Andrew Zbik

The market volatility and uncertainty during the past year and a half of COVID-19 have many share investors understandably rattled.

However, this may present a smart opportunity for investors nearing retirement in the next five years.

It is possible to contribute your shares in what is called an ‘in-specie’ contribution to your SMSF or superannuation fund. That’s right, not all contributions to superannuation need only be cash.

The benefits of this strategy are that you can continue to hold your shares and move the ownership of that holding into the superannuation environment which has a lower tax rate compared to many investors marginal tax rate. Plus, if the shares are being transferred at a price lower than what you paid for them there will be no capital gains tax payable.

Most superannuants are able to draw an account-based pension from their superannuation fund tax free.

However, there are a few things to consider:

1. Making an in-specie transfer of shares from your own name to your superannuation fund is a capital gains event. This means that if you are transferring the shares at a higher value than what you purchased them you may need to pay capital gains tax.

If you are transferring the shares at a loss, it means you will retain that loss on your tax return which can be used to offset future capital gains.

So, for some, it may be an opportune time to contribute these shares to your superannuation fund to allow future gains to be made in a concessional tax environment that is superannuation.

2. You must choose a date that the transfer is to take place, properly report the true value of the share on that day as your sale/purchase price and the share registry must be notified of this transfer within 28 days.

3. Transferring shares into superannuation will most likely count towards your non-concessional contribution cap which is currently $110,000 for this financial year or $330,000 if you bring forward three years of contributions and you are aged under 67.

4. Ultimately, one would only use this strategy if they anticipate to continue holding these shares for the long-term.

5. Most members of SMSFs will be able to use this strategy. Some retail superannuation funds will accept shares as an in-specie contribution. Unfortunately, most industry funds are not able to receive in-specie contributions of shares yet, but several are investigating this as an option in the future.

By Andrew Zbik, Senior Financial Planner

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Andrew Zbik

What will happen to your income if you are injured or ill and cannot work?

How long can your cash reserves last for if you are injured or ill and cannot work?

Can you still afford to pay all your bills if you cannot work for one month? Three months? Or six months?

What happens if you become total and permanent disabled?

These are confronting questions. As a financial adviser, it is confronting how many people do not think about these questions.

Most people I speak with will have their car insured, the home contents insured, but will not have their largest income producing assets – themselves – properly insured.

Below are the four main types of insurance policies available to protect you and your family:

Life cover/death cover

Life cover is one type of cover that falls under the heading ‘life insurance’ and may also be known as ‘term life insurance’ or ‘death cover’. Life cover pays a set amount of money when you die. The money will go to the people you nominate as beneficiaries on your policy. If you have not named someone on your policy, then a Trustee or your estate will decide where the money goes.

How much life/death cover do you need? Something I consider with clients is how much of a mortgage can be serviced by a surviving spouse? We determine how much the mortgage needs to be reduced so that a surviving spouse can meet loan repayments on their sole income. For some clients, the idea of being completely debt free in this situation is a priority. Thus, a lump sum benefit may completely discharge a mortgage, so a surviving spouse does not need to worry about mortgage repayments as all on one income.

Other things to consider are the age of any children. What financial support would be needed for education. A lump sum could then be invested to help produce an income stream to cover education costs.

Life or death insurance can be owned inside your superannuation fund. This has a benefit from a tax perspective as the premiums offset the taxable income in your superannuation fund.

Total and permanent disability

Total and permanent disability (TPD) insurance provides cover if you are totally and permanently disabled. It helps cover the costs of rehabilitation, debt repayments and the future cost of living.

Your insurer will define TPD as when you either:

1. (1) cannot work again in any occupation, or
2. cannot work in your usual occupation.

Similar to life/death cover above, I generally will determine what portion of a home mortgage would need to be discharged. Additional considerations include the fact that if you are total and permanent disabled, what home care arrangements would be needed. Unlike death, a person who is total and permanent disabled still needs to eat, have transport and likely special health care. In this regard I see that total and permanent disability may ‘dovetail’ alongside an income protection policy. Income protection policies generally cover you for up to 75% of your income. A lump sum from total and permanent disability benefit invested can make up the 25% shortfall from an income protection benefit.

For example, if someone earns $100,000 per annum, an income protection policy will likely replace $75,000 (or 75% of that income). To get a recurring income from a lump sum invested of $25,000 per annum. I would assume a return of 4% per annum. The maths shows a lump sum of $625,000 earning 4% or $25,000 per annum can substitute the 25% of your income not replaced through income protection insurance.

For total and permanent disability benefit calculations, I also factor assumed ancillary medical costs of $125,000. Research shows that generally in Australia, if we contemplate all medical events that render a person totally and permanently disabled, you may be out-of-pocket up to this figure for items not covered through Medicare or private health insurance.

Importantly, this also provides a budget to purchase health aides such as wheelchairs or retrofitting a home.

Total and permanent disability insurance can be owned inside your superannuation fund. This has a benefit from a tax perspective as the premiums offset the taxable income in your superannuation fund.

Income protection

Income protection insurance replaces the income lost through your inability to work due to injury or sickness. It is especially suitable for self-employed people, small business owners or professionals whose business relies heavily on their ability to work.

There are a few variables to consider with income protection insurance:

1. How much income replacement do you need? For most people, their lifestyle could not be maintained if they experienced a reduced income. In this instance one would consider obtaining an income protection policy that replaces the maximum 75% of their income. There are some providers out there who may consider 85% income replacement. However, for people who may now have adult children and most of their home loan paid off, full income replacement may not be necessary. In this instance working out your living expenses and ensuring that is replaced may be more appropriate. For example, I have one client who earns a cool $475,000 per annum, However, we have determined family living expenses for them are around $8,000 – $10,000 per month. We have a monthly benefit in place of $15,000 as income protection benefits are considered as taxable income. This means their income protection plan will only cover them for 38% of their current income. However, we don’t need to pay for unnecessary extra cover.
2. How long can you rely on cash savings, annual leave, sick leave or long service leave before you run out of cash? With income protection benefits you can choose your waiting period. I.e., do you need to wait 30, 60, 90 or 180 days before you lodge a claim? The waiting period can be a long as 2 years. The longer the waiting period the lower the insurance premiums will be too. Keep in mind, income protection benefit is paid monthly in arrears. So, you will need to ensure you can still survive for an additional 30 days of no income after lodging a claim.
3. How long do you need a benefit for? Income protection benefits be paid for 2 years, 5 years, or all the way to your 65th Some insurers are now providing cover to age 70. We had a family friend who unfortunately suffered a stroke and could not work. They were fortunate in that they had sufficient income protection in place. Hence, when our friend was unable to work, their income and lifestyle was maintained thanks to the income protection benefits.

Income protection policies can be owned inside or outside of your superannuation fund. A benefit of personal ownership is that the premiums are tax deductible at your marginal tax rate. For most people this will be a higher deduction than the superannuation tax rate of 15%. Another benefit of personal ownership is any benefit will be paid directly to you.

If your policy is owned by your superannuation fund, you then need to meet a ‘condition of release’ get these benefits then paid to you personally. Not a problem if you have a permanent injury or illness. However, if you have short-term incapacity, your benefits may be paid to your superannuation fund, but you may not be able to access it.

Trauma/critical illness

Trauma/critical illness insurance provides cover if you are diagnosed with a specified illness. These policies include the major illnesses that will make a significant impact on your life, such as cancer or a stroke. Trauma insurance pays a set amount. This can be used for things like:

• any private medical costs above your health insurance
• an income stream if you stop working.
• the ongoing cost of any therapy and special transport costs
• adjustments to housing
• repaying your debts.

Statistically, this is the most likely policy you will make a claim. I generally recommend one year’s net income plus a lump sum of $125,000 to cover ancillary medical expenses. There are several conditions such as cancer where you may have periods of reduced income generating capacity. However, you may not qualify to have your income protection or total and permanent disability benefits paid. This formula enables you to choose if you want to take leave from work with no pay to focus on your medical recovery. Last year I had a client in his mid-40’s with two young children diagnosed with stage 3 melanoma. This policy enabled him to take the time off from work for what he wanted. They had not financial pressures in making such a decision.

It is important to note that due to the nature of trauma/critical illness insurance, it cannot be owned in your superannuation fund. The premiums will be paid personally and are not tax deductible. However, the benefit paid is tax free.

The above is a high-level summary of how personal insurance works. There are many other considerations as well. It is good to seek expert advice to ensure you have a suite of policies that are appropriate for you. Now and into the future as circumstances change.

The post Getting your insurance, right? appeared first on AdviserVoice.

Andrew Zbik

When most people think about personal insurance, they think it is important to insure the main income earner of the household.

Just because a spouse may not be earning an income does not mean that they don’t need to be insured.

Based on research by the Australian Institute of Family Studies (AIFS), 39% of families have at least one parent ‘stay-at-home’ to look after children under the age of 18.

The AIFS found that fathers work, on average, 75 hours a week. Of that, 46 hours is on paid work, 16 hours is on housework and 13 hours is on childcare.

Mothers work an average of 77 hours a week: 20 hours is paid work, 30 hours is household work and 27 hours is childcare.

As more mothers stay at home, let’s look at the cost of replacing the ‘in-kind’ (i.e. ‘free’ or ‘unpaid’) hours contributed to running a family home if Mum is injured or ill and cannot perform their contribution.

Cost of childcare

If we assume $150 a day for childcare, 5 days of care a week amounts to $750. Over 50 weeks a year this bill is approximately $37,500 per child before any childcare subsidies which are means tested on household income.

Cost of household tasks

Hiring a cleaner once a week for 2-3 hours for some basic cleaning can cost in the vicinity of $150. Over 52 weeks that is approximately $7,800.

However, there are a many other tasks around the home that need to be completed. Airtasker is a good guide as to what hourly rate Australian households are paying for housekeeping services. The median price per house across all the various services is $100. Putting a price on the 30 hours of unpaid housework you can see would cost more than simply hiring a cleaner for 2-3 hours per week.

Cost of medical care

If a spouse cannot contribute to home care for the family, they will likely be incurring medical bills for their own care.

The nature of any condition if it is short-term or long-term will impact what costs are incurred.

The Zurich ‘Cost of Care’ health research whitepaper highlighted what costs may be incurred when an individual needs medical care. Some of the standout items are:

Patients using drugs not supported by the PBS can face bills of up to $5,000 per month or more
Although healthcare in Australia is largely publicly funded, out-of-pocket (OOP) costs associated with cancer diagnosis, treatment and survival can place a huge burden on sufferers and their families. For example,

* The cost of depression averages $17,190 per individual

Protection for a ‘stay-at-home spouse’

Personal insurance policies are a strategy that can be used to help cover the financial burden if a ‘stay-at-home’ parent is injured or ill and can no longer make a contribution to the household.

Below is a summary of how these policies operate:

* Depending on superannuation beneficiary, some tax may be payable. You will need to seek advice from a Financial Adviser for individual circumstances.

Get the right advice

Each family’s household needs will vary. Therefore, the amount of cover a ‘stay-at-home’ parent may need will also vary. It is important to understand what are your household expenses and the time contributed by a ‘stay-at-home’ parent to calculate what is the appropriate amount of insurance protection required. A fee-for-service financial adviser can assist with providing advice that suits your needs and objectives.

By Andrew Zbik, Senior Financial Planner

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Sources:
– Australian Institute of Family Studies: Facts and Figures – Work and family
– The New Daily: Why Australia has some of the highest child care costs in the world
Airtasker: How much does house cleaning cost?
– Zurich Australia: The Cost of Care

The post How poorly considered insurance can leave a spouse short-changed appeared first on AdviserVoice.

Andrew Zbik

If you have sold an investment property, shares or other investment asset in the last financial year, you may be liable to pay capital gains tax (CGT).

Let’s understand how capital gains tax is calculated. In my experience, many people find this more complex than what is really is.

How to understand your capital gains tax liability

First, you need to calculate what is your capital gain. This is the sale price less your purchase price and any capitalised expenses. For example, when calculating your capital gain on an investment property, your purchase price can then have a number of expenses added to calculate what is called your ‘cost base’. This includes expenses such as stamp duty, legal fees and purchase costs when the property was first bought.

Secondly, do you qualify for the capital gains tax 50% discount? If you have held the asset for more than 12 months, you will be able to choose one of two methods to determine how much capital gains tax is payable. In this case, 50% of the assessable capital gain will be included in your taxable income. The second method is called the indexation method. The indexation method is slightly more complex and you should seek tax advice if this method is to be considered.

Thirdly, what will your marginal tax rate be? Many people are mistaken in thinking there is a separate tax rate for capital gains tax compared to personal income tax. This is not the case. With an assessable capital gain, it is simply added to your other personal income from wages and other sources.

For example, if you earn $80,000 per annum from wages and $5,000 from dividends, your normal assessable income is $85,000. If this financial year you sold an investment property for $700,000 that has a cost base of $400,000, the $300,000 gain qualifies for the 50% discount, therefore the $150,000 taxable gain is then added to your ordinary income. Thus, $85,000 plus $150,000 equates to a taxable income of $235,000. You now have the honour of jumping from the 32.5% marginal tax rate threshold to the 45% marginal tax rate threshold plus the 2% Medicare Levy.

Once you know your capital gains tax liability, these three quick strategies may help to reduce your capital gains tax bill.

1. Make some additional concessional contributions to super

You can opt to make a personal deductible superannuation contribution to your superannuation fund. These are only taxed at 15% (or 30% if your taxable income is over $250,000). It is important to keep in mind that you cannot exceed the concessional contributions cap of $25,000 for the 2020/2021 financial year (this cap increases to $27,500 after the 1 July 2021). Your concessional contributions cap also includes any contributions made by your employer or a salary sacrifice arrangement.

Although this is a great strategy, one needs to weigh up that any contributions cannot be used for personal purposes until you have retired.

2. Prepay interest expenses for next year

If you have any expenses that you can pre-pay, this will help to offset the capital gains tax liability in the year the liability has been incurred.

For example, if you have some capital gains resulting from the sale of shares, and you own an investment property, pre-paying next year’s interest on your loan prior to 30 June means you can offset the capital gain in this financial year.

The downside of this strategy is that in the next financial year you will not be able to claim the expense as you cannot claim it twice. This strategy may be appropriate if the sale of an asset with a large capital gain in the current financial year has pushed you into a higher marginal tax rate bracket.

3. Prepay your advice expenses

Another idea is to speak with your accountant or financial adviser and ask if you can prepay their fees in a year that you need to offset a capital gains tax liability. I have offered this to a few clients with a 10% discount.

There are several more complex strategies that may be available to some people based on their personal circumstances.

It is always wise to seek advice from your financial adviser or accountant early so that you have enough time to prepare and implement any strategies prior to 30 June.

The post Three tips to help reduce capital gains tax appeared first on AdviserVoice.

Andrew Zbik

In the world of superannuation, a few key changes have taken place over the past month that will impact superannuation strategies in the lead up to 30th June 2021 and beyond.

Increase in concessional contributions cap after 1 July 2021

The concessional contributions cap will increase from $25,000 to $27,500.

Contributions included in this cap include your mandated Superannuation Guarantee paid by your employer, any salary sacrificed contributions via your payroll, or any voluntary contributions made that you notify an intent to claim a tax deduction for.

Overall, this is good news as it means people can contribute slightly more to superannuation moving forward and benefit from a lower tax rate of 15% paid on the contribution compared to your marginal tax rate which can be as high as 45%.

Increase in non-concessional contributions cap after 1 July 2021

The non-concessional contributions cap will increase from $100,000 to $110,000.

Contributions included in this cap are any savings or personal assets that you have which already have had income tax paid – i.e., these are ‘after-tax’ savings or assets.

A key point to consider here is if you are in your early sixties. As of writing, the ‘bring-forward’ rule that allows a person to bring forward three years of non-concessional contributions is available to people prior to their 65th birthday. There is legislation before the Commonwealth Parliament to change this to age 67. However, this has not been made law yet.

For example, if you are aged 64 but have your birthday after the 1st July 2021, you would be potentially in a better position if you wait till after 30th June to use the ‘bring-forward’ non-concessional contributions as prior to 30th June you could contribution $300,000 and after 1st July this could be $330,000.

Timing is key here and it would be ideal to seek advice to make sure you don’t breach any contributions caps.

Increase in the transfer balance cap

If you are about to retire, your Superannuation Fund will change from ‘accumulation’ phase to ‘pension’ phase.

In ‘accumulation’ phase, all concessional contributions are taxed at 15%. Income derived from your Superannuation assets are taxed at 15%. Any capital gain is taxed at 15% or 10% if the asset was held for more than 12 months.

In ‘pension’ phase, ALL income and capital gains are TAX-FREE up to a balance of $1.6million per person. After 1st July this will increase to $1.7million.

Thus, if you are contemplating retirement and wish to start drawing an account-based pension from your Superannuation Fund, it may be wise to seek financial advice this year to determine if it is appropriate for you to wait to next financial year to commence your Superannuation account-based pension.

Other changes

There are several other more details changes occurring in the world of superannuation. For simplicity, I have not listed them all here.

Act now!

Don’t leave it till June to start your pre-30 June tax and financial advice planning. I review all my clients’ situations in the month of May to ensure we have enough time to implement any strategies before 30th June.

A common mistake is people are not aware that the ‘record date’ for superannuation contributions is the date that it is received in your Superannuation Fund. For example, if you transfer funds from your personal bank account to make a contribution on the 30th June and the funds are deposited and cleared in your Superannuation Fund on the 1st July, you will have missed having the contribution counted in the 2020/2021 financial year.

Getting appropriate advice early from a Financial Adviser will give you time to consider and implement strategies that will achieve a better outcome for your financial future.

By Andrew Zbik, Senior Financial Planner

The post Make the most of super strategies before 30 June 2021 appeared first on AdviserVoice.

Andrew Zbik

In July 2013, Australians’ superannuation savings started getting an extra boost when the superannuation guarantee contribution (the contribution that is mandated for employers to pay on top of workers’ salaries) increased above 9% for the first time in more than a decade. The plan to increase these contributions to 12% of a worker’s salary stalled in 2015 after a change in Federal Governments. Seven years later, the ‘postponed’ increases are due to start after 1st July 2021. The current schedule of increase will have all Australian workers contributing 12% of their income to superannuation by 2026.

Once again, there is political pressure to halt this increase.

I think this decision would be a tragedy for the long-term wealth creation of individual Australians and Australia as a nation.

The post Don’t delay the superannuation guarantee increase appeared first on AdviserVoice.

Andrew Zbik

Getting good useful advice whether from a plumber or a planner or other expert is a cause of concern for many people.

I can’t help with plumbing but I have a list of strategies that I regularly recommend to clients that provide value for the service I provide and help our clients to grow real wealth.

• Setting the right goals and objectives: I ask my clients a simple question – How much money do you need to enable you to choose if you want to work or not? Surprisingly, most clients cannot answer this when I first meet them. We create a plan that works out how much assets they need to put them in a position of “financial freedom” – where recurring income from assets covers their living and lifestyle expenses. Setting a clear vision on what this is and how short a client is of this objective provides great value in understanding what we need to do.
• Accurate cash flow monitoring and budgeting: Most people do not track their spending or have a budget. We use a great program called MyProsperity that enables our clients to track their spending and then set a budget. Ultimately, it enables us to deliberately make a monthly contribution to an investment strategy. This varies between $200 to $5,000 for some of my clients Thus, this discipline achieves between $2,400 to $60,000 per annum to creating real wealth.
• Restructuring non-deductible debt: I am surprised at how many financial advisers will only focus on managing assets (e.g. superannuation) and have no plan to help a client reduce non-deductible debt on their home. Working closely with a mortgage broker can potentially achieve significant savings on interest repayments by restructuring loans and lenders. The use of additional loan products such as offset accounts can help to create more free cash flow by saving on interest costs. This free cash flow can then be used towards an investment strategy to build real wealth. For many of our clients we achieve an outcome where they are able to do purchase more assets for building wealth without possibly needing to give up cash flow to fund their lifestyle. There is great value in that.
• Using superannuation wisely: Australians are very fortunate to benefit from our superannuation regime. However, for most Australians their superannuation will not be enough to achieve the financial outcomes they desire. A good plan will consider if an industry superannuation fund or a self-managed superannuation fund is most appropriate to facilitate the creation of wealth for retirement. For many of my clients this may include deciding if it is appropriate to combine all their superannuation into a self-managed superannuation fund and purchase an investment property. Alternatively, an industry fund may be appropriate for the sum of money to invest and may be very competitive for fees. This gets more capital working and growing over the long-term in a concessionally taxed environment.
• Getting the asset mix right: A good investment plan will cover the purchase of property, shares, some fixed income securities and a healthy cash reserve. Proper and thorough research will facilitate the purchase of quality investment assets that will maintain their value and cash flow throughout the full economic cycle (the time between a recession and a booming economy). Appropriate gearing for investment assets can help to get more capital working for you which creates a compounding effect when growing real wealth. A good strategic plan will be able to. Maximising superannuation contributions to save tax may not be the most appropriate strategy for everyone. If you still have non-deductible debt on your home, you may be better off paying the higher rate of tax on your income and reducing your home debt. This strategy may save more money on reduced home loan repayments than on the tax saved by maxing additional superannuation contributions.

In summary, a good financial strategy will easily be able to demonstrate benefits such as tax savings, cash flow improvements and projected increase in real wealth through the purchase of investment assets. The cost of paying for that financial plan should be a small price to pay for the benefits of implementing that financial plan.

By Andrew Zbik, Senior Financial Planner

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Andrew Zbik

Your child had their 8th birthday last week. Your mum-in-law again gave her yearly gift of $100 for your child’s saving account. Your second child is having their 10th birthday next month. In total, each child now has $4,000 to $6,000 in their respective savings accounts. You have been studiously putting away $25 per month for each child.

CUA found that 45% of parents who give pocket money for their children expect them to save it.^[1]

Riaz Investments found in a survey last year that while 71% of parents say they do try and save toward their children’s future, only 27% of those surveyed had a regular savings plan for their children.^[2]

If you have built a little stash of cash for your children, what are some options to grow that stash of cash?

1. Cash account

Most people I speak with will have a little bank account set aside for their children. Most banks will have a dedicated account available for children’s savings. However, with interest rates so low (as shown below), the return on cash is not that crash hot.

Source: Australian Money Market (Available cash rates as of 24th Sept 2020)

Despite the return on cash being quite low, I have generally found that if you have under $5,000 it is easier and cost effective to use a savings account to manage such a relatively small stash of cash.

2. Cash in an offset account

If you have a home loan with an offset account, you could place your children’s cash in the offset account. This will effectively save you the rate of interest you are paying on your non-deductible home loan. However, it may be hard to track what portion of cash is designated for your children. Secondly, even though it is helping you to offset interest on your home loan, it is hard to track those savings to your children’s stash of cash.

3. Diversified Manage Fund

I often get asked: “I have a savings account for my child. The cash has built up now. What shares should I buy?”

The problem with buying individual shares is that is a lot of risk exposure to a small handful of companies. Let along the brokerage costs of around $20 on a parcel of $1,000 shares equal a 2% transaction cost – that is steep. In the past I have recommended clients who have more than $5,000 to consider a diversified index fund such as the Vanguard LifeStrategy® Balanced Fund. This can be started with an initial balance of $5,000. The first $50,000 has a management fee of 0.90%. You can make a monthly BPAY contribution of a minimum $100. Their purchase costs equal 0.10% which is a lot cheaper than trying to buy parcels of share directly.

Importantly, it is a well-diversified portfolio that covers Australian shares, international shares, property securities, fixed income and cash.

4. Investment Bond

There is the option to consider an investment bond (also known as insurance bonds). These are a pool of investments where the manage pays the tax on your behalf. If you hold the investment/insurance bond for more than 10 years, you will not pay an additional income tax or capital gains tax.

However, if you have an event or the need to liquidate your investment/insurance bond within the 10 years period, the tax effectiveness may be lost.

Consider tax implications

Then there is the question of how should you structure the ownership of the investment for or on behalf of your children?

The ATO has a good summary of consideration to make when deciding how to own investments on behalf of your children:

Still ask before you act

It is always good to chat with an Accountant or Financial Adviser about what your intentions are in regard to investing on behalf of your children. Depending on the amount of money you have to start investing with and the amount of contributions you can put aside will influence which of the above options are appropriate for your goals and objectives.

By Andrew Zbik, Senior Financial Planner

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1. https://www.cua.com.au/__data/assets/pdf_file/0021/235146/CUA_Infographic.pdf
2. https://raizinvest.com.au/blog/money-management-mishaps-children/

The post Saving for your children appeared first on AdviserVoice.

Andrew Zbik

According to the Reserve Bank of Australia (RBA), Australian households are currently savings 5.5% of their income.

Is this really ‘savings’? Or is it actually a ‘surplus’. There is a difference.

‘Savings’ is when you deliberately put money aside to build a cash reserve for a new car, investments, your next holiday or to accelerate your home loan repayments.

A ‘surplus’ is when your expenses are lower than your income.

‘Savings’ is putting an exact amount of money aside each week, month or year. ‘Surpluses’ just happen – sometimes they don’t.

In my experience most Australians run a surplus which they call savings. They may just happen to be accruing some money each month after their income has been used to cover expenses. There is nothing deliberate about running a surplus.

Graphic: The savings rate of Australian households – past 30 years.

Here are my tips on how to be deliberate about ‘saving’ money.

1. Use a budgeting app

Use a proper budget tracking tool such as MyProsperity (which we use with our clients at CreationWealth). This will help you understand where you spend your money. Once you know exactly where you spend your money it will help you better prioritise what spending habits you will change.

2. Break down your net household income into these four broad categories:

a. Savings: Be deliberate and choose a set amount of money you will put aside into a savings account each pay. For example, this may be 5%. This idea here is this money goes into your savings account before you even have the chance to consider spending it on core or discretionary expenditure items.

b. Core Expenses: Know what your basic living expenses are. For example, the cost of running your home (Utility bills, rent or mortgage payments, Council rates etc), the cost of putting food in your mouth (Weekly grocery spend…OK…some freedom here to choose if coffee fits in this essential category), and essential personal items (Such as basic clothing purchases, health care and personal grooming).This is the bare basics that you need to have shelter over your head, food in your mouth and have clothes on your back.

c. Discretionary Expenses: Know where you spend your money on the fun items. This includes entertainment, hobbies, eating out, holidays. We all need to enjoy the journey that is life. Knowing the difference between core and discretionary expenses can be very helpful for planning your financial future. It breaks down the goals to work towards in building enough superannuation and investments to generate a passive income. First base is to have enough passive income to cover your core living expenses. This can often be achieved when many people have put in a solid plan for a decade or so. There is an amazing sense of freedom I see in my clients when they know that are now in a position where they are no longer working because they need to (i.e. have to cover both core and discretionary expenses) but are working because they can choose to (i.e. core expense are covered by passive investment income and the money they earn now covers their discretionary expenditure and continues to help save and build investments for the future).

d. Surplus: Ensure there is still a little surplus as the end of each month. Our cash flow commitments are not always beautifully divided into 12 instalments over 12 months. Some months you will have a bit of cash left over, other months will be a negative but the previous months surplus will have that covered already.

Saving money is a deliberate habit. The above tips will help you achieve genuine savings. Not a coincidental surplus.

By Andrew Zbik, Senior Financial Planner

The post Are you really ‘surplus’ing or actually saving? appeared first on AdviserVoice.

Andrew Zbik

Ethical investment has been discussed in news articles, financial advice industry publications and, in my personal experience, discussions with clients about how to manage their wealth.

The Responsible Investment Association of Australia (RIAA) reported that in 2020 ninety per cent (90%) of investors believe that impact investing will become a more significant part of the investment landscape. In my role as a Financial Adviser, I am having this conversation more often with clients.

How do you access ethical investments? Firstly, most people think about trying to specifically choose individual companies to invest in. However, statistically trying to pick individual stock winners often leads to portfolio underperformance.

The below table is from Standard & Poors who have been measuring how ‘active’ fund managers (i.e. the professional managers trying to pick individual winners) perform compared to the ‘market’ (i.e. all the companies listed on a stock market).

The results are alarming. In 2019 almost two-thirds of fund managers underperformed compared to the market. This means statistically you would have achieved a better return in your portfolio from buying an index fund that mimics a market opposed to trying to pick individual stock winners.

Back to that question – How do you access ethical investments?

Below are two exchange traded funds that I have recommended to some of my clients. The benefit of these exchange traded funds is that they use primarily an index approach and then apply a positive filter to remove companies that may not meet a certain ‘ethical’ criterion.

Alternatives for Australian shares

State Street’s SPDR® S&P®/ASX 200 ESG Fund (Ticker Code: E200)

Ignore all the TLAs (three letter acronyms). This exchange traded fund focuses on investing in  ‘sustainable’ companies within the top 200 companies on the Australian Securities Exchange.

Key features:

• Responsible Investing – a sustainable alternative to Australia’s flagship benchmark, the S&P/ASX 200 Index.
• Best-in-Class Environmental Social Governance (ESG) Investment Approach – focused on Australian companies with strong ESG characteristics, while also removing companies interacting with tobacco and controversial weapons.

Betashares Global Sustainability Leaders ETF (Ticker Code: ETHI)

Fund objective

ETHI aims to track the performance of an index (before fees and expenses) that includes a portfolio of large global stocks identified as “Climate Leaders” which have also passed screens to exclude companies with direct or significant exposure to fossil fuels or engaged in activities deemed inconsistent with responsible investment considerations.

Benefits of ETHI

• Align your investments with your values – invest in a way that is consistent with your ethical standards.
• True-to-label – combines positive climate leadership screens with a broad set of ESG criteria, offering investors a true-to-label ethical investment solution.
• Diversified global exposure – holds a diversified portfolio of large, sustainable, ethical companies from a range of global locations.

By Andrew Zbik, Senior Financial Planner

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