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12 big money questions

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Recently, I was asked by a group to do a financial education lecture and they fired in a series of questions that I find typical Aussies will often ask me. So I thought I would have a shot at answering these 12 questions.

Here goes:

Fix rates?

When do I fix my interest rates?

Whenever rates are under seven per cent is my best answer. If you see five or six per cent, they are historically low rates but the big question is, for how long? I suspect rates could go one per cent higher over the next two years, but if a major international financial catastrophe happened, rates could fall. If you couldn’t stand two more rises, I would say fix for two to three years but make sure you’re not fixing at a rate much higher than the variable rate. 

Super tips

What’s the best way to manage super?

If you don’t want to do the work and be interested in your investments, go for a good performing industry fund. If you have a lot of money in super and you like to follow the market, self-managed super funds can be cheaper and a good investment option. If the cost of a SMSF is one per cent or less, then it’s worth looking at doing it yourself. The dollar cost would be around $2500 to $3000. If an adviser helps you, it will cost more, but they provide other advice on matters such as tax, strategy, etc.

How much super do I need to retire?

Experts say two-thirds of your final salary, which means you need to save 15 per cent of your income in super for 40 years! I like $1 million for a retiree if they need around $70,000 per year to live on in retirement. You could average a return on $1 million of seven per cent and that’s $70,000 a year but you will be reducing your capital if you draw out more. And if you do that, you better hope you don’t live too long!

Seek an expert

Should I pay down my mortgage first or buy a negatively geared property?

This question underlines the value of advice from an expert. They need to know your goals, how much tax you’re paying and other considerations. After that, they can make the best call. However, both strategies are tax effective, but paying off your house has no capital gains implications while an investment property generally will.

Creating a budget

How do I create a budget and stick to it?

It’s good to get a template, which you can get on the internet, but it’s a simple matter of listing your income and your expenses. Ideally I would divide income by 52 to see weekly income and then divide all expenses to get them to weekly outlays. Of course, if income comes in odd lumps, it could affect your cash flow, so be mindful of that.

Once you see what you have left, and I hope it’s a positive balance, you have to get agreement from your partner or family that you agree to stick to the budget. I suggest you create a saving goal and maybe GST your spending, that is, cut back by 10 per cent what you buy each week. This should be linked to a big goal of using the new savings for something important – paying off loans, buying a house, investing in the stock market.

Outlook for the Aussie dollar

What do you think will happen to the Aussie dollar against the US dollar?

I don’t know and it’s always a tricky gamble. Most currency experts think the greenback rises later this year and our dollar falls into the 90-cent region, but I would rather back a favourite in the Melbourne Cup than punt on the Aussie dollar.

Invest in the US?

Should we invest in US dollars or US assets?

Dollars are easier but probably don’t have the same upside or downside as shares or even property in the US. But the latter two assets are a bigger gamble. Many experts believe this is a good time to invest in the US unhedged because they don’t think the Aussie dollar goes much higher. However, it has been higher before – above US$1.30 in the 1970s – so be careful. 

Shares vs. property

Would you go for shares or property in 2011?

It’s interesting – I think shares go up this year but I think property prices fall. So I like shares for a short-term gain but if I wanted to buy property I would be on the lookout for a bargain! I would be hunting for the cheapest finance as interest rates will rise and so a two- or three-year fixed rate might be the go, provided it’s a good deal. Sometimes, you have to be counter-cyclical.

Mortgage queries

Is it wise to pay lender mortgage insurance if you’re a property investor?

Basically you will be made to take the insurance by the lender because it’s meant to protect the lender. By the way, the insurance company pays the lender but they can still come after you!

How can you pay your mortgage quicker — $100 a week or $5000 at the end of the year?

Doing it each week whittles down the balance owed to the lender and that will mean you’re cutting down your debt over the year and the interest paid over the year.

Fixed deposit vs. shares

Is a fixed deposit better than shares?

You get about six per cent on a fixed deposit but shares average a total return around 10 per cent but these are tricky times. I’m punting that shares will do better than six per cent, especially if you have stocks that average four to five per cent dividend returns. Ironically banks are returning dividends around six per cent and then they can give you capital gain, if you buy them at the right time. 

On choosing a great adviser

Finally, how can I pick a great financial adviser?

Make sure they’re really transparent with their charges and they should have strategies you understand and that match your goals. Don’t let them suck you in with big promises, and if you can get a lot of testimonials and you can talk to these people, then that could be a good start.

For advice you can trust book a complimentary first appointment with Switzer Financial Services today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Wednesday, June 08, 2011

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