Tips & Traps of Self-Diagnosing your Finances
Flinders Wealth was recently interviewed for some tips and traps in relation to people self diagnosing their finances.
Click here to read the full interview.
Flinders Wealth Nominated for Excellence Award
Flinders Wealth is excited to confirm it has been nominated as a Finalist in the IFA Excellence Awards for 2016. These awards aim to benchmark success in the independent and non-aligned financial advice sector. The winners will be announced in August – fingers crossed! Check it out here - http://www.ifa.com.au/ifaawards/
Thinking outside the square
trying to buy a home in Melbourne and Sydney
Flinders Wealth was recently interviewed by Vice Magazine regarding the challenges young people are facing as they consider entering the expensive property markets of Melbourne and Sydney.
Click here to read the article.
Avoid the Squeeze! How much should I borrow for a house?
“Debt is the slavery of the free.” Publilius Syrus, former Roman slave, 42 BC
How much should I borrow for a house? This is a question we are frequently hearing from clients as Melbourne’s median house price blazes past $700,000. Prices are reflecting my 4-year-old son’s favourite Buzz Lightyear saying “to infinity and beyond”!
It is worth considering where the median house price was 10-years ago. In 2006 the median price was around $350,000. Since then the typical home owner has seen their property double in price (a 100% return) and many latte sipping suburbs have seen even stronger growth.
Over the same 10-year period incomes increased by around 40% (ABS data), squeezing recent home buyers’ budgets as mortgage levels soared beyond incomes. It’s no wonder buyers are seeking expert financial advice.
We have 5 smart strategies to stop you from sinking with too much debt.
1. Ditch your debts. Before taking on a mortgage your first task should be to dump your other debts because they’re costing you a lot more than you think. Credit cards, car loans and personal loans can charge interest anywhere up to 19% a year.
2. Don’t rush into buying. Buying a house is one of the biggest purchases of your life. For most, property is an emotional purchase but remember to be flexible as there is going to be another perfect property to fall in love with just around the corner. Knowing the local property market, developing a repayment plan, finance pre-approval and property inspections are a must before buying.
3. 20% deposit. By saving a 20% deposit you will avoid the dreaded ‘Lenders Mortgage Insurance (LMI)’. LMI provides insurance for the bank and is paid for by you. Most underestimate the cost. Based on a $650,000 mortgage expect to pay LMI of $25,000, which is added to your mortgage and repaid with interest over 25 years. By putting down a decent deposit you will have equity in your house from day one and better still it provides a buffer if house prices happen to fall. Just ask people from the UK, US, Western Australia or Northern Queensland about their own experience with property prices.
4. Borrow less than you can afford. From our experience we’ve found when mortgage repayments exceed 30% of after-tax income, you can run into mortgage stress. ASIC’s Money Smart website has some helpful mortgage calculators to assist you with this. And if you are expecting kids consider the impact of time off work and relying on one income.
5. Interest rate increases. With interest rates at record lows, it’s easy to think borrowing money at 4.5% is easy. In your planning, you should factor in the possibility of interest rates reaching 7% or even 10%. Your parents will recall when home loan interest rates in the early 1990’s exceeded 15%. Expect the unexpected with interest rates.
In summary, do the legwork before buying and develop a plan to avoid the squeeze! This will give you the highest probability of setting yourself up for a strong financial future.
Information provided by Flinders Wealth is general in nature and does not take into consideration your personal financial situation. It is for educational purposes only and does not constitute formal financial advice. Remember, the value of any investment can go down as well as up. Before acting, you should consider seeking independent personal financial advice that is tailored to your needs.
The Bond Kings!
Imagine being in charge of a pool of assets larger than the entire Australian economy? Well last week Flinders Wealth was fortunate enough to attend an intimate Q and A session with Douglas Hodge the CEO of Pacific Investment Management Company (PIMCO) an investment management firm located in California.
PIMCO manages over $1.5 trillion of mainly bond assets on behalf of clients including super funds, retirees, pension funds and endowments. PIMCO is synonymous with its co-founder Bill Gross who is known within the financial industry as the “Bond King” – Bill had a very public exit from PIMCO in 2014.
I thought it would be interesting to share a couple of insights provided by Doug and the PIMCO Team from the session about how demographics, central bank policy and the post GFC environment are interacting with each other and impacting financial markets.
- The baby boomers are the wealthiest generation in the history of civilisation. They have accumulated more assets than any group before them. They range in age from 50 – 70 and as they transition to retirement their most important financial requirement is “income”. In the post GFC world it has become a massive challenge for investment firms to generate the much desired income for this generation in a world of low growth and low interest rates. It’s still hard to get ones’ head around the fact that many countries currently have negative interest rates. That’s right, you effectively pay banks to hold your money on deposit!
- One of the consequences of lower global interest rates and the huge amounts of liquidity washing through the system is that the performance between active and passive investment managers has been compressed much closer together. As a result, people extrapolate this phenomenon and have been pouring money into index funds and Exchange Traded Funds (ETF’s). ETFs and Index Funds have seen fund inflows of over $1trillion + since 2008. From a contrarian/cyclical perspective now might be a valuable time to review this proposition.
- PIMCO recently established a global advisory board that includes former US Fed Chairman Ben Bernanke, former British Prime Minister and Chancellor of the Exchequer Gordon Brown and Jean-Claude Trichet a former President of the European Central Bank. Given the unprecedented action governments and central banks have taken since the GFC to stimulate growth – what is now moving markets in the short-term is not hard factual economic data (unemployment rates, payrolls, wages growth, hours price growth etc.) but the analysis of the wording of statements and interviews with the Central Bankers of the world. Who said actions speak louder than words!
Good Cop...Bad Cop
control your "pain of paying" dial
Did you know that the same part of the brain is activated when we bang our finger with a hammer as when we are charged $5 for a small coffee? Well it’s true – psychologists and scientists have found the same section of our brain that deals with pain processing is stimulated when we buy something we think is highly priced. This is known as the pain of paying.
Further to this ask yourself; why does it feel different when we use cash instead of paying by credit card? What feels worse? Why does the cash feel different? All these questions relate back to the notion of the pain of paying.
Now what is probably great news for the business models of VISA, MasterCard and American Express (that’s not an investment recommendation by the way!) - George Lowenstein a professor at Carnegie Mellon who has completed extensive studies into this area found “credit cards effectively anesthetise the pain of paying”. Who would have thought that when they are boiled right down credit card providers are nothing more than pharmaceutical companies!
Studies have confirmed that people’s spending habits change depending on whether they use cash or credit card. In one example, grocery store customers who paid with cash spent on average 40% less than those who paid by card. This illustrates the pain of paying is magnified when we use physical cash and therefore people refrain from spending it more than when swiping a bank card. In the “tap and go” world we live in – I think this highlights it might be more money-smart if you want to save a few bucks to take a handful of $20 notes down to your local Woolies when you are doing the weekly shop.
At Flinders Wealth we are not in the business of wanting to watch our pennies all the time – so we got thinking about how we could use the notion of the pain of paying to enhance not detract from something that should be an enjoyable experience.
Dan Ariely a behavioural psychologist from Duke University gave us some clues when he found the pain of paying is “magnified when we pay for something at the same time we are consuming it.”
Take for example when you are on holiday – after a long day of sight-seeing you’ve made a booking at the well-renowned seafood restaurant down by the beach. You think there would be no better way to end the day by tucking into a quality bottle of wine as you overlook the ocean. The waiter brings over the wine list – but as you look through it all the good bottles are priced over $100. You think to yourself that although you’d love a couple of glasses of Margaret River's finest Chardonnay to take the edge off things you really don’t fancy paying $100+. Spending that amount would ultimately detract from your enjoyment of drinking the wine.
This is probably one of the reasons why the all-inclusive holiday cruise packages are proving so popular (particularly with retirees). Under these types of holidays - you pay an up-front cost before you go that covers all your accommodation, travel, food and drinks. So when you are thinking of having dinner and enjoying a bottle of vino– having to pull money out of your pocket to pay for it is removed. The pain of paying has disappeared – and this will result in a more pleasurable experience.
Now we are certainly not advocating retirees spend their children’s inheritance (well at least not all of it) by going out and booking a pre-paid all-inclusive holiday– but the pain of paying is a fascinating concept that can be used not only to save you money but enhance the enjoyment of an experience as well.
Hey, Big Spender!
“I don’t want to stress out when I think about money”. That is a common comment I hear people make. Given what we go through to earn a dollar why then stress out over that buck? We want to enjoy it - feel confident that we are on the path to a stronger more secure financial future.
Now, unless you’re the person who wins the lottery or receives the $2 million dollar inheritance from a long lost great aunt - I haven’t seen anyone get into a financial secure position by spending more than they earn. Living beneath your income is one habit people who find themselves with financial freedom share.
I am a Financial Planner and a big believer in having a household budget, but I’m well aware we’d all much rather stick needles in our eyes than spend time looking over line item by line item where we are spending our money.
So as a first step (before you go rushing for the needles) I want to introduce you to a concept that can help us adjust our mindset when it comes to spending money.
It is really important to recognise that we often view our spending in relative terms not absolute terms. To explain what this means – Dan Ariely the author of a great book “Predictably Irrational” and a Professor of Psychology and Behavioral Economics at Duke University developed a series of comparisons about how we view our spending in relative terms not absolute terms (and I’ve tried to add some local context!).
Imagine going down to the local Chemist to buy some sunscreen. You go up to the counter with your chosen sunscreen – and the shop assistant sees you’re wearing a Collingwood hat – they explain they don’t want to take advantage of a fellow Magpies fan and say, “I want to let you know that another Chemist has the exact same sunscreen that we sell for $15 – they are selling it for only $7. It’s $8 cheaper – less than half our price. It’s 3 blocks down the road – so it’s up to you if you want to buy from here or down the street at the other Chemist.”
Now you ask yourself – will you walk 3 blocks down the street to save $8? Most people would think about that and say, “yes, I would do that”.
Now consider a slightly different scenario. You are going to buy an IPad – an expensive IPad from the Apple Store. It costs $1,050 and as the store assistant extolls the virtues of the device with all the requisite enthusiasm of an Apple employee – they notice you’re wearing a Collingwood hat and turn and say, “as a fellow Pies fan I’ll let you in on something that I shouldn’t be doing – 3 blocks down the road JB Hi-Fi is selling this exact IPad for $8 less – instead of $1,050 they’ve got it for $1,042.”
Would you take the trip down 3 blocks? Most people would say absolutely not.
The reality of the situation is our bank account doesn’t care where $8 comes from. It doesn’t care whether it’s from sunscreen or an Ipad – whether it’s from a small purchase or a big purchase. But the funny thing is - we care!
An $8 saving from $15 feels like a big amount – it is more than half! However $8 from $1,050 looks like a really small amount.
Another example that illustrates this similar point is consider you are buying a car that costs $45,000. The sales person says for $2,000 more you can get leather seats. Apparently leather seats are all the rage! Now imagine a second case where you are going to buy a chair for your office. The sales person tells you for $2,000 more than the price of the chair – the chair costs $500 – you can get a leather seat on the chair.
Would you do it?
Now most people say the first one is an easy decision the second one is outrageous – paying $2,000 extra on a chair worth $500 for a leather seat! Now presumably you sit more in your office chair at work than in the car – and for whatever the benefits are from leather they would be higher in the office than in the car but that is not how we think about it. When we spend $45,000 - $2,000 seems very small. When we spend $500 – an extra $2,000 looks incredibly large.
So when it comes to spending money – we need to try and overcome our natural tendencies of looking at things in absolute terms not relative terms and think about how we can go about fighting this. What this really involves is not making a decision on something relative to what we are spending – we need to think about them as independent – and the trick is to train ourselves to do that.
The Forgotten Insurance
Australia is often identified as a nation that loves a punt – after all we are known to bet on flies going up a wall and having a horse race that stops the nation. Therefore given our liking for things with probability involved – I often ask myself why do Australian’s overlook the personal insurance cover they are statistically most likely to claim on. According to insurance industry numbers you’ve got a 33% chance of claiming on this type of cover prior to retirement. Well let me try to explain.
Trauma Cover is the least well known type of personal insurance. This probably comes from the fact that it is one type of personal cover that is generally not offered by Super Funds – therefore it often gets put in the “too hard to sell basket” by life insurance salesman. However, it’s no surprise that this doesn’t reduce the importance and value that Trauma cover can provide you and your family.
Now before I drill into the nitty-gritty of trauma cover I thought a different way to look at insurance would involve you buying a block of land. With the block of land you plan to build a house on it. Now, unless you fancy yourself as a “Scottie Cam” type, I imagine the most exciting part of the whole process would be “moving in”. But if I asked you what the most important part was of building the house – I’m tipping Scottie Cam and his Blockhead mates might say, laying strong foundations. Because what would happen if we laid no foundations – well the house may not stay upright for very long. So considering that context it is much easier to understand the importance of laying solid foundations for the long-term and recognise that although insurance is not the most exciting part it is a pre-requisite if we are going to make plans with our on-going income.
Looking at the numbers 50% of people do not get through to retirement age without experiencing an insurable event. The statistics indicate that 1 in 3 people will suffer a health event that would covered by trauma insurance. This makes trauma cover statistically the most likely you will make a claim on. And if you are someone who values managing risk and playing with the odds in your favour – the numbers alone suggest it is a conversation worth having.
Trauma insurance provides an immediate one-off lump sum benefit and pays out on cause or diagnosis of a defined medical condition. Generally speaking it pays a tax-free lump sum in the event of heart attack, cancer and stroke. Policies can vary in terms of defined medical condition – so it is really important you get independent financial advice to ensure you have the most appropriate policy for your circumstances.
Important factors to consider when determining what level of cover is appropriate include;
- Replacing the income shortfall that your Income Protection does not cover
- Debt Retirement (in the event of an illness would you prefer to lose your house or lose your mortgage)
- Medical Costs - funds that can go towards treatment and rehabilitation costs. For example, if the best surgeon/specialist for your condition is located interstate - the insurance proceeds can help make seeing them happen
There are other important factors to consider about how Trauma fits alongside the other insurance cover but a good Certified Financial Planner® will be able to guide you through these issues.