4 simple financial tips for young families

Often young families are very busy with their career and raising children that they can neglect a few simple things that can make a big difference over the long term.  I've put together a list of 4 tips for young families to implement which allows them to continue to get on with their busy lives knowing they are helping to set themselves up long term.

Tip 1 - Make sure your mortgage interest rate is low

A small difference in interest rate can make a huge difference. Don't just think you're too busy to worry about finding a deal that is 0.5% cheaper. You're stealing (or more so the bank is stealing) a large amount of money from your future self. If you are paying minimum repayments on a $300,000 mortgage at 5% and refinance to a 4.5% interest rate and keep paying the same repayments, you are a staggering $17,428 better off after 10 years.

This only applies to those who have a mortgage and not those who are renting. That's ok to be renting, but remember the alternative is paying off a house. You need to be making use of your cheaper living arrangements and saving/investing the surplus, it can't be spent. See the next tip.

Tip 2 - Budget to create a surplus

It is such a weird phenomenon that you can have someone earning $50,000 per annum and someone earning $100,000 and both spend everything they earn and both think there is nothing in the budget that they can do without. The reality is we can meet out basic human needs with much much less and everything else is desired spending. I'm not suggesting that everyone should be living on bread, dripping and living in a 3 bedroom shack with 4 other families but acknowledge that there are a lot of things in your budget that you are choosing to spend for today's lifestyle which is stealing from your future lifestyle. Just try to see what you can do with out and use the extra money to pay additional repayments into your mortgage, or into your savings/investment if you are renting. Once you are in the habit of trying to maximise your surplus each week, fortnight or month, you'll start to enjoy finding ways to maximise your surplus income. In that same example above of the person who has refinanced to a 4.5% mortgage, if they now also pay an additional $200/month into the mortgage, they have made an additional $24,000 in repayments over 10 years plus that has saved themselves $6,239 in interest on their mortgage. So just those 2 things alone put them almost $50,000 in front after 10 years.

Tip 3 - Check your superannuation

It really doesn't make much sense at all for young people to be in the balanced fund with roughly 30% in defensive assets (cash and fixed interest). They have such a long investment time horizon, they can withstand the volatility of the share market. A 1 or 2% better return over your working life can make an absolutely massive difference to your final superannuation balance.  Next time we get a major market crash, think of it as a good thing, your regular superannuation contributions are now buying low/cheap. You could even try tighten the belt and ask your employer to salary sacrifice so you buy even more during the next major downturn. To give you an example, a $50,000 balance with $5,000 per annum being invested would be worth $167,440 after 10 years with a 7% return. If that was a 9% return, it would be $26,893 more. Plus if you invested some extra during a major downturn, that could be even better. With compounding interest, the additional 2% return over 10 or 20 years after that starts making an absolutely massive difference.

Tip 4 - Ensure your personal insurances are sufficient

When people buy a new car, say it's worth $15,000, they don't even bare the thought of driving it out of the dealership without insurance because if that got written off, that $15,000 loss would be devastating. And then think, how much do you earn each and every year?  I can tell you, you will be able to withstand losing a $15,000 car a lot easier than going without your income for 1 year, let alone many years, or forever. Income protection is a must and if you have a family, death cover is also a must. I know we don't like to think about it but there are people dying prematurely every day from car crashes to medical conditions to even suicide (ABS states that there is almost 7 deaths per day from suicide in Australia and men account for 60% of them). Nothing will derail your family's financial position quicker than injury, illness or death.


My name is Glenn Hilber and I am the owner and Senior Financial Adviser at Precision Wealth Management. You can contact me on 1300 200 012 or glenn@precisionwm.com.au

Self Managed Superannuation Funds - What's the fuss

So, Self Managed Superannuation Funds or SMSFs or I have even referred to them as Smurfs (spoken, not written). They have become pretty popular over the past few years and I can't understand why. Well, I know why, but I think those reasons are a little bit misguided on the whole.

So many people are so disengaged from superannuation they haven't changed their super fund, insurances within the super fund, investment option or even consolidated their super funds when they've ended up with more than one, and now they want to take on the much more onerous task of managing a SMSF.

The reason people want a SMSF is because they believe it will result in a greater financial outcomes for them and that belief has mostly come about through the limited recourse borrowing rules that allows you to borrow to purchase investments. Whilst this is often used to buy property, it can also be used to buy shares or managed funds. However, the stats show that this is by far the minority. According to the ATO SMSF statistics from June 2013, limited recourse borrowing arrangements made up a staggering 0.5% of all SMSF assets.  The biggest holdings are 31.3% listed shares and 30.5% cash. What? Cash and listed shares, you can get them in retail super funds and some industry funds.

So, what about that magic balance when it is a good time to get a SMSF. Isn't it better when my super gets to $200,000? Well, if you are paying an administration fee for super that is 0.50% and the annual running cost of the SMSF is $1,000. Then sure. At $200,000 they are the same, then as the balance grows you are better off with the SMSF. And in some instances you may be willing to pay an increased administration fee in the short term to access the benefits of a SMSF. But what ends up happening a lot of the time is that you get the SMSF then go invest in an investment product where there administration fee for that product is roughly equal to the administration fee of the super fund you just got out of. Or even worse, it all gets too hard, the money goes in cash and stays there like the 30.5% of all SMSF assets. That would have really hurt over the past 5 years where diversified investments have returned about 10% and cash about 3%.

So, if you already have a SMSF, what is it invested in? Are you making best use of the fund or is it sitting in cash? Have you reviewed the investments? Make good use of it or wind it up. The accountant doing the fund returns each year isn't going to suggest you wind it up.

If you are thinking about starting a SMSF, have you thought about all the detail involved? Trustees? Are you going to have individual trustees or corporate trustees. As Noel Whittaker said recently "I can't see any reason to have individual trustees", well Noel, there is 1 reason and it is the reason why so many people choose individual trustees and that is cost. Do you know what happens to a SMSF if you have 2 people as individual trustees or directors of a corporate trustee and one dies or one because incapacitated? If you have a corporate trustee, who is going to be the shareholders and secretary? And make sure you're not just getting a SMSF, the SMSF should just be a tool for the investment strategy for you.

One of the big downsides to a SMSF is that it is almost impossible to make use of the anti detriment rules, so consider that carefully. I wrote about anti detriment in an earlier blog here

Also, if you are starting a SMSF, make sure you review your insurances as you will probably be forgoing insurances in your current super fund and also review your Estate Plan.

So, what do I think about it all? Well I think it's the flavour of the month and there are a lot of groups now promoting SMSFs. But it's like the sausage factory, everyone who comes in, gets a SMSF, but that is really not how it should work. They are definitely beneficial to some people who are willing to get involved, take the risk and utilise the strategies available. Whatever you do, don't spend the money setting it up, then let it be a drag on your superannuation wealth creation through lack of involvement.

If you would like advice on Self Managed Superannuation Funds, please contact me on 1300 200 012 or glenn@precisionwm.com.au