Well done for thinking about your financial future

Most households either don’t have a budget or don’t stick to one. We believe the key to financial success is understanding where you spend your money and how much you spend.

There are a number of tools to make budgeting easier (and fun!). You can use the Excel spreadsheet put together by ASIC (found on our resources page) or use budgeting software which links your bank accounts and allows you to categorize your spending. It learns as you go, so once it’s set up, there’s not a lot of work involved.

The reason people don’t stick to budgets is the same reason they don’t stick to diets – they don’t have an appropriate, motivating goal attached to it. Someone might say they want to pay extra off their home loan so do a budget to try and achieve this. However, that’s fairly abstract so easily forgotten when something new to buy comes along. We believe setting short term, relevant and achievable goals is the key to success. Your goal could be to pay $100 every week off your mortgage (short term) so you can go on a holiday next year (longer-term).

To get a budget that works, you need the information on what you’re doing now (spending tracker or some sort of review of bank statements) and a budget which includes all of your bills, commitments and luxuries. From there, you know how much you can save, or where you can cut back.

Superannuation, or Super, is money which is saved to fund your retirement. It’s usually a long term investment, saved over your working life. Superannuation has concessional tax treatment, where most of your earnings are taxed at a maximum rate of 15%.

There’s a lot of bad press around super which can make it seem like it’s not worth bothering with or something you worry about in the future. Successive governments just can’t seem to leave it alone but it is still the most tax-effective way to save for retirement unless you are already not paying any tax.

For most people, super will eventually be one of your largest assets. It’s a way of saving money while paying a lower amount of tax. While the rules can change, it’s still the best legal way to reduce the amount of tax you can pay. Will the rules keep changing? Based on history; yes and we need to stay on top of these changes.

Superannuation is not the investment itself; it is just the structure your investments are held in. The funds can be invested in almost anything with the use of an SMSF. Traditional investments within super funds are broken up by allocating to a range of assets such as shares, bonds, property and cash. One thing we hear is that “I don’t like investing in super”. The truth is you can’t actually invest in “super”, you invest in assets that are in the tax-effective super structure.

Anyone can contribute to a super fund, so long as you are under 67. The most common types of contributions are: Employer contributions – this the minimum amount your employer must pay into your super from your salary (commonly called Superannuation Guarantee, or SG) Salary Sacrifice contributions – these are still employer contributions, but they are in addition to the regular SG contributions. You ‘sacrifice’ part of your salary and have it paid to your superannuation fund instead of to your personal contributions – these can be either after tax (called non-concessional contributions) or before tax (called concessional contributions). The latter ones allow you to claim a tax deduction for the contribution. Another thing to keep in mind is that if you contribute over your contribution caps the resulting tax could be as high as 94%.

And, most people are not aware that there are specific rates and offsets, depending on your level of income. Such as, if you earn more than $250,000 you will pay an additional 15% contributions tax (or 30% in total) and that if you earn less than $37,000 p.a. the 15% contributions tax is paid back into your super through the Low-Income Super Tax Offset (LSITO).

There are a number of contributions types and super strategies, which we can discuss with you if they are suitable for your personal circumstances.

Goal setting is the critical process of deciding what is important to you and what you want to achieve. This is done by separating what’s important from what’s irrelevant or prioritising your goals to remove distractions.

This is one of the most challenging parts of our meeting but can often be the most rewarding.

One question we might ask to help explain this is; how do you eat an elephant? One-piece at a time! Once your goals are identified and prioritised these can be used as a way of motivating yourself through what would ordinarily seem a list of impossible tasks.

This is also a very important tool when used correctly with proven cash flow and budgeting techniques.

We hear about gearing all the time and such terms as negative gearing. Firstly, let’s define gearing. Gearing is the relationship between the amount of money that is owed and the value of the asset. If you were to borrow $50 and combine with $50 of yours and invest $100 then you would have a 50% Loan ($50) to Value ($100) Ratio (LVR).

The term ‘negative gearing’ relates more to the cashflow relationship between the income produced by the investment and the interest cost of the loan. If you have a property that you borrowed to purchase that pays you $20,000 in rental income and you have a loan where the interest expense and property expenses are $25,000, you have a negatively geared property by $5,000. This is a simplification of negative gearing and there are exceptions where a property may be negatively geared on the tax return but actually cashflow neutral and even cash flow positive due to tax deduction called depreciation. The term negative gearing seems to be synonymous with property investment regardless of the cashflow due to it being popular in the 80’ and 90’s when the tax brackets where very close together, now that we have wider tax brackets in Australia having a negatively geared property may not give the same tax advantage.