Saving | Slack Investor

Household Comfort … and March 2021 – End of Month Update

The couch seems to be looking good for some, but not for others. ME Bank have updated the annual Household Financial Comfort Index that surveys 1,500 Australians every year to get an idea of how Australia is travelling in a money sense. Slack Investor was surprised at the research results which revealed that over the past six months, to December 2020, the “financial comfort” of Australian households has reached a record high of 5.89 out of 10. This index is 5% higher than before COVID-19! However, it is full-time workers that report the highest financial comfort across the workforce.

*The changes in the Household Financial Comfort Index since 2012 (Scores out of 10) –* ME *Household Financial Comfort Report* 2020

The high financial comfort can probably be linked with some households going into “savings mode” as the uncertainty caused by COVID-19 on the economy, and the very high levels of government support.

Although, not everyone feels the same after a year of COVID-19. About 30% of households said that their financial situation has worsened. Clubs, pubs, gyms, air transport, restaurants, education, and the creative arts were hit particularly hard – with the cohorts of casual workers and adults under 24 shouldering the burden of Coronavirus disproportionally.

Household Response to the Pandemic

*The main method that households used to ease the financial burden during COVID 19 (Columns %) and the line showing level of financial comfort associated with each method –* ME *Household Financial Comfort Report* 2020

The main ways that households chose to ease the effects of the pandemic were 1. Dipping into savings (14%); 2. JobKeeper payments (Govt. wage subsidy) (11%); 3. Superannuation withdrawal (9%); 4. Delaying bills (7%). With JobKeeper payments having now ended, the raid on super halted, and the other main methods likely exhausted, it looks like a tipping point is approaching.

“And, at $90 billion, (JobKeeper) it’s the single largest economic support program that any Australia government has ever undertaken.”
Australian Treasurer Josh Frydenberg – ABC News

The Australian government’s massive JobKeeper program ending is likely to cause a big rupture in the economy with many small businesses who have, till now, been just “hanging on “. Many of these businesses are likely to cease trading. For employees, Treasury estimates that up to 150,000 workers will move from JobKeeper into unemployment.

Financial Cushion

With tough times ahead, there will be many who would wish for a financial cushion. Slack Investor has often banged on about the need for an emergency fund of cash that will help when one of life’s inevitable bits of bad new turns up. In December 2020, about one in five households reported virtually no, or very low, amounts of cash savings (<$1000).

How much in cash savings does your household currently hold – including savings accounts, term deposits and offset accounts? – ME *Household Financial Comfort Report* 2020

As for the pandemic effect on retirement savings, the reality of individual super balances is starting to bite with the report revealing that only around 18% of households expect to fund retirement with their own superannuation and 42% expecting to use both private savings and the government pension.

“Financial comfort levels are up for now, but many households
are on the cliff’s edge. They’ve lost income, their jobs and entire
livelihoods, their wafer-thin savings buffer is dwindling, and government support is the main action stopping them from falling over.”
Household Financial Comfort Report – 2020 ME Bank survey –

March 2021 – End of Month Update

Slack Investor remains IN for Australian index shares, the US Index S&P 500 and the FTSE 100. All Slack Investor followed markets this month had solid rises (ASX 200 +1.8%; FTSE 100 +3.5%; S&P 500 +4.2%).

In these uncertain times, especially with the high prices on the US market, I am monitoring my index funds weekly and if, at the end of the week my Index funds are below the stop loss, then I will put a post on the blog and sell at the next opportunity. All Stop Losses are Live.

All Index pages and charts have been updated to reflect the monthly changes – (ASX Index, UK Index, US Index). The quarterly updates to the Slack Portfolio have also been completed.

Retirement sweet spot – a place to live is a good start!

Slack Investor has thought a lot about retirement – a lot!

Even though I liked most aspects of my jobs, the thought of doing what I want each day was most appealing. I read quite a few blogs on financial independence and they seem to fall into two main types. The “retire at 30” types and the “building of financial skills to gradually gain financial independence” types. Slack Investor is definitely in the latter camp and, without outside help, or big slabs of luck, I can’t really see a way of avoiding the 25-35 years of work to build up your funds before you then launch your retirement.

This post sets out with two of the building blocks to retirement – a home and some superannuation. You might be just starting your working life, or be in your forties and thinking … “Well, how do I get to my retirement from here?”

The recent Australian government Retirement Income Review emphasised that if your are renting in retirement then things are tough.

In retirement, renters have higher levels of financial stress. A significant proportion of retiree households that rent are in income poverty …”
The Australian Treasury Retirement income Review (2019)

Get a Roof

So take the advice of Flo Rida and Slack Investor and make it a big priority in your life to own a place to live. I know this seems like an impossibility to many as the cost of houses in Australia is eye -watering in the big cities. However, the place you want to own might be an apartment or, it doesn’t have to be in a capital city – it can be in one of the many fantastic regional towns!

From Australia’s most liveable regional cities. Not sure why “Distance to Alcohol” is a criteria – or what it means … might be good … might be bad!- but this is a nice selection of great Australian towns.

When you have found a place that you could retire to, the next step is to get yourself into the property market by saving for a deposit and buying a place. There will now be 30 years of pain … and then you own it! But, at least you have borrowed money for a “hopefully” appreciating asset. Make sure that any property you buy makes good sense – Schools, Transport, Parks, Shops, etc.

Another way to do this is “rentvesting”. This an option where you rent your place to live near your work while your are buying a place that you might want to retire to one day. Rentvesting makes sense when the costs to rent a place is cheaper than the buying costs (Loan Interest/Rates/Stamp Duty, etc). While you are renting in a share house or apartment the extra rental income from the property you own, and tax incentives, will allow you to use any surplus funds to invest in a share portfolio. Rentvesting can also increase your borrowing power and hopefully get a better property – Just don’t over extend yourself.

Get some Super

According to Investblue, in 2018, as boomers are retiring, the average retirement super balance in Australia for men is $270,710, and for women $157,049. This is not really enough, but an “average couple” would have over $400000. Things should get better as compulsory super has only been with us since 1991 . Boomers have had many advantages during a period of rapidly increasing asset prices – but compulsory superannuation over their whole working life was not one of them.

If you are relatively healthy and own your home outright, the Association of Superannuation Funds of Australia (ASFA) have estimated the annual retirement income required for a modest and comfortable lifestyle.

The Association of Superannuation Funds of Australia (ASFA) retirement standards for 2018

Using the average figures, there is a big gap between existing super saved and a comfortable lifestyle

80% of retirees fund their retirement years with a combination of superannuation and the age pension
Money Magazine June 2018

It is worth some study into how the pension and superannuation systems interact. The bare minimum to aim for is the “sweet spot” where under current rules, home owning couples can have $400000 in superannuation (singles $300000) and still qualify for the full government pension. Using this mix of super and the pension, when reaching the pension qualifying age of 67, a modest to comfortable retirement is possible under current rules.

Situation	Superannuation	Drawdown from Super @ 5%	Age Pension	Total Income
Single Home-owner	$300,000	$15,000	$19,210	$34,212
Couple Home-owner	$400,000	$20,000	$33,272	$53,272

Table from Realize Your Dream and based upon 2018 values

This “sweet spot” is our first “port of call” in super terms, and meant to demonstrate that if you own your own home and have a good chunk of super … then you are going to be OK in retirement.

Slack Investor hopes that you have got onto the idea of financial independence a bit earlier than aged 40. By starting to plan in your twenties or early thirties, you can aim to fund your own retirement … and, perhaps not wait until you are 67.

Cash is not King

My nephew is a carpenter and he would often gleefully say “Cash is King” when offered a cash job – no paperwork and no tax. This was fine for him as he was on a travel holiday and didn’t want the hassle of being on the books and claiming his tax back at the end of his holiday.

But, to the investor, Cash is not King.

If you hold too much of your wealth in cash, you won’t be able to keep pace with inflation, meaning your purchasing power will go down and it will be more difficult for you to achieve your goals.
Black Swan Capital

Slack Investor cannot argue that money in the bank is not safe, The government guarantees balances up to $250,000.

Cash is important for day to day expenses and your emergency cash buffer, “the cushion” to keep you going for about 2-3 months in an emergency. However, to get on the path to financial independence you must invest in appreciating assets.

Term Deposits, Bonds and Fixed Interest

For a relative, Slack Investor was trying to find a place where cash would earn a decent rate – without too much risk. There is not much around. Most transaction accounts pay no interest or 0.1% interest per year. If you are prepared to lock your money away for a year in a term deposit in a major bank, you might get 0.85%. One of the newer banks, Judo Bank, is offering 1.01%.

There are a few offerings in the bonds and fixed interest area. I ended up in the Vanguard Australian Fixed Interest Index Fund with a management fee of 0.24% and 1 and 3 year returns of 3.2% and 4.7%, respectively. The fund lends money to mostly government authorities – but, unlike term deposits, the returns are not guaranteed. A similar product is offered as an Exchange Traded Fund Vanguard Australian Fixed Interest Index ETF (VAF).

Growth Assets – Shares and Property

Higher up the risk curve are funds based upon share (equity) investments. In these funds or ETF’s the rewards can be higher – but the risks are also much greater. Only invest in shares or share funds with money that you can lock away for 3 to 5 years.

To grow wealth we must have exposure to growth assets such as shares and property.
Shane Oliver, AMP

Asset classes shown on a logarithmic scale for the past 120 years – From “5 charts to help you through COVID-19 investment fear” – Shane Oliver

Australian shares have returned on average 11.5% per year from 1900 to 2020. The incredible value of sustained compounding over long periods is shown by the dollar amounts achieved over 120 years – A $ 1 investment yielded $481, 910 for Australian Shares, $1017 for Bonds and a paltry $242 for cash. But these high returns on investment in Australian shares did not come without risk. Since 1900, Australian shares have had negative returns for two years out of ten.

A similar chart with data to 2016 shows that Australian residential property has a similar trajectory to Australian Shares (11.1% p.a.). There are many hidden costs to owning property – but that is another story. Lower on the risk curve, are Bonds and Cash.

Slack Investor acknowledges that people have different appetites to risk, but if you are in the fortunate position to be sitting on some cash in excess of your emergency fund … the current rates for term deposits encourage a first journey up the risk curve and consider fixed interest funds or ETF’s. For money that you wont need for the next 3-5 years, then shares have the best long term returns. If your time frame is longer, then a well positioned property has been a good investment.

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.”
H. Jackson Brown Jr. from Goodreads

Robo On

When Robo Advice gets it wrong … Exterminate Financial Freedom! – Image from aminoapps.com

Last month’s post on robo advice had a look at a couple of options … but there is more. They all work in much the same way. In the “old days”, to enter the investing world you would have to register with a broker (e.g. Self Wealth, CommSec) to get access to shares or Exchange Traded Funds (ETFs) – and you would be charged brokerage for each buy and sell. Each ETF also has a management fee (usually 0.10% to 0.50% per year) but that is deducted from your returns internally.

A recent Choice article outlines two things have worked against young people investing in the stock market. Firstly, a lack of knowledge about how to start investing, and then, not having a decent stash of money saved up to make broker fees worthwhile.

With the robo advisors, small amounts are no problem. For a monthly fee they take care of the purchasing and the brokerage – This is usually a much easier experience as it takes less thought and action.

From the robo advice website you open an account and establish your identity.
After a few questions to get your risk profile, the robo advisor will suggest a portfolio of ETFs.
Your bank account details must be given to fund your initial portfolio of ETFs.
You might also setup a regular investment and some of the robo advisors ( Raiz and FirstStep have a cool rounding feature where your everyday card purchases are rounded to the nearest dollar – and the rounding excess will go towards your portfolio.
The Robo Adviser does regular rebalancing of your portfolio.

Robo your Investing

Lets Robo On, Six park, Stockspot, Raiz, Clover, QuietGrowth and FirstStep have some great offerings and are worth a look.

ROBO ADVISOR	Fee Schedule	$2,500 portfolio fees pa	$10,000 portfolio fees pa	$200,000 portfolio fees pa
Six Park	Minimum $10000. Management Fee 0.4% to 0.5%	……	$50	$1,000
Stockspot	Fixed fee of $66 pa for balances < $10k with asset based fees of 0.396% to 0.66% pa	$66	$66	$1,320
Raiz	$1.25 per month <$5K; 0.275% pa >$5K	$15	$27.50	$550
Clover	Minimum $2500. $5.50 per month <$10K; 0.45% -0.65% pa >$10K	$66	$71.50	$1,210
Quietgrowth	Minimum $2000. Promotion No Monthly Fees <$10K; 0.40% – 0.60% pa >$10K	$0	$0	$1,045
First Step	$1.25 per month <$5500; 0.275% pa >$5500	$15	$27.50	$550

The above prices were compiled July 2019 and should be checked before you start investing.

Robo your Super

All of the above Robo advisors will help you build up your ETF investments as a “side hustle”. But, there is a new way of adding to your existing super (hopefully you have made an effort to make sure it is an Industry Fund!) in a relatively painless way. Longevity has a mobile phone app that automatically tops up your Super calculated as a percentage of your everyday purchases – into whatever super account you choose. It is based on your everyday spending and then calculated as a percentage of your spend (default 1% – but go higher if you can -and maybe a set amount each payday!). At the minimum, if you spend $200 on groceries, this will generate a 2 dollar deduction at the end of the month. You can limit your monthly deductions to an amount – so that you don’t go negative in your everyday account.

Because Longevity operates in the superannuation environment it is taxed favourably compared to investments outside of super where earnings are taxed at your marginal tax rate.

What to do Now?

There is always a bit of inertia involved to enter the world of investing. More experienced investors who already have a lump of cash and a disciplined approach to saving perhaps don’t need savings apps like Raiz. They could buy ETF’s directly through a discount broker (e.g Self Wealth), or setup a more sophisticated robo account with Stockspot. Robo investment apps such as those in the above table aren’t after this demographic. Most Robo Advice platforms are targeting younger people who might not otherwise start investing until much later in life.

“Raiz aims to encourage its customers to be mindful of their spending and to start saving and investing some of their income … the average Raiz customer has made 11% per annum since launch
Raiz’s Managing Director, George Lucas. from Choice

Simple steps

When in doubt, do something.
Singer-Songwriter Harry Chapin of “Cats in the Cradle” fame

The beauty of Robo Apps and instruments is that they are an easy way for anyone to start investing. Slack Investor says … just start! The rounding and transactional nature of Raiz and Firststep really appeal to me. Slack Investor likes this sort of painless saving and would get either of these apps as a great first step into investing. I wish these vehicles were around in my younger days. There are risks involved (i.e. share prices going down!) – but hey, That’s Investing – and the risks diminish over period of time (say, 5 years) – According to ASIC, Risk is part of the investing experience.

Given the huge returns money invested early in life can generate, the costs of the lower priced robo devices (e.g Raiz, FirstStep, Longevity) of around $1.25 a month is very reasonable. Pick a platform, install their app and set your contributions – You are launched into the wonderful world of investing – get on that road!

The Slack Way to Financial Freedom: Episode 1 – Saving

Generational wisdom … Homer style. – From Source (May be subject to copyright)

Now Slack Investor admits to being a lucky bloke. and recognizes that many are doing it tough and just haven’t got the income to engage on a savings program. This post is not for you, and I hope that your fortunes will turn around soon. This post is the first in a series – for people with choices on how they spend their income.

Save more than you spend … Duh! – Obvious you would think – Sorry Homer, It is worth doing!

According to a June 2018 Members Equity survey , of Australian households, less than half of them are putting something into the savings bucket each month.

Households who ‘typically spend less than they
earn each month’ (i.e. savers) eased further to 48%

Not only are the savers decreasing, but at the other end of the scale, the number of households that are in financial distress is increasing. The ME Bank report shows that more Australians are overspending – households who ‘typically spend all of their income and more’ increased 3 points to 11% during the six months to June 2018. Cripes!

Now the hard truth is out there … what can you do? Slack investor doesn’t pretend to have invented how to save. Any financial website will contain similar information. The advice is sound because it works. Just get started … this is the first step.

“Go and have a long hard look at yourself in the hall of mirrors” Roy and HG

Analyze your financial situation … Over a month or two, see what is coming in and what is going out. Many banking apps assign categories for your monthly spending in your statements. A pen and paper would do, but free software makes this task easy ( e.g. for PC, MS Money Sunset (Slack Investor way); or Phone: Pocketbook). Track your financial habits – you have to get an idea of what is going on in your financial world first … and then, take control.

2. Set yourself some savings goals. ...

Now the interesting part, and this is the “Art of the Possible”. Be realistic here and set goals that you can actually get done. Unless you can you work more hours or get an additional job, it is difficult to adjust the income side. The real power you have is over your spending. There are some things that you just have to spend – Rent, Bills, food etc. However, it is the discretionary things that need looking at. It doesn’t mean that you cant have fun anymore … just less expensive fun!

“The purpose of discipline is to live more fully, not less.” Master Po – From Kung Fu (see below)

The objective is to build up some savings – for a house or retirement. Naturally, if you have any personal debt (Credit Cards, Personal loans) you should get rid of this first. Keep your savings account separate from all others. The best savings method is what works with you – It can be a jar, or a monthly transfer from your transaction account to your savings account. Young Slack investor always found saving easier if he didn’t see the money. – A direct debit just after payday into your savings account will get this done.

What you should aim for when you get your first full-time job is to set up good habits. There is a good “Rule of Thumb” known as the 50:30:20 rule where you divide up your take home salary into parts – 50% for essentials, 30% for discretionary items (Fun!) and 20% for saving. There is a little bit of mathematics to back up this 20% savings rate. The Money Under Thirty table calculates that it will take 41 years of 20% saving (earning 5%) to get your savings to 25 times your inflation adjusted income – This is the amount that is generally agreed to be sustainable using investment earnings to replace your income, using the 4% rule.

Do not despair with these calculations, they are just a rough guide – and there are some things going in your favour as:

You don’t need to replace your whole income in retirement – just enough to cover your yearly expenses.
Over the long term, investment return earnings would hopefully better than 5% – this will get you to your goal quicker.
In Australia, if you earn over $450 per month, your employer is already contributing 9.5% of your wages to your retirement savings (Superannuation).
In Australia, we are in the very fortunate to have Medicare, a universal health system that subsidises health care for Australian citizens and permanent residents.
Although Slack Investor encourages readers to aim for complete financial independence in retirement. Under current rules, for Australians, there is a “sweet spot” for home owning couples of $400 000 in superannuation savings. Using a mix of the Age Pension and Super, couples can have a retirement income of $52,395 per annum. This bizarre sweet spot will be expanded upon in later posts.

3. Build an emergency fund.

In June 2018, a significant majority of households (62%) continued to report that they ‘could not easily raise $3,000 for an emergency’ – a percentage point lower than six months ago … ME Bank survey

Do not be part of this 62%, it is so important to have that “cushion of cash” – from which your financial independence can build. You must be ready for the many unexpected things that life can throw at you -$3000 in an online account is a good start and will help you sleep better at night.

Youtube excerpt from Kung Fu (3:35) where wisdom is imparted from Master Po to Grasshopper (May be subject to copyright)

The next part of the Slack Way to Financial freedom is Investing. But, to paraphrase Master Po from the old TV Series (1972) Kung Fu

“Grasshopper … you are not ready for this … until you have mastered saving”

PS … If the discipline of saving gets too much, I recommend a bit of Youtube Roy and HG magic (12:39) here for light relief.

Spaceship … Let Me Out Here!

Hey you Millennial dudes and hipsters… Suh!

Space … sounds good … its so snatched! … Spaceship … even better. Come on … lets get on board. Superannuation is so boring … but Spaceship .. Its so now – isn’t Elon Musk working on one?

What Slack Investor is referring to is the reach out to the younger crowd of cool new investor products that will look after your superannuation in a really cool way. Spaceship, is just one of the new breed of disruptors (e.g, Zuper, MobiSuper, Grow Super) that is encouraging you to put your super investments into a high tech sounding enterprise that focuses on new technology companies. It seems that their marketing push has been successful with at least $100 million in funds under management for Spaceship.

Now, Slack Investor has a soft spot for disruptors that make use of new technology to help the investor work more efficiently through lower costs and new platforms. However, Spaceship and their ilk are not, so far, disruptors. They are just a repackaging of the same old greedy financial industry that are trying to separate the investor from their hard earned loot.

We had a look at the critical importance of fees in investment in an earlier articles here and here. Despite the marketing fluff, Slack Investor is getting off the couch and drilling down. A highly recommended process before you part with your money to anyone. Spaceship fees are 1.6% plus administration, MobiSuper fees 1.5% plus admin fees, Grow Super fees are 1.85%! Fees are critical to investment returns.

The same drilling down process can be done in the USA with Individual Retirement Accounts (IRA) or employer sponsored 401(k) plans. Google is your friend – Long term performance and Fees Fees Fees is what you are looking for. A good articles for the USA on fee impact can be found here, And for the UK here.

The Australian Securities and investment commission (ASIC) says

A 1 % difference in fees can lead to a 20 per cent difference in the value of a superannuation benefit over 30 years.

From Hostplus – Money Magazine Best of Best 2017

The above table shows some existing funds that have established long-term returns and with a fee structure less than 0.5% for $50000 invested.

So get out of the spaceship … and relish life on planet Earth with some low cost super funds … they are so “On Fleek” as far as your money is concerned.

Banks … If you must!

Slack Investor has been banging on about the efficiency of online accounts as a place to park your savings (here and here) but my life is also cluttered with other banking relationships – but each of these accounts are first thoroughly researched.

This sounds a bit Un-Slack but banks don’t want you to really think about your accounts, they want you to accept this banking relationship in a benign way as they clip the ticket on every transaction. But, with a bit of thought, you can save some money … and it is much better in your pocket than theirs.

Firstly, Online accounts, everyone should have one as this is the most efficient and flexible way of saving with no risk. Try InfoChoice for a selection of accounts – although some institutions ask you to set up another transaction account with them. At the moment, it is difficult to go past RaboDirect who have a juicy base rate of 1.9% and they link to your current transaction account. Make sure you look at the base rates as the “honeymoon” rates often expire after a few months.

Transaction accounts, these are the busy accounts that you usually have your pay go into and they have good online access and come with a debit card or perhaps pay wave. These accounts usually pay little or no interest and sometimes have monthly fees (If so, … avoid these like the plague!). Make sure you always use the no fee ATM’s or eftpos for getting cash.

Credit Cards, this is where it gets interesting and where banks get a lot of justified bad press ie., Greedy Banks. The current average credit charge rate is 16.92 percent in an environment where the Reserve Bank has set the cash rate at 1.5 percent – I know that there must be a margin … but this is ridiculous! Then there are the credit card transaction charges at the retail level (The ACCC reports them at 1-1.5 percent for Visa and MasterCard, and between 2-3 percent for an American Express card). But there are ways to avoid the hook.

Golden Slack Investor rules:

Be nice to your mother.
Always … Just Always … pay off your credit card every month to avoid these inflated interest rates.
Ask at the point of purchase what the credit card transaction charges will be – explore alternatives to avoid these charges eg, eftpos

I don’t really blame banks… they are just companies that try to do the best for there shareholders. I received a great bit of advice from a seasoned investor 15 years ago …

Don’t complain about the big banks … just close your accounts and make sure you are a shareholder!

I took this advice and, where practical, moved my custom to the smaller banks and credit unions who were working a bit harder for their customers. Owning the big banks have been a profitable trade up until now, especially when you consider the fat dividends that pop up twice per year – Much better than bank account interest!

Due to their privileged position in the Australian economy, I am sure that big 4 banks will continue to be profitable, but they face a few headwinds now and growth will be difficult – They are out of the Slack Investor portfolio for now.

However, the first bit of advice remains true, engage with your banking – look at comparison sites like InfoChoice or Finder The smaller banks, mutual banks, and credit unions are still offering the best deals – make sure they have free ATM access, and some way of doing the occasional face-to-face transactions.

Just fill out a few forms, get some ID certified with a JP, scan … and join the banking revolution!

May 2017 – End of Month Update … and FHSST!

Slack Investor remains IN for US, UK, and Australian index shares.

Despite a bad month for the Australian index, the Slack Investment Cycle returns for the US, UK and Australian markets are 141.0%, 12.7% and 8.9%, respectively.

Extract from the ASX Index Fund (STW) May 2017 – Incredible Charts – More detail on the individual Index Chart Pages

May 2017 still finds the monthly price range bar is well above the 10-month moving average in all markets (This is the last bar on the far right of the charts on the index pages – and it is above the black wavy line that represents the 10-period moving average). This is Slack Investors comfort zone … so no action again this month.

For more information on parameters such as progressive gains, try the Slack investor ASX Index, US Index and UK Index pages for updated details – and a look at the charts. Next end of month update on the index charts will be early in July.

FHSST … First home super saver scheme

Slack Investor has probably gone a little early on this as, although announced in the 2017 budget, it is still a twinkle in the government’s eye as the legislation is still to be presented to the quite fickle senate and passed as law. But, it is a sensible proposal that should give first home savers in Australia a bit of a kick along if passed.

The scheme opens up the great tax-saving vehicle of salary sacrifice. Salary sacrifice is not normally on the radar for young first home buyers as it is normally associated with saving for your superannuation – and locking away your money for decades. FHSST lets you save up to $30000 for individuals ($60000 couples) – and lets you access your money when you buy your first house.

There is a nice calculator and graph here provided by SCOMO Someone on $60000 who puts $10000 per year into the scheme would have $25578 saved up after 3 years. This is a bonus of $6239 as measured against just putting the savings into a bank.

For those who are young and saving for their first home … hope for a quick legislative passage and get on it! … Its really dope!

Sometimes What You Don’t See is Really Important!

Especially when the thing you don’t see is your money!

I know things are difficult out there … rents are high, things break, bills keep coming in, and everything seems to be going up – except for your wages. But, if you can have the discipline to save even a little bit of your money, your wealth fund will be able to establish some roots … and this start is a huge and necessary step to financial independence.

Through experience, Slack Investor knows that it is easier to save money close to the source – if you can quarantine some of your income at the time of payment, – all the better! Start up an online, no fees, bank account and tell your boss that you want a portion of your pay put into this. If your employer can’t do this, then set up a direct transfer from your wages bank, the day after payday, to your online savings account. It is done … you are on your way.

In the parable from the financial classic The Richest Man In Babylon, the rich man Algamish passes on the secret of his wealth to the financially challenged scribe Arkad –

“I found the road to wealth,” he said, “When I decided that a part of all I earned was mine to keep. And so will you.”

Algamish suggested at least 10% of your wealth was to be put aside – and Arcad, with his mentor’s help, also became a rich man in Babylon. Arcad was not lazy with his money and understood the power of money and time through compounding interest …

“Then learn to make your treasure work for you. Make it your slave. Make its children and its children’s children work for you … Invest they treasure with greatest caution that it may not be lost.”

Back in the real world, and far, far from Babylon … So many Australians have built their wealth through real estate. Increasing land values have helped this (Especially in Melbourne and Sydney) … but a big reason why home ownership is a vital stepping stone to wealth is that the banks will lend you 80% of the asset value (If you satisfy their income tests!) … and you are “forced” to quarantine your monthly loan repayments from your spending. This is “forced” saving and most homeowner’s, up until now, have found a way to make these payments each month. Business Insider quote a Standard and Poor’s report of an Australia wide loan delinquency rate of only 1.29% for January 2017. This figure will most certainly rise as we go into an interest rate increasing regime – but that’s another story!

Salary sacrifice into superannuation is another way of putting a portion of your wages aside and “paying yourself” in a tax-advantaged way. This strategy has great benefits for older folk but, … this has little appeal if you are 40 years from retirement.

But wait … Hidden in SCOMO’s 2017 Australian budget there is a tantalizing offer to the young home saver who wants to quarantine a bit of money for their future wealth … The First Home Super Saver Scheme. The unfortunately named, deflating sounding scheme has the acronym – FHSST … and will be discussed next post.

Superannuation … Engage! – Part 2

You have been busy (and definitely not Slack) and gone through the paperwork that combines your super funds into one fund that you will keep for your working life. You have probably found an Industry Super Fund provider with established performance and low fees … Sorted!

Slack Investor is proud of you!

However, a little more work is required. The default investment option for most funds is called “balanced” – that sounds pretty cool – who wouldn’t want to be balanced! Generally Balanced options comprise 60-70% in growth assets and 40-30% in income assets.

The options that your fund may offer you are … in terms of increasing risk are

Cash – Invests 100% in bank deposits or other ‘capital guaranteed’ products.
Conservative – Around 30% in shares and property with the majority in fixed interest and cash.
Balanced – About 70% in shares or property, and the rest in fixed interest and cash.
Growth – At least 85% in shares or property.

If you are young … go for Growth, or High Growth … every time! Your super will be invested for 40-50 years and this is plenty of time to ride a few bumps that Growth assets such as shares and property can sometimes throw … Embrace risk and ride these bumps …. It is a good lesson to realise that the beautiful dance between risk and growth must be part of your investing life – Without risk, it is impossible for your investments to grow substantially.

Depending on your time frame, your tolerance to risk will vary. There are good reasons for someone approaching retirement to step back from a growth at all costs investment strategy. But, if you are just starting your working life, and want to grow your superannuation in a meaningful way … time is on your side … and risk is part of this process …

Australian Super have crunched the numbers and found that

YOUNG workers choosing “low risk” investments for their superannuation may be up to $170,000 worse off

The appealing sounding “low risk” options mostly deliver returns not much higher than inflation … And, we are not interested in just tracking inflation … we want growth!

If your superannuation amount is low and you want to give it a bit of a boost, and you earn less than $51,021 (2016/2017 year), the Australian government runs a co-contribution scheme that will reward you on a sliding scale – If you earn less than $36,021, the tax office will automatically kick in a maximum $500 for a $1000 after tax contribution to your super fund – This reward gradually tapers to zero as your income approaches $51,021. This is a pretty good return for your investment!

Grandparents and parents please note – if your wonderful offspring have a part-time job and a compulsory super fund – and you have a windfall that you would like to pass onto the next generations that cannot be frittered away on teenage pleasures – I am reminded of the fantastic George Best quote here.

I spent a lot of money on booze, birds and fast cars. The rest I just squandered.

Despite the wisdom of George Best, a gift of $1000 that would go directly to your loved one’s super fund would attract this govt co-contribution and be a great lesson in the benefits of compounding interest.