Financial literacy leads to healthy habits

It’s an important skill but many people are still not as financially literate as they should be. Here are some ways that may help you improve.

Financial well-being is defined¹ as when a person is able to meet expenses and has some money left over, is in control of their finances and feels financially secure, now and in the future. However, financial decision-making is complex and contextual and often we need help to understand what to do.

The latest Australian Securities and Investments Commission (ASIC) Australian Financial Attitudes and Behaviour Tracker, which monitors financial attitudes and behaviour in adults, showed Australians had some great habits when it comes to their finances but that there were also ways we could improve.

Healthy financial habits

About nine in 10 respondents to the ASIC survey said they kept track of their finances in some way and eight in 10 had a budget². Significantly, 23 per cent said they always stuck to their budget.³

Keeping track of your finances is crucial to strong financial literacy. Here are some quick tips:

• set a budget for your weekly expenses and stick to it
• check your bank and credit card statements regularly
• save something from every pay.

Educate yourself

Staying on top of the latest financial information and learning key concepts may help you understand more about what you need to discuss with an adviser. Generally, there’s a low understanding of key investment concepts when choosing financial products. Fewer than one in three respondents to the ASIC survey understood the risk-return trade-off and only four in 10 understood the principle of diversification in investing.⁴

Do your research

There is a lot of financial information at hand and it’s easy to get overwhelmed and stick with what you know – but committing to researching the latest on finance monthly or checking in with your financial adviser every quarter is all it may take to update your financial knowledge and skills and make better informed decisions.

Think long term

A long-term financial plan may help you see the ‘big picture’ of your finances. However, only about one in four respondents had a long-term financial plan, with 63 per cent monitoring their progress in the past six months.5 If you set a long-term financial plan, you can work towards it every day and even if the goal is just to get out of debt, the satisfaction of reaching it will be worth the effort.

Talk to your adviser

Your adviser may help you achieve a higher level of financial literacy and give you a financial plan that remains in sync with all the changes in your life.

A Financial Adviser could work with you to develop a financial plan that’s specifically tailored to your needs, so get in touch with Dev Sarker today on 1300 71 71 36.

1 www.financialliteracy.gov.au/media/560752/research-unsw-fla-exploringfinancialwellbeingintheaustraliancontext-report-201709.pdf

2 www.financialliteracy.gov.au/research-and-evaluation/financial-attitudes-and-behaviour-tracker

3 www.financialliteracy.gov.au/research-and-evaluation/financial-attitudes-and-behaviour-tracker

4 www.financialliteracy.gov.au/research-and-evaluation/financial-attitudes-and-behaviour-tracker

The urge to donate is strong in Australia, and it’s easy to make it part of your financial plan.

An estimated 14.9 million Australian adults (80.8 per cent of the population) gave $12.5 billion to charities and not-for-profit organisations in 2015–16. 

For many people donating comes as a response to a request from a charity, but if you feel strongly about a cause or providing ongoing help to someone less fortunate, why not budget for it?

As well, many people plan to leave money to charities in their wills and with some extra thought in estate planning, a bequest can be made in a tax-effective way. An example is transferring shares that may have significant capital gains attached to them. These can be transferred to charities that have zero tax status, which will then get the full benefit of the gains.

Regardless of how you give, it’s always important to keep accurate records of your donations to give to your accountant at tax time.

Here are five things to consider before donating.

1. Why giving is important

Giving to the less fortunate is a good thing to encourage from a young age. Certain schools make volunteering with charity organisations part of their programs but even parents can encourage philanthropy through their own actions, showing that it feels good to give.

You can touch the life of another person and affect them in ways you may never know – and it’s a win-win proposition. Giving is good for both the donor and the recipient. There’s nothing wrong with feeling proud of your generosity and using that to spur you on to further acts of kindness. Giving makes the world a better place.

2. Do you know what the charity does?

It’s an obvious question, but at the very least the charity’s mission and goals should align with what you hope to accomplish with your generous gift. Is the charity doing good works in the areas that concern you? Do you feel strongly about what it is doing with your money? Is it obvious what the charity does, or does it help out behind the scenes?

3. What has the charity achieved?

Most organisations are happy to advertise their successes through videos, photos or testimonials that showcase their work. There also should be plenty of information in their annual reports to help you get a more complete picture.

4. Can you volunteer?

Being charitable often means more than giving a few dollars. It can also mean pitching in and helping, which is a great way of finding information and making connections. Meeting employees and volunteers will help you decide whether the organisation fits your values and goals, and this can make you become more involved in the cause. Plus, you may feel more fulfilled and happier knowing that you are making a difference.

5. How much are you comfortable giving?

Giving circles are becoming popular for people who don’t have a lot to donate. This just means getting a group of 100 or so people together who each contribute perhaps $1,000 to create a pool of $100,000. They donate the lot to one charity to make a big impact.

If you would like to make giving part of your financial plan, your adviser can help you get the most out of your philanthropic efforts.

A financial advisor can work with you to develop a financial plan that’s specifically tailored to your needs.

Get in touch with Dev Sarker on 1300 71 71 36 today and start planning.

As the new financial year has just begun, it’s a good time to consider your financial strategy for the rest of the year.

Important actions to consider

• Salary sacrificing into super, while saving on tax, can help you build for retirement
• If you receive any extra cash during the year, you can add it to your super as well
• Monitor your claimable expenses so you can take advantage of your tax deductions from one year to the next

For many of us, the start of a new year is a time when we make resolutions for the coming year — whether it’s committing to an exercise plan or learning a new language, or even just resolving to spend more time with family.

But when it comes to making resolutions about your finances, there’s no better time than the start of a new financial year. So if you’re looking to boost your super or reduce your tax bill, here are three resolutions you can make now to start next financial year on the right foot.

Resolution 1: I will start salary sacrificing

Salary sacrificing into super is a great way boost your retirement savings and also save on tax. If your employer agrees, you can ask them to take a fixed amount out of your pre-tax salary and pay it directly into your super. Since this strategy essentially lowers your income, it may reduce your tax liability.

In a single financial year, you can put up to $30,000 of your pre-tax earnings into super (or $35,000 a year if you are aged 50 or more at any point during the financial year). This $30,000 cap includes compulsory contributions from your employer plus any extra amount that you salary sacrifice. And now is a great time to make the most of your cap ― as of 1 July 2017, the Government has proposed a reduced cap of $25,000 a year.

The beginning of the financial year is the perfect time to get started. Work out how much you can afford to salary sacrifice each week or month, then ask your boss to contribute this amount to your super from each pay cheque.

If you’re already salary sacrificing, be sure to keep track of how much you’re putting into super overall. For example, if your salary has increased during the year, then your employer’s contributions will have gone up too. That means you might need to reduce the amount you’re salary sacrificing, so the total amount doesn’t exceed the relevant cap.

Resolution 2: I will invest any extra cash

In the last 12 months, did you receive any extra money on top of your regular salary ― maybe a bonus, an inheritance or a gift? When extra cash comes your way, it’s easy to let it flow straight back out again, so it’s worth planning ahead in case you get a windfall next financial year.

A great way to make this extra cash work for you is to invest it straight into your super as an after-tax or ‘non-concessional’ contribution. Remember, a boost to your super now will make a big difference when the time comes for you to retire.

But be careful how much you put in ― an annual non-concessional contribution cap of $180,000 exists to limit the amount of after-tax contributions that can be made (the current three year cap is $540,000). One of this year’s Federal Budget announcements was the introduction of a $500,000 lifetime cap on non-concessional contributions to replace the current annual cap of $180,000. So if you’ve already made more than $500,000 worth of after-tax contributions from 1 July 2007 to now, you won’t be able to put in any more.

Resolution 3: I will keep track of my tax deductions

It’s tempting to leave it to the last minute to sort out your tax deductions ― but as you may know, this can result in a big headache when tax time rolls around. So to relieve some of the stress, it’s worth keeping track of your deductions right from the get-go.

Make sure you understand what you can claim for. Depending on your situation, this could include business or home office costs, repairs on your investment property, professional development expenses, financial advice fees or income protection insurance premiums.

Even before the financial year starts, it’s worth considering how to make your deductions work may benefit you. This may mean paying some of next year’s expenses before 30 June — or if you’re expecting a tax increase in the next financial year, holding off some payments until then.

Keep in mind that for some expenses, like income protection premiums or investment fees, you can prepay up to 12 months’ and claim a deduction in the financial year you make the payments. So it’s a great idea to work out a payment plan now for the year ahead.

Speak to a BlueRocke financial adviser

As we all know, making resolutions is just the first step ― sticking to them is the real challenge. At BlueRocke we can give you expert guidance and advice, with solutions tailored for your unique needs and goals.

When cash is king, choose the best option for you.

Hoarding your dollars under the mattress probably won’t have much appeal for many of us. But is it possible you may be doing the modern day equivalent with your current cash investments.

The reason the mattress isn’t such an attractive idea is that, apart from the obvious security issues, the value of your stash falls over time. You earn no interest and there’s no capital growth.

There could be a similar result if you don’t think through the options available for cash investments. It may mean lost opportunities and fail to maximise the returns from your most liquid assets.

Which account?
While the everyday bank account will always score highly as a convenient place to park your cash, it comes at a price.

A better option for your cash reserves could be a high-interest savings account. Here, your cash can be earning more than a typical transaction account.

A slightly higher rate of interest again can be earned in a term deposit. In return for agreeing to tie up your cash for a set period of time, usually between a month and five years, you’ll earn more. The longer the period, the higher the interest. Term deposit accounts often require a minimum amount of around $1,000 to $5,000.

You’ll need to be certain that you won’t need the money for the fixed term because withdrawing funds early can attract penalties. Also, don’t forget to keep track of when the term expires so that you can plan what to do next. Unwittingly allowing the term deposit to rollover into another term might not be best for your circumstances at the time.

Of course, there are many other ways to hold cash investments, such as managed funds that either focus purely on cash investments, or include a large holding of cash investments as part of their portfolio.

What suits you?
Another way to take advantage of the security and performance of cash and fixed interest is to change the asset allocation in your superannuation or pension fund.

You can manipulate your investments inside your fund to create a portfolio that suits the market conditions and your own goals.

Thoughtful people who are long-term investors must first decide on their investment objectives when deciding between active or passive managed funds.

Investing in equities is an increasingly popular method of assisting people to achieve their long-term financial goals. An investment in equities can generate promising returns over time as companies grow and become more profitable.

Further, dividends paid by listed companies also provide a good income stream for investors. In Australia the benefit of franking credits enhance the attractiveness of equities as an asset class.

However, there are also risks associated with investing in shares. Companies that struggle are likely to see their share prices fall and stock markets as a whole can be affected by periods of economic weakness or unexpected events, as illustrated by the chart on the next page.

In order to minimise risk many investors maintain exposure to shares in professionally managed funds. These funds are usually well diversified, spreading investment risk across a wide range of companies. There are two distinct types of funds that are available to investors – active funds and passive funds. In this paper, we will take a closer look at both types of funds and highlight the key differences between the two.

 What is active investing?

Most actively managed funds aim to outperform a particular index, for example the S&P/ASX 300 Accumulation Index (ASX 300).

To achieve this, the fund managers actively research companies that are constituents of the index. Professional managers typically have the resources required to complete detailed analysis on companies and skilled investors can identify those likely to perform better than the market average over time. These qualified investors have access to information, research and robust investment processes that are not readily available to individuals.

Following this analysis, active fund managers buy and sell shares in an effort to maximise returns for investors. They will buy stocks that are expected to perform better than the broader market, sell winning stocks following a period of favourable performance, and avoid those that are expected to underperform.

The intention is that the combined portfolio of shares will perform better than a comparable index, normally referred to as the ‘benchmark’. Of course there is also a risk that active funds will perform less well than the benchmark index if the selected stocks do not perform as well as the manager anticipates.

The performance of active managers is typically measured against these benchmark indices, which they try to outperform by a given margin. The extent to which returns vary from those of the benchmark index is a fair indication of the manager’s skill.

Chart 1: Volatility in sharemarkets is constant

Source: Colonial First State. S&P/ASX 300 Accumulation Index Jan 1995 – May 2014. Chart is for illustrative purposes only.

What is passive investing?

A passive investment manager tries to replicate a sharemarket index, such as the ASX 300, by owning shares in each constituent of the index. The quantity of each stock held is determined by the stock’s weight in the index. If BHP Billiton accounts for 8.6% of the ASX 300, for example, a passive fund manager will invest 8.6% of the fund’s assets in that stock, and so on, for every stock in the index. The investor should expect returns to be close to that of the market index.

 Which type of fund is right for you?

In deciding on the style of investment, investors must first decide on their investment objectives, in particular return targets. Most investors would expect to generate returns that are above that of a market index and would prefer investing in an actively managed fund. In this case, the selection of the active manager is crucially important and the consideration for investors is their confidence in an active manager to achieve their investment objectives. While past performance is not necessarily an indication of future performance, most investors will consider a manager’s long-term performance track record before making an investment.

Cost is another differentiator of the two styles. Actively managed funds typically charge a higher management fee to cover research costs and to pay for the large teams of experienced analysts that are typically employed in the management of the fund. In contrast, because no attempt is made to outperform a benchmark index through research or stock selection, management fees for passive funds tend to be much lower than for actively managed funds. Cost should not be the main factor in picking a fund as contrary to the belief of many investors, selecting an active fund based solely on a low fee can be a mistake.

Here is a summary of some of the key advantages and disadvantages of active and passive funds:

One approach is not necessarily better than the other. Before making an investment, it’s always best to speak to a financial adviser, who can help you select a fund – whether active or passive – that can help you achieve your investment goals.

Four tips on what to do with a windfall

If you were lucky enough to land a windfall, before you rush off on that long dreamed of holiday, here are four practical considerations:

1. Reduce your debt

The most financially sensible thing you could do, is pay off debt. Before doing anything else with you cash, it would be wise to pay off loans which charge you the highest rates of interest, such as credit cards, car or personal loans, store cards or short term loans.

Only then should you consider paying off your mortgage, in full or in part, because your mortgage is likely to be charging you the lowest interest rates. Apart from the savings you’ll make from lower interest payments, getting rid of debt could also eliminate financial stress and allow you to focus on smarter financial decisions for your future.

You should speak with a financial adviser about your current situation. It doesn’t matter what stage of life you’re at, how much money you have, or how much advice you need

2. Plan for retirement and build up your super balance

You should consider taking advantage of non-concessional contributions and build more of your wealth within super, rather than having it all invested in your own name in the bank. Non-concessional contributions refer to after-tax amounts which are indexed each year.

Under current rules, you could contribute $180,000 in non-concessional contributions. Further, and subject to regulatory compliance, if you are 64 years old or less anytime in the financial year and you make a non-concessional contribution, it would trigger a ‘bring-forward’ provision, and you could contribute up to $540,000. This would result in a significant tax saving on your investment earnings, but it would depend on your personal income levels. Keep in mind, though, that the downside of building up your super is that you cannot access the money until you stop working or retire (subject to meeting a condition of release).

3. Diversify your investments

Keeping large sums of money in the bank at current term deposit interest rates may not be the best investment in the long term. You could work out what large capital expenses you may have over the next three years and leave this sum in the bank, but the remainder could be invested in a more growth-oriented manner, depending on your appetite for risk.

If you have already purchased an investment property, you could consider building up investments in Australian shares, international shares and other asset classes to diversify your investment portfolio.

You could also look at a managed fund that is appropriately diversified across a number of asset classes, but a good portion could be in Australian shares which aim to deliver the growth that can be achieved over the long term with this asset class.

4. Find a financial adviser

You should speak with a financial adviser about your current situation. It doesn’t matter what stage of life you’re at, how much money you have, or how much advice you need, it could be beneficial for you to sit down with a financial adviser and work out your short and long term financial goals and aspirations. For more on how you could benefit from financial advice, see The right advice can make all the difference.