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

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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:

• My Financial Planner wants me to take out a margin loan?
• Margin loans - A Friend Of Mine Says They’re The Way To Go, Why?
• Is Topping up margin loans risky?
• Financial Planning Factories - Money Tip without the Boring Stuff
• Margin Lending - the good, bad and the ugly.

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

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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:

• Margin loans - A Friend Of Mine Says They’re The Way To Go, Why?
• Is Topping up margin loans risky?
• My Financial Planner wants me to take out a margin loan?
• I have a margin loan and not sure whether I should top up my investment?
• Sharemarket volatility – friend or foe?

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

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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

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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

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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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• Margin loans - A Friend Of Mine Says They’re The Way To Go, Why?
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• Margin Lending - the good, bad and the ugly.

Q. I am wondering about savings we have with Suncorp Bank.  Is it safe or should we pull it out for the time being also which banks have frozen accounts already?

Josie’s answer: If your money is sitting in a savings account within a bank, building society or credit union that is based in Australia, then the Government has guaranteed that you will not lose your money, for the next three years anyway.    You will not find a better guarantor.

Foreign banks may be covered by the guarantee, provided they agree to pay a fee, but this can be a little confusing.  For example, ING’s parent is based in Holland, but they are covered by the guarantee as they have an Australian subsidiary (up to a $1M.  If greater than $1M then they will be charged a fee).

For example, institutions such as Duetche, Credit Suisse do not have an Australian subsidiary in Australia, just a branch office who reports to their parent overseas.   Therefore, different rules apply to them.  Some commentators argue that this is fair as they made the decisions they didn’t want to operate under the same rules and regulations that apply to our banks, building society and credit unions.

It is also important to understand that some cash management trusts, income and mortgage trusts are also not covered.      I recommend that investors ring their financial adviser or the institution directly.  This is causing all sorts of problems for the institutions who manage these types of trusts as large numbers of investors are requesting to withdraw their money.

They had no choice but to freeze redemptions.   Very stressful for retirees who want to access their money.   However, I can understand.  They have to protect all investors within the fund.  For example, a mortgage trust invests in real property* which is illiquid - you just can’t sell quickly.   It takes a long time to offload a 10 storey commercial property, and it would be foolish to sell at any price.

These are difficult times and thing are changing by the day.   Keep up to date and if in doubt, don’t hesitate to ring Suncorp and ask for something in writing.   Good luck.

Josie Kay

Sponsor - save on health cover with iselect*

Image credit - Michel Osullivan smh.com.au 18/10/08

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.

ps. hope the above helps. I am continually trying to improve this service. Your feedback would be greatly appreciated.

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Must admit it is confusing as the Government didn’t include the fine print.    You will not find a better guarantor than the Australian government.   Following is a link to the Treasury Department - www.treasury.gov.au.

Foreign banks who do not have an Australian subsidiary may be covered by the guarantee, provided they agree to pay a fee for the guarantee on their deposits.  For example, ING’s parent is based in Holland, but they are covered by the guarantee as they have an Australian subsidiary. 

However, institutions, such as Duetche Bank who do not have an Australian subsidiary in Australia are not automatically covered, unless they pay a fee (just a branch office who reports directly to their parent overseas).    Some commentators argue that this is fair as they were the ones who made the decision when when they set up shop in Australia they didn’t want to operate under the same rules and regulations that apply to our banks,building society and credit unions (governed by APRA - Australian Prudential and Regulatory Authority).

It is important to understand that some cash management trusts, income and mortgage trusts are also not covered.     This is causing all sorts of problems for the institutions who manage these types of trusts as large numbers of Investors are requesting to withdraw their money.  They had no choice but to freeze redemptions.   

Very stressful for retirees who want to access their money.   However, I can understand.  They have to protect all investors within the fund.  For example, a mortgage trust indirectly invests in real property which is illiquid - you just can’t sell the asset quickly.   It takes a long time to offload a 10 storey commercial property, and it would be foolish to sell at any price.

If in doubt speak to your financial planner who is getting paid to look after you,  or direct with the financial institution.   Ask for something in writing.

Wishing you all many happy investment returns.

Josie Kay
Sponsor - Property price reports Rp Data* - Do your rssearch before you buy or sell.

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 money 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:

• Are the savings in our bank safe?
• Institutions covered by the Guarantee?
• How safe is our fixed term deposit with Suncorp?
• Is my term deposit safe? I am very concerned the banks will collapse.
• Margin Lending - the good, bad and the ugly.

The bottom line is that the so called stimulus will have no impact as it is based on the mistaken belief that consumer spending drives the economy, when in fact business spending is the driver.

Any surplus is held by the Reserve Bank, and is still part of the money supply, so that it is money created out of thin air (as central banks have an addiction to which is one of the causes of inflation), but a draw down in money balances (often erroneously referred to as idle balances).

The Australian Industry Group’s October Report stated that manufacturing activity fell for a fourth successive month. For those who do not understand the link between interest rates, monetary policy and manufacturing, we are going into a recession, and no amount of consumer stimulus is going to prevent it.

If you look at RBA indexes for monetary aggregates M1 (currency deposits) fell between Dec 2007 and May 2008 by 6.5%. That, in a reversal of their policy for the last 12 years or so, is deflation.

The primary reason, indeed the sole reason, why we have this global meltdown is that US Federal Reserve chairman, Alan Greenspan (referred to by some as the Mr. Magoo of central bankers), in 2001 I believe it was, reduced the Fed’s lending rate to 1% and kept it there for some 16 months and creating excess credit ( the RBA and other central banks, wanting not to miss out on the action followed a similar course).

This excess credit found its way into housing which morphed into weird derivatives of almost unimaginable complexity, and which also worked its way into other areas of business activity, we saw oil peak at USD147 a barrel, more recently commodities. These were all bubbles fed by the world’s central banks, the merchant and commercial bankers being publicly hung now were merely wholesalers.

The central bankers are the ones that must be brought to account. So you see, it was the bureaucrats whose job it was to oversight this things that has got us in the current mess.

So the solution will be more bureaucrats to do more supervision which guarantees that the next recession will be even worse, as it will be compounded by government injecting more liquidity into the economy which is exactly why we’re in this mess. The elephant in the lounge room that no one wants to be in the room when it does decide to flop down is the swap derivatives (estimated at just over one quadrillion US dollars.

That’s right, quadrillion, not trillion. When that baby goes, the reds, sorry greens will be happy, because most peoples standard of living will have been blown back to the dark ages.

Josie’ answer: Thank you for taking the time to write to us.   Your email was informative and I agree
with most of it.   However, you did not specifically mention the incorrect economic statements that were made during the show.

At the outset I want to highlight that we are not economists, and even if we were, I have no doubt we would be receiving emails disagreeing with some our statements.  They say that economists were created to make weather forecasters look good - hope I don’t offend as you seem to know what you are talking about.

Re your comment that business spending is the driver, not consumer, surely a business won’t invest capital unless there is a consumer buying?  Therefore, aren’t they interlinked? (remember I am not an economist!).

I also agree with you that the stimulus package is really only a band-aid solution.  I think, I was caught up in the emotion of feeling good that the pensioners would be getting something.  We cannot afford it, but hard to argue that they didn’t deserve the bonus.

It is also important to highlight that feedback we receive from our listeners is that they don’t want all the ‘technical stuff’.  Consequently, it needs to pass what I call ‘the Burnie Pub Test’.  In other words, the bloke having a beer in the local needs to be able to understand the information and subsequently form their own opinion.   More importantly, if they fall asleep the show wouldn’t survive.   Time is always a problem as
well.

My finger is pointing to the  greedy and ruthless executives who lent buckets of money to people who can least afford it and then onsold the rubbish to unsuspecting investors. This is elementary stuff, and greed was the primary driver.     Sadly this debacle has proven that we cannot let the financial services industry self regulate, both here and around the globe.   Yes, it would be nice to reduce bureaucrat numbers, but there is no easy solution to this problem (unless you become a politician and therefore be in a
position to change things).

Again thanks for your comments which are always welcome and for listening to Money Matters.

Kind regards

Josie Kay

Sponsor - Property Price reports Rp Data*

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. I 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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They get all muddled on the phone and thoroughly confused (Italian migrants).   It’s tough enough working out which ‘number’ to select on the automated service.

You know that lovely lady who tries to direct you to the ‘right department’ and you end up going around in circles.

Anyway, they have been loyal Telstra customers for decades and having phoned them recently, we were told they were eligible for a pensioner discount on their land line service.  

The trap is that you have to ring them to activate it.    Sure an oversight on our behalf, but thought it was a bit cheeky of Telstra not to send something with the quarterly bill, after all they do have their dates of birth entered on their system.

Following is the relevant link to Testra website with all the details:

Pensioner discount

Telstra’s phone number is 1800 353 652 (business hours) and you get to talk to the real thing - a human working in Australia.

The amount you save depends on your total monthly call spend.  My parents spend around $7-8 a month and are now saving $11.00 per month or $132.00 per year. When you are relying solely on the age pension for income, this is welcome relief.

Of course it pays to shop around e.g. Optus.      My parents will not hear of it.   They have been with Telstra for years and want to stick with them.    Seems to be a typical response from anyone over 70 years of age, especially  if they struggle with the English language.

If your land line service is with Optus, their website states the following:-

“Optus offers a Pension Saver Discount to eligible pensioners who sign up to either a HomeOne, HomeSaver or Home Comfort (except Home Comfort Lite) plan for 12 months. If you are eligible for the Pension Saver Discount you will receive 10% off your bill each month up to $15 (inc GST). Terms and conditions apply, please call Customer Service for details on 1300 300 469.”

Make sure you give them a call to check whether your pension discount has been activated.

Cheers and hope the above helps.   Let me know if you hit a brick wall and if you feel inclined, share your story.

Josie Kay

‘Watch out.   Everyone is after your money.  Learn how to outsmart them’

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Beat the Retailers at their own Game

We are all prone to overspending. Ladies, just look at all the clothes you have purchased over the years, and half of them you probably don’t wear. If I calculated how much I have spent just on clothes since I started work at 15 years of age, I would no doubt be horrified (best to stick my head in the sand!).

The men are not going to get away with it either. From my experience they tend to purchase big ticket items, such as big screen TVs, power tools, and stereos.

I know life is for living, however, it is no secret that my biggest bug bear is credit card debt.   If you are unable to pay for all your purchases by the end of the month, and you find this is happening on a regular basis, stop using your credit card.  It is simple.   You are spending more than what you earn and destroying your wealth long term.

Here are my top five simple ways to avoid overspending at the shops. Let’s not beat around the bush here. They are all obvious, but we all fall into the trap of spending money on stuff that ends up cluttering our lives or in the rubbish tip.

1. Don’t get sucked in by ‘Buy Now Pay Later’. You might have all the best intentions of paying for the item within the interest free period, but think about why they offer it. The majority of people don’t manage to pay it off on time and then a huge interest rate kicks in, sometimes up to 30%. Finance companies have a responsibility to their shareholders. They are not a charity, and the customer is at the bottom of the gravy chain.
2. Retailers spend millions of dollars on advertising and employ an army of marketing gurus to manipulate us. These people have spent years at University working out ways to get a slice of our hard earned money and they are on the winning side. After all, if they don’t win, they don’t have a job. Unfortunately, we were not taught how to play their game at school. Just remember that money you spend today is gone forever. Are you giving up tomorrow’s peace of mind?
3. Don’t get sucked in by sales, especially if you don’t need the item. We know the original price, is ‘not really the original price’, just there to think we are getting bargain. A dress which had an original price tag of $200 is not a bargain at $100 is you don’t wear it often. Before I purchase an item of clothing, I think about the number of times I might wear it e.g. if a dress cost me $100, and I only wear it 10 times, then it has cost me $10 per outing (and I have a few of these in my wardrobe).
4. Understand the true cost of buying on your credit card. If you purchase an item for $100, and the interest rate is 18%, at the end of 12 months, that item has cost you $118. Credit card debt is at an all time high. If you have a problem, cut it up. Don’t worry you will survive (just like your parents and grandparents did before they were invented).
5. Go grocery shopping with a list and a calculator? This way you will not exceed your budget. Remember that the bargains are usually found on the top and bottom shelves and you should never go grocery shopping if you are hungry.

Money is more about emotion, than logic. The key to wealth creation is knowing when emotion, or when you find the ‘must have at all costs feeling’ has clouded your judgment.

Repeat after me… “Watch out. Everyone is After My Money. I can outsmart them”. It works for my kids anyway. Good luck and enjoy the challenge of saving money.

Cheers and please tell all your friends and family about askjosiekay.com.au.

Josie Kay

P.S. Here are a few places to shop and save:

ebay.com.au*

Online discount store* Lots of bargains here

Catalogue Central* - Get all your catalogs online instead of in your mailbox

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