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4 money lessons your kids should know

Paul Rickard
Monday, December 24, 2018

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Being a “non-cool old man” (hell, I’m not even 60 yet!), some might say it’s a bit rich for me to be lecturing millennials less than half my age about how to save and invest. So this appeal is through you – their elder siblings, parents, or perhaps even grandparents – to share these tips about how they can spend, save or invest “smarter”. And also, a couple of things they shouldn’t do.

1. Spending

Firstly, I’m not going to labour the point about doing a budget (which sounds incredibly boring). It goes without saying that this is a good idea. By working out that you spend $12 a day on those three take away cappuccinos and if you cut back to just two per day how much that would improve your bank balance over a month – that is the power of a budget. Peter Switzer called doing a budget “exciting” as “it gives you the money firepower to turbo charge your wealth-building” (see here).

But I do want to address how you pay for things. Using Afterpay (which for the non-millennials is electronic lay-buy) is OK, provided you are really disciplined about your payments. Remember, you will pay 4 equal instalments due every 2 weeks by direct debit to your debit or credit card. Miss one instalment on an item under $40 and you pay a late fee of $10 (a simple interest rate of 25% - the effective per annum rate could be in the 100’s of percent), and on larger items, a simple interest rate of 25% capped at $68. Could it happen to you? Possibly. While only 5% of instalments incur a late fee, Afterpay says 22% of customers have paid late fees.

Debit or credit card? Debit cards are fine. If you get a credit card, and there are sound reasons to do so including establishing a credit history with a bank, keep it simple. Low or no fee, low interest rate, no reward or loyalty points.

Loyalty points are great for people who always pay their credit card balance off in full by the due date, but for everyone else, they are a waste of time. They are the classic marketing illusion – they look and feel valuable, but in reality, they aren’t worth that much. In most loyalty schemes, one point is worth on average half of one cent. That means 100 points, which you get when you spend $100, is worth 50 cents. 1,000 points is worth $5, 10,000 points is worth $50 and 100,000 points is worth $500. That’s right – you have to spend $100,000 to earn $500!

Miss a credit card payment (or not pay the full amount) and you could be paying interest at over 20% pa, and you pay it from the statement date, not the date you miss the payment. The “interest free” period only applies when you pay the whole amount by the due date.

 An idea to help with budgeting and spending is to manage the timing of direct debits around when you get paid. For example, if you get paid monthly, see if you can get all your direct debits timed to occur on the day (perhaps the day after) you get paid. That way, you get all the regular payments out of the way – and know what you have left over for the month. If your landlord or utility won’t co-operate, open a second bank account to act as a holding account so you can set these funds aside.

2. Saving

I am a bit old fashioned when it comes to owning your own home – I think this should be the number one savings priority for younger Australians. While a case can be made that renting a home and buying an investment property can produce a better outcome, most people don’t buy “the worst house in the best street”. Further, the comfort of owning the roof over your head, let alone a tax system that biases home ownership through the absence of capital gains tax and latter on when it comes to eligibility for the government pension, speaks to making this a priority.

The Government’s new First Home Super Saver Scheme has changed the game for millennials saving for their first home. This is an absolute “no brainer” (see here). It is not the panacea to address the housing affordability challenge, but it will make it easier for those trying to breach the deposit gap.

The scheme allows savers to make voluntary contributions to super of up to $15,000 in any one year, and then up to a maximum of $30,000 over the duration of the scheme. This means that a couple can effectively save $60,000.

Critically, the contributions to super can be out of “pre-tax” dollars – just like salary sacrifice contributions - making them particularly tax effective.

Bottom line is that when withdrawn from super to purchase the first home, net of all taxes,  savers will have about 30% more on average than if they had saved the same amount in a bank term deposit.

Like any Government scheme, there are several rules that govern eligibility. 

You can participate in the scheme if you have never previously owned property (including an investment property). There is no age limit or minimum – but you must be at least 18 to make a withdrawal from the scheme. And you must intend to live in the property as soon as practicable, and for at least 6 months of the first 12 months you own the property. Further, the monies must be used for a home or home and land package – you just can’t use the funds to buy land.

Finally, eligibility is assessed individually, so while your partner might not qualify (because he/she owns an investment property), you can still qualify.

3. Investing

If you have already got the first home sorted, investing surplus cash in other growth assets should be a good strategy over the medium term. Putting extra money into  superannuation is probably not the smartest strategy because you won’t be able to access it for 30, 40 or possibly even 50 years. With retirement ages moving out and the Government capping how much you can have in super, millennials in this position will have lots of  time to build up their super nest egg.

The obvious investment assets are shares or property. The former have the advantage that you can start with as little as $500 per share (arguably, this is too small for the brokerage charges and a few thousand makes more sense), and shares can be readily liquidated so that they can be used as savings for your first home. If you don’t know what to buy, CommSec offers starter “share packs” (pre-blended portfolios of shares from $4,000). Alternatively, you could look at an index tracking exchange traded fund such as IOZ ; an actively managed fund such as SWTZ; or companies that you know and understand such as your bank or telco.

Buying an investment property is a bigger decision. The important thing to remember here is that your investment return will come from an appreciation in the price of the property. While the rental income should cover your operating expenses, it won’t usually cover your interest costs. If you negatively gear (best suited to those paying tax at a high marginal rate of tax such as 47%), by definition, you are losing money (outgoings, including interest costs, exceed income).

Not everyone is a great buyer of property, and with the market looking like it has further to pull back, this strategy should be carefully considered. The ALP’s proposed ban on negative gearing is another factor to consider. While this could be a negative in the medium term for property investors, as existing properties will be grandfathered, there is an argument that says to get in ahead of an expected ALP win.

4. Cancel

Finally, two things to cancel. Unless you have dependents or a mortgage, you probably don’t  need life insurance. While many super funds automatically deduct from your employer’s 9.5% super contribution a life insurance premium, it is your call whether you want this or not. Tell your super fund to cancel the deduction. Also, cancel any salary sacrifice contributions (outside those which can be put in to the First Home Super Saver Scheme) and invest these monies outside the super system.

Published: Monday, December 24, 2018

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