Managing your own self managed superannuation fund can be time consuming,  and very few investors fully understand the responsibilities of being a Trustee of their own fund (and the ATO are onto them!).   To give you a hand to start your research to ascertain whether a SMSF is your perfect match, I have sourced the following publications on the Australian Taxation Office website:-

Thinking about self-managed super (NAT 72579)
Developed jointly with the Australian Securities Investments Commission, this publication provides information about factors to consider before setting up an SMSF.

Setting up a self-managed super fund (NAT 71923)
Provides information about how to set up an SMSF and basic information about operating the fund.

Running a self-managed super fund (NAT 11032)
Provides information on the role and responsibilities of trustees of an SMSF, such as your compliance and lodgment obligations. This publication replaces Roles and responsibilities of trustees (NAT 11032-07.2007) and DIY Super Its your money… but not yet! (NAT 11393).

Winding up a self-managed superannuation fund (NAT 8107)
Provides information on how to wind up an SMSF including trustee requirements and reporting obligations.

Click below to obtain copies of the above booklets:-

http://www.ato.gov.au/superfunds/content.asp?doc=/content/00182862.htm&pc=001/149/005/001/001&mnu=46091&mfp=001/149&st=&cy=1

Why don’t you subscribe to SMSF news in order to receive regular and up to date information from the ATO on developments in this area?

Interested in borrowing money via your superannuation fund? It is not as straightforward as it sounds and you have to jump a few hurdles.  Consequently, I highly recommend you seek specialist advice from your accountant or financial planner. Following is another ATO link which provides information on this subject (note – superannuation funds use vehicles called ‘instalment warrants’ to borrow money):-

http://www.ato.gov.au/super/content.asp?doc=/content/00132054.htm

I also found the following free booklet produced by Julie Hartman, CPA from Bantacs, who has a practice based in Queensland. I think she does an excellent job explaining the advantages and disadvantages of borrowing funds via your superannuation fund.

http://www.bantacs.com.au/booklets.php

Your perfect superannuation match could be a SMSF, just  don’t ignore the complexities and costs.   For the majority of superannuation account holders, outsourcing the administration and investment to an industry corporate, government or retail superannuation fund may also be a perfect marriage.

Cheers and happy researching.

Josie

ps  Remember ‘nobody cares more about your money than you do!’ and make sure you work out the real cost of running your own superannuation.    Have a question?   Don’t hesitate to send me a question.

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Basically, if you have a chronic disease, such as asthma, cancer, diabetes or some other major illness, you may be able to claim up to $4250 over a two year period for major dental work.    To ascertain whether you are eligible, following is a link to the Department of Health and Aging.   You will also need a referral form your General Practitioner.

http://www.health.gov.au/internet/main/publishing.nsf/Content/fact%20sheet_dental-patients

Alternatively, you can ring Medicare on 132 011.

Cheers

Josie Kay

ps. It is rumoured that the Labour Party was to axe this benefit, so don’t leave it for too long to find out if you qualify.Similar Posts:

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For people who love detail, included in the information is a  booklet published by APCA (Australian Payments Clearing Association) which includes lots of good information.  There is also a copy of the  Code of Conduct that the financial institutions need to adhere to.   Just go to Part D.  It states they have to provide you with the information within five working days.  Make sure you keep them on their toes.

Can’t be bothered.  That’s OK it can be daunting.   Just do a couple of things over the next few months e.g. check the interest rate, fees and charges attached to all your accounts when you receive the statements.   In particular, check the interest rate and fees you are paying on your credit card.   Remember, small leaks, sink big ships.   Knowledge also helps in the negotiation process.

In the case of banks, just like any corporation, their shareholders come first, in other words, profits come first.     ’Watch Out.  Everyone is after your money.  Learn how to outsmart them’.

Happy bank shopping.    Please don’t hesitate to share your stories.

Josie KaySimilar Posts:

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Mick travels a lot and has shared this fantastic tip to save money on Damage Waiver Excess Insurance that car hire companies entice you to pay.    You know the drill.  You front up to pick up the keys and sort out the paperwork and then they ask if you would like to purchase insurance to waive the excess which is usually a daily charge.  You smell a rat, but you are in a bind as you don’t want to risk it.  If you had an accident or your car was stolen you might be liable to pay  thousands of dollars.  It would certainly put a dampener on the holiday.

However, did you know that travel insurance provided by various companies already covers this excess (in the fine print)?   Even if you travel domestically you can purchase travel insurance for medical, unexpected cancellation, lost luggage etc.

Mick suggested I check out Defence Health Travel.  You don’t need to be a member of the armed forces, anyone can join.     I also researched the cost of excess insurance with Hertz (not picking on Hertz specifically, they were all pretty much the same).   Hertz charges $34.90 per day to waive the standard excess of $3,300.    If you needed a car for one week, insurance would be an extra $244.30.  

A little forward planning could save you heaps.   If you purchased a one week domestic travel insurance policy with http://www.defencehealth.com.au/Travel/Whytravelinsurance/tabid/185/Default.aspx as a single (assuming only one person will be driving and aged less than 70), the cost is $37.00, saving a whopping $207.00.  Their policy automatically gives you $4,000 of hire car excess cover, plus extra benefits (including $10K for hijack and kidnap - very handy!). 

Thanks Mick for this great money saving tip and reminding us that we need to ‘Watch out. Everyone is after our money.  Learn how to outsmart them!

Josie Kay

30 November 2008

ps.  if you have a money saving tip that you would like to share, please send me an email via ‘ask a question’

pps.   Defence Health Travel is not a sponsor of www.askjosiekay.com.au. 

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• We’re Having Trouble Saving for a home - Any Suggestions?

I remember the days when I was itching to buy a home and it felt great when I was able to purchase a little three bedroom home in the burbs on my own.   This was back in the early 1990s.   I sold this house in only a few years ago and it did increase in value.  However, after I calculated interest costs and ongoing maintenance I made very little from it.    At least it forced me to save.

Purchasing a home is a major commitment and it is important to remember there are no guarantees it will increase in value.   There are plenty of examples where they have declined in value and are ruining the financial lives of many battlers.  Surf the internet and read the various articles about house prices in Western Sydney, which is a typical suburb favoured by first home owners.

Luckily interest rates are falling.  Have you done some simple maths to work out how much you would be paying the bank (and boosting their bottom line).  With interest rates around 7.5%, for every $100K you need to borrow, you have the pay the bank at least $7,500 in interest payments each year.   Assuming you need to borrow $300K, your interest payments will be at least $22,500 per year after tax (and you haven’t paid any of the principal!).   To put it another way, the bank is charging you $433 per week to borrow their money.    I won’t mention all the other expenses associated with owning a home.

As a guide, you would be stretching your budget if repayments represent more than 30% of your take home pay.   I can understand why people hate renting as you are at the mercy of the landlord.  The major advantage of renting is that you don’t have any ongoing maintenance (can you hear the landlord whinging?).

You also need to think about the future prospects of the property market which is classified as a growth asset.   Just like any growth asset, the prices go up and down.  The real value of your house is only revealed when it is sold.     Just ask yourself one question.  ’Am I better off purchasing now in order to take advantage of the $14K or $21K first home owner grant, or would I be better off waiting’?   I am not conviced young couples will be better if they purchased now.  For example, let’s say you purchased a $300K property (not including possible stamp duty, legals, loan fees etc), did you know that your home only has to decrease in value by 2.4% and you will effectively lose the extra $7K that Mr Rudd is offering?.      What if the same house was forced to reduce its price to $270K, you will be in front.   Food for thought anyway.   Do you have a decent deposit, 20% would be ideal?    If you saved $60K, your interest saving would be $4,500 per year (assuming 7.5%pa interest rate).

Following is a loan calculator to help you work out if you can afford the repayments — http://moneymap.nicri.org.au/

If you need help with a budget, the following worksheet produced by BT could be useful - budgetworksheet-bt

If you get cold feet, think about the First Home Saver Accounts which are concessionally taxed (maximum 15% tax) and you receive a bonus of 17% from the Government if you save at least $1,000 per year (max $850 per year, if you save $5K).    Assuming the First Home Owners Grant will still be around, you will also receive $7,000.   Disadvantage is that you have to leave it there for at least four years to get the benefit.  Following is a bit more for you to digest, plus a calculator produced by ASIC.

firsthomesaversaccountfactsheet1 - fact sheet

first-home-saver-account-fido-081 - calculator

Not sure if you are eligible for the First Home Owner Grant?  The $14K/$21K is administered by each State and Territory.   Following is a link with all the goss: - www.firsthome.gov.au

Please don’t get the impression that I am against young couples buying a home.  Far from it.   I am concerned that they may be taking on too much debt and could end up regretting the day they made the decision to buy their dream home which turned out to be their worst nightmare.

Happy house hunting and hope you find the right one at the right price.

Josie Kay

This article proudly brought to you by: Rp Data

Just having a sticky beak? I constantly trying to improve the service, so don’t hesitate to rate the response:  1 = crap, 2 = Average, 3 = Great.  Would also help if you tell me why (I am very thick skinned!)Similar Posts:

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• I want to save tax and increase my family’s wealth.

Josie’s answer: ‘Watch out.  Everyone is after your money.   Learn how to outsmart them! (also applies to financial planners).

Thanks for your question and I am gobsmacked.     I don’t know how much work your financial planner did for the $7,700 he initially charged and even if it was a lot, did you really need that much service? ’ I am guessing, you went to a seminar, they told you that if you didn’t do something now, you will be living on the pension, which is a pittance, and have a miserable retirement (even though millions do now and manage to smile every day).

Hope they didn’t make the claim the pension won’t be around, which is a blatant lie! It is all very emotional and easy to feel there is some urgency to act.  You then sat down with a financial planner and completed a fact find.   A few weeks later, they presented you with a slick Statement of Advice (a financial plan) and here you are now questioning your decision.    Again guessing,  but I imagine that the majority of their clients would have a similar strategy in place.

Their financial planner has recommended a stock standard financial planning strategy.   Borrow money and invest in a managed fund which replicates a share index.   If this is the style of service you received, why do they need to charge so much?   It is a financial planning factory - one size fits all which theoretically means it should be much cheaper to run the business.

Furthermore, they have recommended an index fund which simply replicates a parcel of stocks on the stock exchange - the human element of trying to pick the right shares at the right time has been eliminated.   For more information on index investing, go to www.vanguard.com.au.         By the way, I have money invested in the Vanguard Australian Share Index Fund via my superannuation fund (not 100%).

It is widely known what my feelings are in relation to commissions being paid from investment products.   I DO NOT LIKE COMMISSIONS AND/OR FEES BEING CHARGED AS A PERCENTAGE OF THE AMOUNTS INVESTED.  Financial planners are humans after all, and there is too much temptation to choose investments that pay high commission (the Westpoint debacle is proof of this).

There is also an incentive for financial planners to encourage investors to borrow significant sums of money (the more you borrow, the more you invest, the more they earn).   Remember, they have the same financial burdens as you do - mortgage, car, kids, wife, lifestyle, retirement savings (plus business expenses, especially if they have fancy offices).

Some fly the flag and promote they are fee for service advisers because they rebate all commissions, but at the same time charge a percentage of the amount invested (I call it a commission by another name).   Are they  claiming that it takes 5 times longer to service a client with $500K to invest, than someone with $100K to invest?   Highly unlikely, as every client has different goals and objectives and the amount of money they have has nothing to do with the complexity of a client’s circumstances.

The only good thing about this practice is that you can cancel the fees being paid on an ongoing basis (you can’t cancel commissions until you redeem the investment).    Again, there is an underlying temptation to make recommendations which favour increased amounts to be invested e.g. borrowing using the equity in the family home, margin lending, recommend investment properties be sold.

They may also be less ethusiastic to explore whether you might be better off salary sacrificing income into your work super, or perhaps injecting more funds into the mortgage (as they sometimes don’t pay).    Fortunately, not all financial planners behave like this.  It is vital that people understand the financial planning industry before they accept recommendations.  Life savings are at stake here and it breaks my heart when I see people disillusioned.

Personally, I believe the consumer is better off with a financial planner who charges a flat hourly fee, or quoted flat fee, just  like accountants, lawyers, and like professionals.   The average hourly rate is around $250, but good luck finding one (probably range from $150 - $450).     Based on your fee of $7,700, and an hourly rate of $250, your financial planner could personally work on your particular situation for least 30 hours.   The highly regarded Institute of Chartered Accountants shares a similar philosophy which is outlined in the following document - Reinventing financial planning - Institute of Chartered Accountants.

I know I have gone a bit too much, but you have hit a nerve.  I have some further thoughts on this matter:-

• the 5.5% contribution charge seems excessive?   How much work is involved e.g. you contribute $20K, they receive $1,100.   Usually funds can be transferred online which only takes a few minutes.   If they charged an hourly rate, it equates to approximately four hours work.   Again, I have a bug bear about fees being charged as a percentage of amounts invested, because it doesn’t correlate with the amount of work involved.
• with regards to your calculation that you would need a return of 4% growth + 4% in dividends in order to break even.  The final figure would be dependant on your personal rate of tax and the amount of interest you are charged on the margin loan (which is usually 1-2% higher than home loans).   You have already lost at least 23% of the $30K originally invested, plus margin loan interest and costs - deposited in the financial planners account, plus any downturns in the sharemarket - a paper loss anyway.  To help with this task, the following ASIC calculator may help - managed-funds-calculator-fido
• are you aware that your financial planner  gets paid a commission on the margin loan?  For example,  if you borrow $100K, the lending institution usually pays approximately 0.3 - 0.5% per annum (or $300 - $500 and sometimes a set up fee).  Furthermore, if they recommended any personal insurances the standard commission is approximately 100%+ of the first years premium, plus 10-15% every year thereafter e.g. $2,000 premium = revenue of $2,000 (sometimes more) plus $200 per year (sometimes more).   I am not revealing industry secrets.   It is law that all commissions and fees be disclosed in the Statement of Advice.    Have a read of this document to work it out.  If you can’t send me another question.   Therefore, when working out how much money your financial planner has made, you need to include these amounts.
• check the Management Expense Ratio (MER), sometimes known as ‘indirect cost ratio’ applied to the MLC Vanguard Share Index Fund.  The amount of 0.54% with 0.3% rebate just seems a little low.  However, it all depends on the product they are using.   I am assuming that the 0.3% rebate is commission they may be rebating in lieu of the amount they are charging upfront (up to 5.5%).   The MLC Vanguard Australian Share Index Fund is the similar to the Vanguard Australian Share Index Fund, just a different badge, but MLC also needs to make a bit.

No doubt I have put a lot of people off financial planners.   This is not my intention as I actually believe that most people would benefit from the services of a financial planner.  Financial literacy is a huge issue in Australia and we spend thousands of hours imparting knowledge which no doubt helps people organise their financial lives and leads them onto the path to financial security.   The biggest mistake people make is thinking we somehow know where the best place to invest is.  Nothing could be further from the truth.   The best description for what we do is ‘financial coach’.    I just want people to ask lots of questions and be confident they understand the risk involved.    Attached is a document published by the Financial Planning Association and ASIC which assists with this process. Getting good advice booklet - ASIC and FPA

The fact that you have written to me questioning how much your financial planning is charging, obviously means that you don’t perceive you are getting value for money.   Firstly you need to sit down with your financial planner with a list of questions.   A professional financial planning practice will take the time to listen to your concerns.    You might want seek a second opinion (or third in this case).    Investing in this volatile market is very tricky at the moment, with plenty arguing you are buying bargains (which they also said months ago - see nobody really knows).    Could be true, but remember if you are using borrowed funds, and if the share market keeps going down you are magnifying your losses.    The success of your investment strategy all depends on your time frame (hope it at least 10 plus years), and your cash flow (if your income changes, you might struggle to pay the loan and forced to sell) and of course the return on your investment.

I wish you all the very best for the future and sincerely hope it all works out for you.   Thanks for posting for posting a question on www.askjosiekay.com.au

Sponsor - iselect*

YOU MUST READ THIS: Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. For your information, the average hourly rate for a Certified Financial Planner is approximately $250 per hour. Josie does not ask for money. She relies on word of mouth, and would be chuffed and humbled if you told your friends, family, workmates, local media outlets to check out and subscribe to www.askjosiekay.com.au – free financial advice by a Certified Financial Planner. No strings attached! Don’t forget to subscribe to our weekly newsletter in order to receive great money savng tips.

ps. Hope the above helps. I am continually trying to improve this service, your feedback would be greatly appreciated.Similar Posts:

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You may have heard of margin calls.   When these happen, investors are in a bind.  They can either sell down their investment to restore the LVR,  in other words forced to crystalize losses, or have to find the funds to top it up.  What a tough decision to make in this current economic climate.  You could be buying bargains, or perhaps throwing good money after bad.    Some institutions also allow you to assign other assets. 

Personally, I have never taken out a margin loan, because the interest rate is usually around 2% higher which will reduce the return on my investment.   I would prefer to use the equity in my home.  Plenty of fingers pointing to financial planners who loved them as it allowed their clients to have access to higher amounts of borrowings to invest.  They are now accusing them of recommending these products in order to receive higher commissions and fees (they also get a commission on the loans, plus sell extra insurances that people will need).    You be the judge.

Recently, a listener wrote to me asking whether a fee of $7,700 on a $30,000 margin loan investment and then 5.5% on extra contributions was reasonable.  This represents around 25% of the investment.  With a fall of around 40%, his $30K is probably now worth around $14K - he needs at least 120% return just to get his money back, plus has to pay interest on the loan.   My answer is yes, it is reasonable, if the adviser spent at least 35 hours developing the financial plan (using an hourly rate of $250).   Could easily argue it was a bit of an overkill anyway.   However, this particular investor was put on a travelator, until such time as he was convinced this was the most appropriate strategy to create wealth.   I call them ’financial planning factories’.  They go something like this:-

Step 1 - go to seminar to hear blurb - you know if you don’t do something now you will have a miserable existence in retirement.  After all the pension may not be there when you retire (a blatant lie).

Step 2 - you are so disturbed and emotionally drained, you decide you should come back to complete the data collection form, known as the fact find.

Step 3- make another appointment to review financial plan.  Surprise, surprise, they have recommended that you borrow money to invest into a managed fund - nothing really personal about it.    Did they discuss your short, medium and long term goals and explore the advantages and disadvantages of other strategies which could be utilised?   For example, salary sacrificing to super, extra repayments into mortgage where you receive a guaranted after tax return?  I could go on forever!

However, it is very important to emphasise, I am not suggesting that this strategy is not suitable under any circumstances.    Just wish investors would scrutinize the recommendation with a lot more vigour (a second opinion might be helpful).

In fairness to financial planners, plenty of people also did their own thing with margin lending as the banks enticed them - usually day traders on the stockmarket who think they are gurus in stock picking.    Not sure who they are blaming - perhaps greedy banking executives who need to meet targets in order to receive their generous bonuses.    Of course, they are not personally responsible for their actions.

Borrowing money to create wealth can be a sound and financially rewarding strategy, particularly when asset prices are rising.   A long term commitment is essential (at least 10 years +).  In the end if your cash flow can weather the storms along the way, i.e. good income and assets to back you up, then your chances of survival are quite high.   For those who cannot afford the downturns, panic selling sets in, and wealth subsequently shifts from those who are suffering to those whose financial position is sound (hopefully it is you).   In simple terms, they didn’t go over their head.

Remember … Watch out.  Everyone is after your money.  Learn how to outsmart them.   I have attached a couple of educational booklets on gearing and margin lending.    Most financial institutions will outline the positives and negatives.  Nothing is guaranteed.     Don’t hesitate to contact me if you have any questions or if you  have your own story to share.

gearing-guide-mlc

margin-lending-set-your-sites-higher-mlc-2008

margin-lending-case-study-40s-typical-investor-bt-08

Good luck working your way through the financial maze.

Josie Kay

Sponsor - Rp Data How much is your property worth?

YOU MUST READ THIS: Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. Thanks for posting your question on www.askjosiekay.com.au. For your information, the average hourly rate for a Certified Financial Planner is approximately $250 per hour. Josie does not ask for money. She relies on word of mouth, and would be chuffed and humbled if you told your friends, family, workmates, local media outlets to check out and subscribe to www.askjosiekay.com.au – free financial advice by a Certified Financial Planner. No strings attached! Don’t forget to enter your email to receive our weekly newsletter and great money saving tips.

Similar Posts:

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Josie’s answer: I think this is an easy one to answer.   The following documents were published by the Government in October 2008.  Remember, things are changing by the day.    If in doubt, contact the financial institution and ask for something in writing.

government-guarantee-eligible-accounts-and-institutions

government-guarantee-paramaters-oct-08

The website that I sourced this information is www.treasury.gov.au (I call it the horse’s mouth)

Wishing you all the best for the future.

Josie Kay

Sponsor - Online discount store*

YOU MUST READ THIS: Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. Thanks for posting your question on www.askjosiekay.com.au. For your information, the average hourly rate for a Certified Financial Planner is approximately $250 per hour. Josie does not ask for money. She relies on word of mouth, and would be chuffed and humbled if you told your friends, family, workmates, local media outlets to check out and subscribe to www.askjosiekay.com.au – free financial advice by a Certified Financial Planner. No strings attached! Don’t forget to enter your email to receive our weekly newsletter and great money saving tips.Similar Posts:

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It is not the first time you have heard me say that finance professionals cannot predict the future (obviously).   It worries me no end that people (known as prospects to the financial planner) walk into extravagant financial planning offices and think to themselves ‘Wow, this guy must know what he is talking about!’   Look he is so successful!.

Intelligent investors know if anyone possessed the ability to consistently and accurately time the market, they would be instant billionaires.   Why didn’t Warren Buffet, Bill Gates, anyone in the Top 500 Rich List walk into the same office?   Oh that’s right.. I forgot they genuinely care about the little people.  Codswallop! (not even sure if it is a word).   If that is the case, why do they need to charge ridiculous fees?  Why do they have to preach to the masses?  Why do they need to advertise to get people to attend their seminars?

Their profits, and subsequent wealth is dependant on how much you invest with them (their retirement plan).  They make money from commissions and fees.  The more you borrow, the more they make.   This is why I hate percentage fees as it provides too much of a carrot e.g. 3% contribution fee.  Invest $100K = $3K, $500K = $15K.   Does it take five times longer to implement your financial plan?

Potential clients hear the spiel, promoted as a ‘wealth creation’ seminar, which always starts with the emotionally draining stuff.  If you have been to one, you will know what I am talking about.   For example, if you don’t do something NOW, you will be living on the pension which is a miserable existence (eating dog food and sitting at home feeling sorry for yourself - tell that to my parents or my husband’s grandmother who is one of the happiest and proudest ladies I know, living on the single pension and socialising every day).

Throughout the whole 1-2 hour seminar they are chipping away at your emotions, so you feel under enormous pressure to do more for you and your family.  Off you go …  you decide to jump on their travelator (known as their gravy train) and end up borrowing large sums of money either against your home or taken out a margin loan (in many cases both).

I call them financial planning factories which is best described as a product flog – investment, loan and insurance.   Similar to the investment property spruiker who collects high up front commission when he flogs you that over inflated investment property.  Only difference is that the property spruiker makes all his money on the initial sale, whereas the financial planner can collect money from you year in year out (nice work if you can get it).

Financial planners are all different (because we are human).   In my past life as a business development manager, I had the privilege to work with hundreds of financial planning business.   Plenty do provide value for money and don’t charge an arm and a leg (perhaps their daggy office keeps costs down?).

Some even charge a flat fee, rather than a percentage of the amount invested.   Most are educated on the concepts of risk and reward, investment time horizons, asset allocation, and portfolio rebalancing, as well as having the ability to analyse a few different strategies which are personalised and appropriate for YOUR needs and objectives e.g. are you better off paying the mortgage or perhaps salary sacrifice income to superannuation?

Do you qualify for first home savers account, co-contribution?  Is your super fund the best place for your life insurance as it is cheaper and tax effective?   Can you afford to put your house on the line?  I can go on and on and on….

There you have it.   I don’t like financial planning factories where they believe that ‘one size fits all’ (just like when I go shopping for a dress and want to wear size 8 and the shop assistant tells me it looks lovely).   Unfortunately, these factories also give you the impression it is personalised advice.

Demigods don’t exist.   Don’t forget to listen to that voice inside your head - you know - ’pehaps it is too good to be true’.   This is very serious stuff!

If you have an experience you would like to share, please do not hesitate to contact me. I have a very sympathetic ear. Watch out.   Everyone is after your money.  Learn how to outstmart them!

Josie Kay

Sponsor - WineMakersChoice.com.au*

YOU MUST READ THIS: Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. Josie does not ask for money. She relies on word of mouth, and would be chuffed and humbled if you told your friends, family, workmates, local media outlets to check out and subscribe to www.askjosiekay.com.au – free financial advice by a Certified Financial Planner. No strings attached! Don’t forget to enter your email to receive our weekly newsletter and great money saving tips.

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I was able to to this by redrawing equity from my home loan. I am expecting to need to do this again soon as share prices continue to fall. My question is - Is it foolish to continue to use borrowed money (E.G. Redrawing funds from my home loan) to maintain my margin loan? Thanks very much for this opportunity to hear another opinion. Regards Allen.

Josie’s answer.   Is it foolish to continue to use borrowed money and perhaps be throwing good money after bad in your margin loan?   Good question and the answer lies in your cash flow (income you can generate at the moment and in the future) and whether you are prepared to ride out this volatility (I think we need to be prepared to hang in there for at least 5, probably closer to 10 years - yes I am being conservative, but we are in the middle of financial storm and nobody knows what damage has been done to major economies around the world).

The advantage of topping up your margin loan is that you are buying cheap, with plenty of experts arguing we are buying bargains (they also said that a few months ago!).   The alternative is that you will have no choice but to reduce your holding, and therefore crystalise losses.   Your losses are ’real’ rather than a ‘paper loss’.   Thank God,  interest rates are more likely to go down than up.

You are paying interest on $240K, probably around $20K per annum.    Income on share investments is usually around 3%, but who knows if this will continue.   Therefore, your investment is giving you a negative return at the moment, and the difference come out of your savings.   Luckily the tax man helps a little with cashflow as the interest payments are tax deductible, which means you will geting a tax break of up to 46.5%.  Most of us, are paying 31.5% (earn less than $80K).

In case people are wondering, LVR, stands for ‘loan to value ratio’.  When you take out a margin loan, if your investment goes below a certain value, the lending institution asks you to add money, or sell part of the investment to retore it to the right level.

What should you do?   The reality is that the only thing you can control with an investment are the fees (and only to some degree).   Things are not looking great for the sharemarket in the short term, and nobody rings a bell when we are at the bottom or top.    Your financial planner is being remunerated so please don’t feel you would be bothering him or her.

I highly recommend you sit down with them to revisit your short, medium and long term goals and be doubly sure that your cashflow will be enough to ride out this volatilty.   I am assuming your adviser is receiving an annual service fee based on a percentage of your investments, plus commission from the margin loan, as well as any insurances you may have taken out.  Are you paying a fee on contributions?

The biggest mistake people make is thinking their financial adviser has all the answers on the best place to invest.  Nothing could be further from the truth.  If we did, then we wouldn’t need to work as a financial adviser (same applies to stock brokers, real estate experts etc).   The best description is probably ‘financial coach’.   We can help you organise your financial life and give you guidance on achieving your goals and objectives, in particular, funding for a comfortable retirement.   A simple definition, and of course we are all different.

Borrowing money for investments can be an effective strategy long term to create wealth.  However, this strategy can also magnify losses (and gains) so if the timing is not right, you can do lots of damage to your finances.

To sum up, after consulting your financial planner, use your own gut feeling as to what you should do.  If you do decide to hang in there and if the need arises, you are required to top up your margin loan, you must be committed long term to the investment.    If you do not, then you just have to accept a loss.   As I said earlier, it all depends on how much you earn and hope you have surplus savings as your loan is increasing, not decreasing, which all equals to high interest costs.   Also hope you are young and able to ride out this crisis.

Isn’t hindsight a wonderful thing?   I lived through 1987 and lost a little on my share investments (didn’t have much then).   It always feels worse, but they tell us it isn’t.

Take care and hope it all works out for you.

Cheers

Josie Kay

Sponsor - save on health cover with iselect*

YOU MUST READ THIS: Don’t forget that the above information is general in nature and not specific to your goals and objectives. It is recommended that you seek personal financial advice specific to your needs. Thanks for posting your question on www.askjosiekay.com.au. For your information, the average hourly rate for a Certified Financial Planner is approximately $250 per hour. Josie does not ask for money. She relies on word of mouth, and would be chuffed and humbled if you told your friends, family, workmates, local media outlets to check out and subscribe to www.askjosiekay.com.au – free financial advice by a Certified Financial Planner. No strings attached! Don’t forget to enter your email to receive our weekly newsletter and great money saving tips.

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