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Edition 9
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Warren Buffet’s 7 secrets for living a happy and simple life
IN THIS ISSUE
Secret # 1: Happiness comes from within.
Warren Buffet’s 7 Secrets for living a happy and simple life
In my adult business life I have never had to make a choice of trading between professional and personal. I tap-dance to work, and when I get there it’s tremendous fun.- Warren Buffett
Flood cover on Business insurance Laying the foundations for successful investing
In reality, productivity comes from within. It comes from doing what we love and loving what we do. When we start trading time between our professional and personal life, we wage war in our own mind to justify our passion in terms of a personal benefit
Will retirement become a thing of the past?
Secret # 2 Find happiness in simple pleasures.
The future of the family business The nuts & bolts of a Pre Nuptial Agreement It will never happen to me...?
I have simple pleasures. I play bridge online for 12 hours a week. Bill and I play, he’s “chalengr” and I’m “tbone”. - Warren Buffett The man richer than most can find happiness in the simple pleasure of playing bridge online with another billionaire.
Secret # 3 Live a simple life.
Paying tax on dad’s home – a disgrace
I just naturally want to do things that make sense. In my personal life too, I don’t care what other rich people are doing. I don’t want a 405 foot boat just because someone else has a 400 foot boat. - Warren Buffett
At last, an Insurer prepared to offer Flood cover on Business Insurance.
Secret # 4 Think Simply.
A major insurance company has decided to offer flood cover to business owners. It is a small step but a crucial one for the insurance industry. The insurance industry in Australia has struggled for many years on the concept of offering flood cover for residential and commercial premises and how to deal with these claims fairly and effectively. With the increased frequency and ferocity of storms due in some part on the effects of global warming, now is the time to be looking for the inclusion of Flood cover with your buildings insurance. You should check to see if your policy wording covers you for this important cover.
“I want to be able to explain my mistakes. This means I do only the things I completely understand.” Warren Buffett There lies one of the greatest secrets of simplicity. Warren Buffett invests only in the businesses that he understands. If you ever read research reports from an accomplished investment guru, you’ll find a plethora of details that make you dizzy. The success of Warren Buffett as the greatest investor ever lies in his ability to think simply.
us the most simplistic approach to our financial freedom - “Flow with the market rather than pretending to be smarter than God.” In this world full of so-called financial experts, Warren stands tall by showing us the simplest way to the riches.
Secret # 6 Have a mentor in life. I was lucky to have the right heroes. Tell me who your heroes are and I’ll tell you how you’ll turn out to be. The qualities of the one you admire are the traits that you, with a little practice, can make your own, and that, if practiced, will become habit-forming. Warren Buffett The mentor has to be someone whom we can trust and have an unwavering faith in his/her guidance. The mentor has to be the one who has made outstanding strides in advancing the greater and guiding purpose of happiness in his/her own life. You’ll find that person in your inner circle if you think hard enough. Write down why you admire them. Try to emulate their traits and as Warren has shown by his exemplary life, with a little practice, you can form a habit to clone the life that you admire the most.
Secret # 7 Making money isn’t the backbone of our guiding purpose; making money is the by-product of our guiding purpose. If you’re doing something you love, you’re more likely to put your all into it, and that generally equates to making money. - Warren Buffett How do you rationalise the richest man on the earth still living in a small 3-bedroom house that he purchased fifty years ago? Warren Buffett never travels in a private jet despite the fact that he owns the largest private jet company. His character and way of life speak volume about his greatness.
Secret # 5 Invest Simply. The best way to own common stocks is through an index fund. - Warren Buffett It is astounding to know that the greatest investor in the world is not bragging about intricate financial maneuvering to impress the rest of the world with his financial genius. Instead, Warren Buffett shows
Warren Buffet
Laying the foundations for successful investing Establishing an investment portfolio can be likened to building a home. The most destructive, yet unpredictable event that can cause damage to the structure of a home is the weather... and even in these most technically advanced days, we are still unable to accurately predict the weather. No one can successfully predict the future of the global economy... like the weather it is the most unpredictable and most destructive threat to your investment earnings. But with a carefully built portfolio based on sound foundations, you have a much better chance to weather out any financial storm. The foundations of a strong portfolio rely on four key ‘pillars’ or investment principles... quality, value, diversity and time. We’re probably all tiring of the old adage, “don’t put all your eggs into one basket”... meaning to diversify your portfolio, but that is only one pillar on which you need to rely. The other three are equally important... in fact, forget about just one and you are setting yourself up for a very bumpy ride! Let us briefly explain why all four pillars are crucial to your investing success, particularly in the current volatile environment...
If we look at the first two pillars, quality and value, it’s obvious this means to look for assets that are expected to provide high returns relative to their risks. Applying this to shares, quality companies will have a sound basis to their operations and growth, that is, their earnings are not driven by fashion. This, however, might mean that they take time to deliver promised returns. But remember, investing in the sharemarket is a long-term strategy. Quality and value do not always go hand in hand. Quality stocks may trade at such high prices that they offer low initial value, or expectations for these companies are sometimes placed too high. However, the key here is quality... the expectation is that they will be around for a long time, not just a good time.
This takes us back to diversity... diversity acts like the scales in a portfolio, providing balance. True diversity in a portfolio gives the investor the opportunity to take advantage of “hot stocks”, whilst balancing out the risk with quality stocks. It provides insurance against mistakes in assessing value because nobody gets it right all of the time. A well-balanced portfolio can cope with occasional losses. And finally, one of the most important pillars is time... because it applies to all three, giving you the best chance of success. Every market will suffer periodic downturns, however, over time the upturn will always be there. The golden rule is don’t panic and refrain from getting caught up in the fear and greed cycle.
Will retirement become a thing of the past? Research over recent years suggests that the secret to a long and healthy life is to continue working and to stay in control of your finances and life. The nature of work may change – fewer hours, less stress, new career – and with good planning it is possible to have all the good things associated with retirement such as more leisure, time with family, travel and new activities. No Government can afford to keep the baby boomers in retirement. Early retirement and paying pensions for longer life spans is not sustainable. In 1905 the average life expectancy was 55.2 years for men and 58.8 for women. The age pension was introduced from 1909 and was available from age 65 so most people did not qualify. However, almost 100 years later the average life expectancy is 78.5 years for men and 83.3 for women yet the age pension remains available at age 65 for men. Overseas governments are considering a higher eligibility age for a state pension – for example, to 72 in the USA. In Australia, government policies have aimed to encourage older people to keep working. Measures include tighter eligibility for income support before age pension age, a tax rebate for mature age workers, tax-
free superannuation after age 60, ability to access superannuation as a pension before retirement, increasing the age when superannuation can be accessed to age 60 and increasing the eligibility for the age pension to age 65 for women.
many people who retire to the beach or the country for a life of leisure end up disillusioned with early retirement. This resentment can create ill-health and ironically, the years they were hoping to spend enjoying life, can be unexpectedly cut short.
Our leaders are also concerned about the shrinking pool of workers in a growing economy. In 2007, there were five workers for every person over age 65 but by 2047 it is projected that the ratio will have decreased to 2.4 workers.
Research shows being active and engaged in life leads to a healthier and longer life. This doesn’t have to be paid employment but for many of us it is what provides the challenge and excitement. Many people who could retire choose to keep working for the love of it, or if money is no longer an issue, offering their experience and knowledge in volunteer positions – here or across the world.
The policies are having an impact with Productivity Commission figures showing an increase in participation of workers in the 5565 age group. They predict that by 2041, 32% of those aged 65-69 will be working. One retirement myth is that if you don’t retire by age 55 you are a failure because all the smart people are doing it. The reality is that
Maybe there will soon come a time when the word “retirement” will disappear from our vocabularies because more people will want to keep on keeping on?
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The future of the family business A succession plan is absolutely essential for every family business to ensure continuity. It is an issue the family must deal with whether it owns a small business, family farm or a global empire. Most businesses in Australia are family-owned and business operators are often too busy dealing with today’s operations to worry about tomorrow. However, putting off establishing a clear-cut succession plan in a family business will lead to future problems and can drive a deep wedge into the closest of families. History shows that succession is the Achilles Heel of the family business. Most do not make it past the first generation, with only three out of ten making it into the second generation. Here are seven steps that should be followed to ensure that your family business succession is a success! 1. Board Meetings or formal family meetings should be held regularly. There must be a defined business agenda and open discussions encouraged to ensure no breakdown of communication between all of the family members involved in the business.
2. Plan for the exit of the older generation by setting dates and establishing retirement funds to ensure that they are well provided for. If you fail to have the total support of the older generation they are unlikely to relinquish their position. 3. Who replaces the older generation at the helm of the family business is a vital issue because in order for the business to succeed it may not always be appropriate for the eldest son to automatically take the lead (whether he expects to or not!!) There must be full and frank discussions on this issue and firm decisions made. 4. Seek professional advice. It is crucial that all-important planning issues are discussed with your accountant, solicitor and financial planner. 5. Dates for future meetings must be set so that discussions continue until a plan that provides for all family members in the business has been completed.
6. It is imperative that you keep your plan current. Succession plans require periodic revision and updating to ensure that what you have agreed upon remains relevant. 7. You should seek professional advice in regards to funding the purchase of shareholders equity if they suffer a major trauma, become disabled or die. This is normally achieved with a cost effective insurance policy and a correctly structured legal agreement. There is an old saying. “One generation will build an empire, the second generation will fight over it and the third generation will sell the empire and spend what is left of it.” Times have not really changed much, but the simple and commonsense approach of preparing in advance, seeking professional advice and having sound, unemotional management can make the process a lot easier. Your financial / insurance adviser can help create a plan of action with clearly defined goals and objectives.
The nuts & bolts of a Pre Nuptial Agreement Pre nuptial agreements are made by people who are intending to marry and are often made shortly before the date of marriage. If parties have no intention of marrying, then such agreements would normally be referred to as a defacto agreement or cohabitation agreement. The format of these agreements may vary depending on what State or Territory the parties reside in. A pre nuptial agreement is a written agreement between a prospective husband and wife as to how they propose to deal with each other financially both during the marriage and in the event of a separation. The agreement will usually provide how the parties propose to operate in respect of financial matters, as well as often providing what should occur in the event of the marriage breaking down including how specific assets are to be divided. In more recent times, pre nuptial agreements have again become more popular, particularly since the Family Law Amendment Act 2000 (which took effect from 27 December 2000) provided for pre nuptial agreements (Financial Agreements) to be fully enforceable in the Family Court of Australia provided certain conditions are met by the parties to the Agreement. In fact, the Act allows for Financial Agreements prior to marriage (Family Law Act 1975 - Section 90B) after marriage (Section 90C) and even after separation (Section 90D). To ensure that your pre nuptial agreement complies with the Family Law Act 1975 you should:
1. Have a written agreement. 2. Make the agreement before your marriage and in contemplation of that marriage. 3. The agreement must be signed by both parties and witnessed by an authorised person. 4. Both parties are required have independent legal advice prior to entering into the agreement, and must evidence that by providing Certificates signed by a legal practitioner.
Your draft agreement must then be taken to your solicitor, and the other party must also see their solicitor to be reviewed and certified before signing. What are some circumstances where you should consider signing a pre nuptial agreement? • If you are a business owner and want to maintain control of that business in the event of separation; • You have significant assets;
5. The agreement must relate to specified property of the parties. The property can be in specific terms (eg, the ford falcon motor vehicle registration abc 123 or in general terms (eg, any motor vehicle owned by Gary).
• You have considerably more assets than your partner;
6. The agreement needs to make it clear that it is intended by the parties that the property dealt with in the agreement is not to be made the subject of the property orders subsequently by the Family Court.
• You may be giving up a lucrative career and want protecting in the event of separation;
If it is your intention that, in the event that the marriage is unsuccessful, you want the Family Court to enforce the terms of the agreement, then it is essential that both parties comply with the terms of the agreement during the marriage.
• You have children from a previous marriage, you want to be sure that the family wealth passes to them;
• You have a family member who has special needs, i.e. disabled child; • You want certainty in respect of your financial position in the event of separation; • You are concerned about a significant debt that one of you is bringing to the marriage
It will never happen to me ...? We all hope the nasty things won’t happen to us, but what if something did? These people held the same belief until... Patrick started his own business servicing computers last year after working for a major company for many years. He loved the freedom and control it gave him. Unfortunately a truck ran into his car and he received a severe whiplash injury. He couldn’t work for two months and the loss of income made life hard for his young family. He didn’t think to arrange income protection insurance to replace the sick leave he had with his ex-employer.
Paul and Sue worked hard to reduce their mortgage and once they had some equity in their home they used it to borrow to buy an investment unit. It was tenanted and had the potential for long-term capital growth. Sadly, Paul died suddenly from a stroke. On a reduced income Sue couldn’t afford to keep paying the interest on the investment loan. The unit had to be sold quickly at a loss. They did not think to increase Paul’s life insurance when they borrowed for the unit.
Karen is successful in business and prides herself in managing her personal finances well. She has a well-diversified portfolio of property and shares. Last year she contracted breast cancer and her work was disrupted with tests and hospital treatment for over five months. She has now recovered but the medical bills made a severe dent in her finances so she was forced to sell some excellent shares at short notice. Karen did not know that trauma insurance would have paid her a tax free lump sum if she was diagnosed with a critical illness.
Three important lessons can be learned from these cases Firstly, the unexpected can happen to anyone. Secondly, take the time to review your insurance arrangements at least once every year. If there are changes in your circumstances – new job, new loans, family changes, etc – arrange a meeting with your adviser.
Thirdly, talk to an expert. There are many different choices of insurance and it pays to have a specialist analyse your needs and find the most cost-effective solution for your circumstances.
Each time you review your insurance check your coverage and make sure you have told the insurer all the information they need to know on any new policies. The last thing you want if making a claim is that you’re not covered because you inadvertently didn’t disclose all the facts.
Checklist 1. Does your income protection policy still reflect the income you are currently earning? 2. Will your house insurance pay you enough to rebuild your house? 3. Will your life insurance pay off all your debts and be able to support your dependants if you are no longer around? 4. Has your car been modified in any way?
5. Have you recently installed security devices or extra locking systems on your home that could reduce your premium? 6. Have you changed jobs and not informed your insurance adviser that your new occupation is less risk or no more manual work. These changes could reduce your premiums? 7. Assignment of a personally owned insurance policy into a DIY super fund is not allowed,
This ‘in specie’ transfer could render your fund ‘non complying’ 8. If you have given up smoking for more than 12 months you could change your policies to non smoking status and save substantial premiums. 9. Changing jobs, moving home, re-financing or birth of a child are some common Trigger events that should prompt you to review your insurance cover
Talk to your insurance adviser if you need to review your current cover.
Paying tax on dad’s home - a disgrace Question: Mum and Dad bought a house on a massive property in the early 1990’s on what was then the “fringe of Melbourne”. It is now surrounded by new housing estates. Property developers appear every week at the front door begging to buy it. Mum died a couple of years ago. Dad is determined to remain on the property until the day he dies. Dad told me that he is leaving everything (including his home) to my brother and me when he dies. What CGT do my brother and I face if we decide to sell the property after we inherit it? Is there anything Dad can do
now to improve the CGT situation when my brother and I get the property?
• whether your Dad’s personal belongings were in the house;
Answer: Your brother and you have 2 years from the date of your Dad’s death to sell his home without CGT. This is provided the property passes the CGT main residence exemption test.
• whether your Dad’s mail was delivered to the house;
To apply for an exemption, it is first necessary to determine whether the dwelling was your Dad’s main residence.
• whether services such as gas, telephone and electricity accounts at the home address were in your Dad’s name; and
The ATO looks at these types of issues to answer that question:
• Whether your Dad occupied the house.
• the length of time your Dad lived in the house on the property;
• whether your Dad’s home address and electoral address were the same;
Brett Davies, Lawcentral.com.au
Disclaimer The information in this newsletter is of a general nature and is provided for illustrative purposes only. It is not intended to constitute advice of any kind. The information has been prepared without taking into account the objectives, financial situation, needs or circumstances of any particular person and should not be relied upon. You should not act on the information, rather it is designed for you to contemplate whether you should obtain professional advice if an issue may be of relevance, having regard to your objectives, financial situation, needs and circumstances. Authorised representative no 282461 of AAA Financial Intelligence Ltd AFSL: 312478
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