Prune, adapt and budget: Managing the rising cost of living

If you’re organised with your finances, the high cost of living doesn’t have to mean diminished savings.

The increasing cost of goods and services – from food and housing to transport and utilities – is a reality most Australians have to face every day.

Data from the Australian Bureau of Statistics (ABS) shows that living expenses for employee households were up by 2 per cent in September 2018 compared to a year ago. Among self‑funded retiree households and age pension recipients, living costs rose by 2.3 per cent and 2.2 per cent respectively.[1]

But don’t panic. By being organised and smart about your finances, you could manage rising costs without draining your savings and sacrificing your financial security.

Cut back on major expenses

Reducing your expenses is an obvious way to manage the high cost of living. But rather than taking a piecemeal approach, it may be more effective to cut back on the largest drains on your funds.

For a start, you may want to trim costs in areas that, according to the ABS, account for more than half of Australian households’ weekly expenditure: housing, food and drinks, and transport.[2] Do you really need a second car? Can you negotiate a lower mortgage rate with your lender? Paring discretionary expenses in these areas may result in big savings.

Reduce your lifestyle costs

It may be worth auditing your lifestyle expenses to see if you could do some pruning. These costs can burn a big hole in your pocket if you don’t monitor or check them. Research shows that Australians spent $145 billion on lifestyle goods and services in 2017.[3]

While you don’t have to give up all the things you enjoy, cutting down on, for example, your overseas holidays or dining out could go a long way towards reducing your costs. Savings in these areas may help you cover essential expenses or boost your nest egg and investments.

Create a budget

Having a budget and sticking to it may help you minimise unnecessary expenses. A budget tracks your weekly or monthly spending and may help ensure you have enough money to cover essentials while being flexible enough to manage unexpected or increased costs.

To create a budget that factors in your income, expenses and financial obligations, it is recommended that you consult a professional financial adviser. Your adviser may also suggest ways to manage your costs and build up your savings.

Supplement your income

Increasing your income could be another way to ride out the rising cost of living. You could do this by taking on extra work in your spare time or starting a side business. And in today’s digital sharing economy, earning extra money in a way that suits you has never been easier. Become a private tutor in your field of expertise. If you’re an avid gardener, advertise your gardening services online and in your community. Rent out your car or a spare room in your house, join the drive-share economy or even pet sit. By having one or two side gigs, you won’t have to dip into your savings just to meet the rising cost of living.

If you have enough savings on top of your emergency fund, you may want to consider investing to grow your capital. Your financial adviser could recommend strategies to help you generate an income from your investments.

The high costs of goods and services may affect your savings and lead to money-related stress. But if you’re smart about your finances, you could keep your cost of living in check and remain financially secure.

[1] Mozo, August 2017, ‘Australians eating away savings, spending a whopping $4 billion on food and drink per month’. Accessible at: https://stat.mozo.com.au/images/more-on-mozo/media-releases/MOZO-MEDIA-RELEASE-cost-of-lifestyle-2017-final.pdf

[2] Australian Bureau of Statistics, September 2017, ‘Household Expenditure Survey, Australia: Summary of Results, 2015–16. Accessible at: https://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/6530.0Main Features32015-16

[3] Australian Bureau of Statistics, September 2018, ‘Selected Living Cost Indexes, Australia’. Accessible at: https://www.abs.gov.au/ausstats/abs@.nsf/PrimaryMainFeatures/6467.0?OpenDocument

Set a good example for your children with just a few simple changes.

As a parent, you try to ensure your children have the skills to make smart financial decisions. For example, you tell them about the importance of saving or the power of compounding interest. But did you know that you could be sending them negative money messages without meaning to?

Here are four common ways you could teach your children healthy money habits.

1. Revealing the magic behind digital money

Your children have likely seen you pay for hundreds of transactions without glimpsing cash changing hands. For small children, it can seem like money problems are solved with magic – just wave or tap a plastic card. This makes it important to discuss the value of money with them. A good way to start is to explain how your earnings get deposited into your bank account and how you use this account to pay bills. For older children, consider showing them how taxes are deducted from your salary.

2. Spending wisely

Frequently buying things on an impulse could send the message that it’s fine to spend without planning. Sticking to a budget is key to avoiding impulse-buying. To set an effective budget, consider working with a professional financial adviser. Your adviser may help develop a budget that factors in your income, expenses and financial obligations.

3. Teaching them independence

It’s convenient to do everything for your children. But by giving them a chance to have their own money and decide how and where to spend it, they could learn powerful lessons about budgeting. For adult children, always offering them financial help can create a cycle of dependency. Letting them make their own money decisions could help them develop financial responsibility.

4. Including them in budgeting

Many parents keep household financial planning and budgeting to themselves. While you don’t have to fully involve your children in managing your family’s finances, giving them a role to play, such as getting them to do grocery shopping using a set budget, can teach them lessons about money. If your children are old enough to earn some income, why not get them to pitch in to help achieve a family goal?

Using your influence positively

You can strongly influence your children in relation to money, so it’s important to pass on smart money management skills. If you don’t know where to start, consider reaching out to your financial adviser to help you stay on top of your finances through proper planning and budgeting. Contact Dev Sarker on 1300 71 71 36 today!

Setting a financial goal for the New Year? Take steps to make
it work.

It’s that time of year when we set new goals or dust off old ones. But how can we boost our chances of sticking to our financial resolution? Here are some practical tips.

1. Choose an attainable goal

It’s good to be ambitious, but you may have a better chance of adhering to your resolution if you have a smaller, reachable goal. Using the well-established SMART formula can help. SMART stands for:

• Specific – make your financial goal as clear as possible.
• Measurable – if your goal is specific, most likely it is measurable too.
• Achievable – choose a goal that you can reach in the foreseeable future.
• Relevant – ensure you really want this goal and that it would benefit you.
• Time bound – set a timeline for achieving your target.

2. Have a plan

Create a plan that can help you take small but regular steps toward reaching your financial goal.
The key is to set specific milestones and a timeframe for each. You may wish to talk to your financial adviser about setting a plan for your financial situation and goal.

3. Announce your resolution

Tell your family members or friends about your resolution, or post it on social media. By making your resolution known to others, you might feel more responsible for sticking to it.

4. Track your progress

Record and analyse your progress against your milestones. It could help to get your financial adviser to check your progress every so often.

5. Enjoy the process

Enjoying the process of reaching your goal may help you stick to your financial resolution. So give yourself a small reward every time you hit a milestone.

Whether you want to boost your savings or retirement fund, your financial adviser may be able to help you stay on track to achieve your resolution.

How financial market volatility affects investors at different life stages

Many people understand that volatility in financial markets can affect the value of their investments. Taking a closer look at sequencing risk, we will explain how the order of investment returns can have a significant influence on the value of investors’ retirement savings.

Does the order of returns really matter?

In reality, the order of investment returns does not matter too much for most long-term investors. While nobody likes to see the value of their investments going down, irrespective of the ‘return path’ or order of returns, an investment will have risen in value as long as the average return is positive.

This is illustrated in the stylised example in Table 1. Investor A and Investor B invest $1,000,000 in different products – the table highlights how both investments performed over 15 years.

Table 1: Impact of the ‘return path’

Source: First State Investments. Table is used for illustrative purposes only.

Both investments deliver the same returns, but the order of those returns is reversed for the two investors. Investor A’s investment delivers three consecutive years of negative returns early in the period, while Investor B’s investment delivers negative returns at the end of the period.

Assuming both investors stay invested for the full 15 years, it is clear that the order of returns had no impact on their final investment balance – both investments have grown to $1,407,905. This is because positive and negative market movements have averaged out over time. Importantly, despite the volatility in annual returns, the average return is positive.

For this reason, most people saving for their retirement should not be overly concerned about short-term volatility in markets, even though this can result in short-term downward movements in the value of their investment. Assuming that the long-term average return is positive, the value of their investment will grow.

Does anybody need to be concerned with volatility then?

One group of investors in particular needs to think about volatility and the order of their investment returns – retirees. The following example illustrates how the order of returns affects them. Let’s assume Investor C and Investor D are both 65 years old and about to retire. In order to help finance their day-to-day living costs, both investors withdraw $5,000 each month, or $60,000 per year, from their investment.

Table 2: Impact of the ‘return path’ with regular withdrawals

Source: First State Investments. Table is used for illustrative purposes only.

Again, the two different investments deliver the same percentage returns, but the ordering of the returns is reversed.

The investment outcomes of Investor C and Investor D highlight how sequencing risk (or the order of investment returns) can be crucially important around retirement age. At this time, investors are typically making the transition from savers to income-seekers – from building up their nest egg to drawing income from it. If financial markets struggle around the time of retirement, there could be undesired consequences such as delaying retirement to continue working, or having to reduce expenditure in retirement.

This is the clear problem for Investor C. Regular withdrawals, combined with a series of negative investment returns in the first three years of retirement, mean Investor C has less time to recover from negative market movements. In the above example, Investor C faces the unfortunate prospect of having their funds depleted just 12 years into retirement.

Over the same period, Investor D continued to accumulate wealth during retirement despite making exactly the same withdrawals as Investor C. This is because Investor D had the better fortune of having three consecutive years of positive, double-digit returns immediately after retirement.

What can you do about sequencing risk?

The rapidly declining value of Investor C’s investment shows that sequencing risk can have serious implications for retirees. Importantly, it can make a meaningful difference to how long an investor’s savings will last in retirement and how much income can be withdrawn in order to help fund day-to-day living costs. As a result, sequencing risk must be addressed before savers reach retirement as part of a transition strategy.

One thing is for sure – volatility will remain a feature of financial markets. While nobody can control the order of investment returns, there are some steps investors can take to mitigate the effects of sequencing risk.

Mitigating the effects of sequencing risk

– Diversifying your investments across different asset classes can reduce the volatility of investment returns and reduce the severity of downward movements in individual asset classes. It’s important to remember that diversification can reduce the volatility of investment returns without inhibiting total returns.

– Amending asset allocation in your investments over your working life. Many investors choose to have greater exposure to growth assets early in their working life and then reinvest their assets in more defensive, less volatile investments as they approach retirement.

– Adjusting the rate of savings during your working life. It may be worthwhile having a higher contribution rate early in your working life (when income is typically lower) and reducing the rate as you approach retirement (when income is typically higher).

Want to know more about sequencing risk? Speak to a BlueRocke financial adviser on 1300 71 71 36.

How does it work and is it a good strategy for you?

The recent housing boom in Australia has been driven by both investors and home-buyers. According to the Australian Bureau of Statistics, investment loans hit record levels in June 2015, contributing to more than half of all new housing loans, including more than 60% of loans in New South Wales. Even as those numbers fell back in July, due to investment lending being reigned by regulators, investors sentiment continues to remain strong.

Surging prices have seen rents struggle to keep pace. According to the CoreLogic RP Data Home Value Index, annual rental income from investment properties fell to an average of just 3.3% of house prices in August — more than the interest on a typical term deposit, but less than the dividend yield on many shares. That suggests many investors may be using a negative gearing strategy, sacrificing short-term income for long term gains. But while negative gearing can be a powerful tool for building wealth, that doesn’t mean it’s for every investor or every situation. Here’s how it works, and how to decide if it’s right for you.

How it works

Gearing is simply borrowing to invest. As many investment home-owners know, it can be a winning strategy because it enables you to buy bigger and more valuable assets with less cash upfront, so you can potentially earn more income and make larger capital gains.
If the income from your investment is higher than your borrowing costs, you’re said to be positively geared. But if you pay more in interest and other costs than you earn from your investment, you’re negatively geared. In other words, negative gearing means making a loss on your investment today in the hope of making a gain tomorrow. So how can you use it as a strategy to build wealth?

Multiplying your gains

The key is that rental income is just one of the ways you can make money when you invest in property. The other, often much larger, money-spinner is the gain you make when you eventually sell, always assuming the property has risen in value. That’s because gearing also has the effect of multiplying your capital gains. Here’s a simple example. Let’s say you invest $500,000 in a property and it rises 10% to $550,000, you make a 10% capital gain. But if you invest $100,000 of your own money and borrow the rest, that $50,000 profit is 50% of your initial investment — 10 times the capital gain. For investors, this multiplying effect can often outweigh the short-term losses that negative gearing involves. But there is also a downside. Just as gearing multiplies your gains when you invest successfully, it also multiplies your losses if an asset falls in value. And remember that house prices can and do fall, especially after a period of strong gains. That’s why gearing should always be used as a long-term strategy, allowing you ride out any short-term ups and downs in the market.

Tax concessions

Of course, the other reason negative gearing is popular with investors is that it can bring sizeable tax concessions. That’s because investors can generally claim a tax deduction for their interest and costs. For example, if you’re in the highest 49% tax bracket (including the Medicare and budget repair levies), and you’re paying $20,000 a year in interest and other costs, you could receive a tax concession worth $9,800, making that expensive property look much more affordable. So while you may be making a loss today on your negatively geared investment, you can offset that loss against your other taxable income, lowering your overall tax bill. But an important word of warning: tax laws are complex, and everyone’s situation is different. So it’s essential to get professional tax advice before you commit. And while the tax concessions can make your strategy more effective, it is never a good idea to let tax influence your investment decisions. After all, a bad investment with tax concessions is still a bad investment.[1]

Getting great advice

As you can see, making gearing work is all about getting the numbers right. That’s why it makes sense to talk to a professional who can help you stress-test your strategy and find the most rewarding option with the least risk. For more information, talk to an advisor at BlueRocke at 1300 71 71 36.

[1] Seek advice from an accountant regarding tax concessions for your personal situation.

If you have just received an inheritance, you may be considering different ways to best make use of it. The different choices you have to use and invest this money may seem endless: take a holiday, put it towards your children’s education, pay off your mortgage, or add to your retirement savings.

While thinking about your options, placing the funds in a term deposit or high interest savings account can offer a higher interest rate than your everyday bank account.

Picking what’s best will depend on your level of debt and income, appetite for risk and overall financial situation, including how close you are to retirement.

Here are some options to think about:

1. Pay off debts

Paying off debts can reduce your financial stress now and in the future. It’s wise to pay off loans which charge you the highest interest rate first, such as credit cards, car or personal loans, store cards and short term loans.

2. Build your super balance

Putting money into super can be a tax-effective way to increase your retirement savings .There are rules around super contributions that you need to be aware of, for example:

• Excess non-concessional contributions are taxed at 49%. However, you can generally withdraw any excess contributions tax free although a deemed earning amount will apply to the excess contributions and will be taxable to you personally.
• You could choose to keep the inheritance outside super and set up an arrangement with your employer to contribute more to super from your before-tax income – also known as concessional or salary sacrifice contributions. Concessional contributions don’t attract income tax and instead are generally only taxed at 15%. This means you could lower your taxable income. Money you draw from your inheritance could supplement the income you sacrifice.

It’s also important to remember that money you put into super is generally not able to be accessed until after you retire.

3. Invest in shares or property outside super

Depending on how comfortable you are with taking investment risks, you could invest some of your money in assets with the potential to grow in value, like shares or property.

Shares and property are two key investment types, sometimes referred to as asset classes. Others include cash and fixed interest. All investment types carry their own risks and benefits and if you invest in a mix of them, you may be able to minimise the chance that all your investments will perform poorly at the same time. This is what’s known as diversification. It’s important to understand the risks involved and seek advice if you’re not sure.

Investing in property

What are some of the benefits of property investment?

• The rental income you receive may cover your loan repayments.
• You may be able to claim a tax deduction for some of your expenses.
• It can offer a lump sum payment if you decide to sell.

What do you need to consider when investing in property?

• You will need to pay tax on any income you make.
• There are high buying costs, including stamp duty.
• If you have a variable rate loan and interest rates go up, so do your repayments.
• You run the risk that your property may decrease in value.

Investing in shares

By buying shares you are buying part ownership of a company. If the company performs well, you can benefit from share price growth. Equally, if the company performs poorly, your share performance will suffer.

What are some of the benefits of shares?

• They can be bought and sold quickly with relatively low transaction costs.
• Potential returns from shares include an increase in the share price, also known as capital growth.
• You may make a capital gain, where you sell your shares for more than you paid for them.
• Some shares also pay income in the form of dividends, which are distributions paid out of the company’s profits to its shareholders.

What do you need to consider when investing in shares?

• Markets can be volatile, meaning share prices can fluctuate frequently. This is why shares are considered a higher risk investment.
• Brokerage fees – these are what you pay when you buy and sell shares.
• You’ll need a broker, which can be an online trading platform or a stockbroker.

Any form of investment has its benefits and risks. A financial adviser can help you decide what your best options are according to your needs and circumstances.

Want to know more?

Talk to a financial adviser at BlueRocke, call us on 1300 71 71 36.