Manage your debt, don’t let it manage you

We all borrow money to buy things when we don’t have  the money to pay the full purchase price. Most people borrow to buy personal assets like a home but you can also borrow to access investment opportunities to help grow your wealth.

Not all debt is the same and it is important to understand how it works and consider the implications of particular strategies. While it can be a great tool to grow your wealth, if it is not carefully managed it can have the opposite effect.

WHICH LOANS SHOULD YOU REPAY FIRST?

The interest on loans to buy personal assets such as your home, car, lifestyle purchases or living expenses cannot be claimed as a tax deduction, so it makes sense to repay these debts as a priority.

Your credit card usually charges the highest rate of interest so you should aim to pay this debt off as quickly as possible while continuing to make the required repayments on your other loans.

If you currently make monthly repayments, one simple trick is to halve these amounts and pay them fortnightly instead. There are 26 fortnights in a year compared to 12 months so you will make additional repayments across the year and reduce your total interest cost and the loan term.

The fees to establish loans may depend on the type of loan. It is important to understand all the costs charged by the lender or government. This includes the cost of making extra or increased repayments and the cost of any restructuring.

If you have a Higher Education loan (HECS-HELP), this is at relatively low interest rates, so it can make sense to repay the minimum amounts on this while concentrating on repaying other loans.

BORROWING TO INVEST

If you borrow to buy an investment the interest cost and other expenses may be tax deductible. This applies to loans used to buy a rental property, shares or managed funds.
If the returns are lower than the overall costs of the investment then you are able to claim this as a tax deduction against your other income at your marginal income tax rate. This is widely known as negative gearing.

This makes sense if, over time, the capital gain from the investment exceeds your after-tax losses. But you need to be very careful with this strategy, because if the value of the investment falls you will amplify your capital losses while also losing money on your after-tax cash flow.

You should never borrow to invest just for the sake of the tax deduction, or in the hope that markets always rise. You also need to be confident that you can ride out periods when the returns are lower, such as when you have no tenants in a rental property.

DEBT CONSOLIDATION

Debt consolidation involves combining several loans into one loan account. For example, you may increase your home loan to repay your car loan and credit card debt.
You need to be disciplined when consolidating your debt to ensure you do not simply increase your overall debt from other sources.
Credit cards can be wonderfully convenient, but they can also be a real trap for some. If you seem to have ongoing credit card debt that you never seem to pay off fully then this will end up costing you a lot of money. In addition, it may prevent you obtaining or paying off other important loans, such as your home or investment loans.

PROTECT YOURSELF

All lending requires discipline to ensure that you do not over-commit yourself and are able to make repayments, and preferably pay them sooner than required.

You should ensure that you have adequate life insurance (e.g. life, total and permanent disability and income protection) so that you can continue to meet your loan repayments or repay the debt if your income stops or reduces due to death or illness.
Sensible use of debt should be considered as part of your overall financial plan and you should seek professional advice before using debt for wealth creation strategies.

Find out more. Call us on 02 9533 7599

Disclaimer: The articles included on our website are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives.

This article originally appeared in the InterPrac Newsletter Issue 20. Re-published with permission.

Finding the right investment property location

In this article, we take a look at what makes a good investment location - both for residential and commercial properties - and how to find one.

Location, location, location!

Choosing the right location is one of the most  important factors in the success of a property investment. The right location can differ  according to the kind of property investment you choose – commercial or residential.

However, in both cases, the principal is to find  a property that will be popular with tenants both now and into the future, as this will support your requirement both for a steady rental income and future capital growth.

What to look for in a commercial property location

Looking for commercial property, you will need to assess the purpose of the property and if the location will be good for  that particular business. Retail commercial property should be in a location that provides a steady stream of passing trade and is easy to reach via public transport or car. There should be plenty of car parking available and if possible, the location should already be enjoying good trade. Locations that are busy will create competition amongst potential tenants and this will always be good for capital growth.

For more industrial commercial properties, good road links and parking, ample space and excellent facilities are more important than passing foot traffic. You’ll need to ensure that the purpose or possible uses of the building are acceptable under local council zoning laws so that there are no restrictions on the type of tenants who may use it. Importantly, you’ll want to make sure the property is not too far away from a city / port or airport – particularly if it is a warehouse or manufacturing building.

What to look for in a residential property location

You may think that it will be easier to find a suitable location for a residential property investment. However, competition for good locations is on the rise. With residential property, you’ll also need to find a location that provides all the attributes a tenant will be looking for.

Apartment living is rising in popularity, particularly for working people with no families. If you’re choosing an apartment, make sure it has good public transport facilities, and is close to amenities such as restaurants, shopping and entertainment.

Houses are more popular with families, and for an investment like this, facilities such as parks, schools, and easy access to public transport are important. Suburbs that are already popular with tenants because of the quality and easy access to such facilities may be in short supply and therefore expensive, so look at adjoining locations that may be up and coming.
For both apartments and houses, the availability of work nearby for tenants will help to ensure its popularity with tenants and this adds up to capital growth potential. Properties that are a long way from employment may be less expensive and easier to secure, however rental returns may be much lower and the potential for capital growth reduced.

How to find the right location

All property investment requires careful research to find the best locations with optimal capital growth potential. Most people start with online research and by making contacts within reliable real estate agencies so they are alerted when investments with potential become available.

The first step is to look for areas where income levels are high and occupancy rates are good. Real estate agents and reputable buyer’s agents are a reliable source of this information, but it’s also a good idea to subscribe to a property market data service that will give you the information you need at your fingertips.

Try to avoid areas where future oversupply of properties may become an issue. This is particularly important when considering investment in an apartment – to avoid mistakes, check with the local council to find out how many developments are in the pipeline for the area as this may have a significant effect on values.

Houses appeal more to families and may carry better
capital growth potential. Look for areas where infrastructure development is either good or planned for the near future.

Popular schools always attract competition for houses, so you may want to research which are the best schools in the areas you are considering and look for property nearby. University locations also create a reliable source of tenants and income, and often offer good entry level investment opportunities.

Find out more. Call us on 02 9533 7599

Disclaimer: The articles included on our website are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives.

This article originally appeared in the InterPrac 2015 Winter Newsletter, June 2015. Re-published with permission.

Make sure your SMSF is on track

Managing your own superannuation fund gives you the greatest flexibility over exactly how and where your super investments are made. But it also means that you are solely responsible for complying with super and tax laws.

With the self-managed superannuation funds (SMSF) reforms which came into effect on 1 July 2014 and the end of the financial year upon us, now is as good a time as any to make sure your SMSF is on track.

Penalty regime

A new penalty regime came into effect from 1 July 2014 for trustees of self-managed superannuation funds who are in breach of certain superannuation laws. Where breaches are identified, trustees will be personally liable for the penalty the ATO imposes. It is timely for SMSF trustees, in conjunction with the professional advisers, to rectify any outstanding breaches as quickly as possible.

Investment strategy
Each SMSF must have an investment strategy that reflects the high level investment strategy adopted by the trustees of the fund. As part of the investment strategy, trustees are also required to consider insurance for each member of the fund. In addition to formulating
and implementing an investment strategy, trustees are also required to regularly review the fund’s investment strategy.

Now is a good time for trustees to review their investment strategy and ensure that it continues to be appropriate for the fund, particularly where members’ circumstances may have changed.

Value assets
It’s a requirement that trustees of a SMSF value their fund’s assets at market value. This does not necessarily involve trustees obtaining formal valuations from a qualified valuer, however valuations must be provided by a person familiar with valuing such assets.

Find out more. Call us on 02 9533 7599

Disclaimer: The articles included on our website are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives.

This article originally appeared in the InterPrac 2015 Winter Newsletter, June 2015. Re-published with permission.

Age Pension – hit or miss?

Age Pension Entitlements: Are you being under paid?

For a person in receipt of a part rate Age Pension – as a result of their assets and their income being above the applicable thresholds – understanding the pension they are being paid and working out whether it is correct can sometimes be a hit and miss process.

The asset and income thresholds which affect your pension entitlement are adjusted every year on 1 July. The age pension itself is increased in March and again in September every year.

If you have money invested in shares or managed funds, the asset value of these are also adjusted automatically every year in March in September. Depending on the movement in the official interest rate the deemed rate of interest which would be applied to a pensioner’s financial assets could also be adjusted at least twice a year.

Five to seven of these movements are automatic reviews carried out by Centrelink at the push of a button.

These automatic reviews do not take into account a change in a pensioner’s circumstances, which they are required to report to Centrelink within 14 days. It is not wonder a large section of the pension community are confused by their correct entitlement and I would suggest a fairly substantial number are receiving the incorrect entitlement.

As a pensioner, if you are concerns about your entitlement and don’t fully understand the letters that you receive from either Centrelink or Veterans Affairs, you definitely need to talk to someone who specialises in this type of advice - like Etlanda Taxation & Accounting.

You don’t want to find yourself in a position of being under paid, or even worse, overpaid.

Find out more. Call us on 02 9533 7599

Disclaimer: The articles included on our website are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives.

This article originally appeared in the InterPrac Financial Planning Investment Newsletter, March 2015 and was written by Mark Teale, Centrepoint Alliance. Re-published with permission.

What’s your risk appetite?

Know your risk appetite

Before you start investing it’s important to work out what your “risk appetite” is. Essentially, your risk appetite is how comfortable you are with the risks associated with investment returns.

For example, someone with a high risk tolerance is willing to accept losing their capital in search for higher investment returns. On the other hand, someone with a low tolerance, also called risk-adverse, is often more concerned with preserving their capital.

At Etlanda, we use a range of tools to determine what’s right for our clients. Everyone is different and what’s right for you will depend on:

  • Your personal circumstances including your capacity to accept risk
  • Your investment goals, time frames and need for returns
  • Your personal attitude towards risk.

You can determine your own risk tolerance

Ask yourself these questions:

1. What can I afford to lose?
What would happen if you lost some or all of the money you invest? Think about what impact losing this money would have on you, your business and the people who depend on you financially.

2. What are my goals and timeframes?
Work out what you want to achieve in the short, medium and long-term. If you have short-term goals it might make sense to save for these using cash or a term deposit because your money needs to be accessible. If you have long-term goals it might make sense to put these into shares because you have more time and can afford to.

3. What’s my attitude towards risk?
This is all about how comfortable you are with your decisions. If you’re the kind of person who will lie awake at night worrying the chances are an aggressive investment strategy isn’t for you. On the other hand, if you’re comfortable with knowing your investments might go down (and you can afford it), an aggressive strategy might be just the thing you need.

Disclaimer: The articles included are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives

What is Key Person insurance? And why do you need it?

What is Key Person insurance?

Key Person insurance (previously known as Key Man insurance) is life insurance taken out on a “key person” employed by a business.

In small-to-medium sized companies, this is often the business owner.

It can also be someone who has speciality skills such as a top performing sales person. Essentially, a key person is anyone who is crucial to the running of a business. And if they weren’t around anymore the business would fail. It works like this:

  • the company/business takes out a life insurance policy on the key person.
  • the company is responsible for paying the annual premiums and is the beneficiary of the policy.
  • if the key person dies unexpectedly, the beneficiary i.e. the company receives a lump sum payment.

It can prevent immediate bankruptcy.

Receiving a lump sum payment can often mean the difference between immediate bankruptcy and being able to pay expenses until a replacement person can be found and/or the business can be sold.

Without it, most small businesses wouldn’t be able to survive the blow.

Think about your business. If you or another key person were to pass away unexpectedly how would all outstanding business invoices, loans and other debts get paid? Key person insurance is one way to make sure you, your family and business partners have options.

How much cover do you need?

Well, that all depends on your business. A good gauge is to work out how much money your business would need until a replacement key person (with the same skills and experience) can be found, recruited and trained.

Disclaimer: The articles included are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives.

Why I Buy Blue

What is blue-chip stock? And why should you care?

The term blue-chip is said to come from poker, where blue chips are the most expensive chips. For example, if a white chip is worth $1, a red chip is generally worth $5 and the blue chip is worth $25.

Today, the term is associated with stocks that are high in quality, with a history of paying stable or rising dividends, over many years and sometimes decades.

Typically, blue-chip stock has a market capitalisation in the billions, coming from companies that are well-established. Often, they are also market leaders (or at least the top 3) in their sector.

In 2013, these included organisations such as:

  • ANZ
  • CBA
  • NAB
  • Wesfarmers
  • Westfield
  • Westpac
  • Woolworths.

The reason I like them so much is because of their history of paying dividends even during the financial crisis of 2009. And because the majority of blue chips pay a fully-franked dividend, they are particularly attractive to members of SMSF who are in the Pension phase.

Disclaimer: The articles included are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives.

Is an SMSF right for you?

Should you start an SMSF?

So you’ve heard about the benefits of starting your own super fund. Maybe it’s because you like the idea of investing in property? Or perhaps you want to choose your own share portfolio? Whatever the reason, here are 3 questions you should consider before you start your own SMSF:

1) Do you have enough money?
You can start your SMSF with less but ATO research shows you will need a minimum starting balance of around $200,000 for a self-managed fund to be beneficial.

Not sure whether you have enough? We can help you find out. For example, you might have multiple super accounts with a total balance of more than $200,000.

2) Do you have the time to maintain it?

Keeping your SMSF in good shape takes time as there are special rules about how it needs to be managed. Compliance and administration tasks such as the preparation of annual statements can be time consuming if you’re not experienced.

If you don’t have the time to do this yourself Etlanda can help. Check out our SMSF page to find out more or call us on 02 9533 7599

3) Do you have the skills and knowledge to run an SMSF long-term?

SMSF owners are expected to have a good understanding of investment and SMSF legislation to make sure you operate within the confines of the law. You can’t claim ignorance.

At Etlanda, we can teach you everything you need to know so you’ll feel confident and in control.

Disclaimer: The articles included are for general information only and have not taken into account a clients’ personal circumstances, goals or objectives. Prior to making any investment decisions you should contact us to ensure that the advice is appropriate to your personal needs and objectives.