • Home loan – No assessable income, no deduction
• Personal loans – Asset often depreciates in value (car loan) – No assessable income, no deduction
• Credit cards – Aim to repay in full, every month
Reduce non-deductible debt as quickly as possible
Managing your debt • Consolidate non-deductible debts into one – One loan with low interest rate – Reduce overall interest on debts – Simplify finances
• Repay credit card on time, every month – Cut up credit cards if you have to – Arrange repayment direct debit
• Have appropriate insurance cover
More efficient repayments • Increase frequency of repayments – Reduces average daily loan balance – Same total annual repayments
• Increase amount of repayments – Deposit any surplus money
• Use credit card to pay for expenses – Defer payment of expenses – Personal funds reduce average daily loan balance – Credit card repaid in full every month
Conclusion • Australians are earning more and living longer, but saving less and taking on more debt • A budget can help you keep track of where your money is going and help control your expenses • Prioritise repayment of non-deductible debt
What do long-term savers want? • As much capital as possible at retirement = greater income in retirement • A comfortable ride on the journey
Source: BT
Cash vs growth • Common belief that cash is ‘safe’, so term deposits are a better investment for longterm savers than growth investments • Mistake to compare term deposit interest rate with dividend yield of a similar share investment • In any given year, term deposit % income may well be a higher figure
Source: BT
Value of $100k invested Dec 1980 Return on investment (income and capital) of $100,000 to July 2010 $1,200,000
45,000 ASX200 value Cash deposit value ASX200 annual dividends Cash deposit interest
40,000
$1,000,000 35,000
30,000
25,000 $600,000 20,000
$400,000
15,000
10,000 $200,000 5,000
10 Ju l-2 0
-2 00 8 Ju l
6 -2 00 Ju l
2
04 Ju l-2 0
Ju l-2 00
00 -2 0 Ju l
-1 99 8 Ju l
4
6 Ju l-1 99
Ju l-1 99
92 -1 9 Ju l
-1 99 0 Ju l
8 Ju l-1 98
6 Ju l-1 98
84 Ju l-1 9
Ju l
Ju l-1 98
Source: BT
-1 98 2
0
$-
Annual income
Capital value
$800,000
Long term investment
Source: BT (Standard & Poors)
Cash vs growth investments • “Today, people who hold cash feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value”. New York Times: Warren Buffett 16 October 2008
Source: BT
Investment principals • • • • •
Compounding Dollar cost averaging Gearing Diversification Ownership
Compounding • Reinvest investment returns – Example: • Year 1: $1,000 @ 5% = $50.00 interest • Year 2: $1,050 @ 5% = $52.50 interest
• Allow investments time to grow – Invest from an early age – Defer financial goals
• Increase regular investments over time – Dollar cost averaging
• Correct risk profile to maximise returns
Dollar cost averaging • Investing a fixed sum at regular intervals • Benefit from fluctuations in price – Buy more units if price falls – Buy less units if price goes up
• Takes the guesswork out of the market Monthly investment
Unit price
Units received
January
$100
$2.00
50
February
$100
$1.80
55
March
$100
$1.50
66
April
$100
$2.00
50
Your average price = $1.80
Gearing • Borrow to invest • Shares & property most common • Successful if total return (capital & income) exceed cost of borrowing • Tax deduction if investment produces assessable income for taxpayer • Downside – gearing can multiply losses if investment falls in value.
Diversification • Risky to put all eggs into one basket. • Reduce risk by investing in variety of asset classes. • Managed funds for small investments.
Ownership • Direct in your name • Spouse’s name – If spouse has/will have lower taxable income
• Joint ownership with spouse – Automatic passage to spouse on death
• Trusts • Superannuation fund – 15% maximum tax on earnings – Pre-tax contributions taxed at just 15% – Preservation issues
Conclusion • Spending, not saving, will impair your income in the long term • Determining your risk profile can help you achieve your goals comfortably • Invest now and invest regularly to benefit from compounding and dollar cost averaging.
Why defensive strategies?
Why defensive strategies? • Most savings plans and wealth creation strategies rely on the ongoing ability to earn income and to repay debt • Proper insurance planning can prevent a personal catastrophe becoming a financial catastrophe for a family or business
Types of insurance Term life
Lump sum paid in the event of death
Total and permanent disablement
Lump sum paid if permanently incapacitated
Trauma
Lump sum paid on occurrence of specified insured medical event
Income protection
Monthly income if unable to work due to injury/illness
Business expenses
Monthly payment to reimburse fixed operating costs of business