Written by Hudson Editor Hayley Mcleod
2015 has brought new lows to oil prices, dropping to a five year low of below $US50 a barrel. This is a drop of more then $US100 ($A123) a barrel since mid-2014. So what does this mean for consumers and more importantly the economy?
The impact of lower fuel prices differs – for consumers it is a welcome relief with fuel prices dropping for everyday motorists. For large companies such as Qantas the savings are obvious with fuel accounting for more then a third of their annual costs. Building companies such as Boral will also benefit with lower fuel bills and a cost saving of an estimated $100 million annually. Rio Tinto and BHP will benefit for the same reasons but of course all of this positivity in the mining, building and travel sectors has led to a decrease in sentiment towards energy stocks.
Australia however is not a large importer of oil and therefore lower oil prices have less of an impact on our economy then other countries. Our annual oil exports only account for 4% of our total exports. So the news is mostly positive. It is hoped that reduced fuel prices will leave a little more spare cash for households and improve spending overall, thus improving the economy. Lower oil prices have also dampened inflationary pressures leaving the door open for the Reserve Bank to again drop interest rates; yet another reprieve for households.
Currently, compared to last year, the average family are saving around $35 a week in fuel prices or around $1500 a year. Savings are also expected to be passed on for travel (cheaper flights) and in your grocery bills.
But while it’s good news for us in Australia it is not such good news for countries like Venezuela, where oil makes up 96 per cent of the country’s export earnings which means that for every US$1 a barrel drop the country loses $US 770 million a year. For producers like Russia and OPEC nations it’s also a disaster with the Russian rouble dropping so significantly it has forced consumers into panic buying and the central bank to hike interest rates to 17 per cent. This is all being caused by the oil cartels in Saudi Arabia who instead of cutting supply to increase demand have maintained the oversupply and kept producing.
We should enjoy these lower prices while we have them for while it doesn’t impact our economy greatly, as a whole the negative impacts globally are cause for concern. So as they saying goes…. Enjoy it while it lasts!
Average Weekly Retail Petrol Prices for the 12 Weeks to Sunday, 15 March 2015
– National Average –
Read in full + comments 0 Comments
Written by a Hudson Adviser
In the world of budgeting there are two broad categories: B1 – The Budget Conscious and B2 – The Big Spender
As you are all well aware, the old rule of saving 10% of your gross earnings forms part of Hudson’s core investment philosophy. Do this and you are almost assured of success. Ignore this rule, or God forbid, spend more than you earn, and you are bound for a life of financial frustration.
B1 – The Budget Conscious
Hudson members of mine – who are both teachers (aged 42 and 34) have managed to accumulate six investment properties and a substantial share, managed fund and superannuation portfolio, and recently took two years off to travel around Australia. As they explain below – budgeting is one of the key building blocks that has enabled them to achieve this.
How many of you could take two years off to travel – whilst growing your asset base at the same time?
“… as a tribute to Hudson, I am currently sitting here doing the May to June household and investment budget roll over a glass of beer.
I have been keeping a budget religiously now for over 13 years, ever since I became a member of Hudson back in 1997.
Hudson have provided my wife and I with many very important services … Above all else however, the budget I was provided at the very start of my membership has been the catalyst for everything we have achieved so far.
My budget format has changed over the years to suit our growing investment portfolio and lifestyle. My wife says I take pleasure in reformulating the budget template and also looking back over previous budgets to see just how little money we have lived on in the past. But the proof is in the two years we have had away from our jobs. Leading up to and during our year traveling overseas in 2002, and our year traveling Oz in 2008, it was keeping a budget (sometimes on the back of an envelope, scrap of paper or bus ticket) that ensured we did what we wanted to do and still had cash left over at the end of those trips.
I am hoping that budget keeping will hold us in good stead leading into the next financial year that will be our most challenging yet. My wife’s maternity leave pay runs out this month, so we will be on one wage for the foreseeable future. Keeping the investments chugging along and having enough to maintain a reasonable lifestyle will be quite a task. My wife says I am looking forward to tightening our belts.
Anyway, I am sure that without Hudson showing me the way with budgeting back 13 years ago we probably wouldn't have any investments to speak of at all.”
The key to it of course, is that not only has budgeting enabled them to build up their asset base, but it also enables them to retain the asset base even when they stop earning a salary.
B2 – The Big Spenders
Despite our core philosophy and the many years our members have been with us, sadly I still have a handful of The Big Spenders amongst my members – and they are definitely paying the price.
A recent discussion with a member of mine brought this reality to the front of my mind. These members have a household income of $185,000, well above the median household income of $59,228, and yet they swore black and blue that they did not have an extravagant lifestyle, and they couldn’t possibly cut back on any of their expenses.
In the last ten years, despite their own home having doubled in value, they still have no equity (with the exception of a modest amount in superannuation) as their mortgage, credit cards and car loans have all increased along with the value of their home.
I encouraged these members to compile a budget to send in to me so that I could give them some suggestions as to where they might start. Predictably, I am still waiting for the budget to find its way to my desk.
More disturbingly still, I have members that are even worse off than this – my record being $180,000 in credit card and personal debt with no assets at all – and this member was earning $160,000 and had no dependants. Crazy!!
Some of the common characteristics and thought processes of The Budget Conscious and The Big Spender are outlined below: Which one more closely resembles you?
Which one more closely resembles you?
|Thoughts On:||B1 – The Budget Conscious||B2 – The Big Spender|
Tend to have a formal or informal budgeting system
Have no idea how much they spend but often complain that:
Tend to have a target savings figure in mind – such as to save $1,000 per month
Tend to allocate the savings to a predetermined location such as into super, a managed fund or against their mortgage
Allocate a portion of any pay rise to additional savings
Get real satisfaction from saving and always make time to budget
Think budgeting is boring and believe they are too busy to budget
Live for today but plan for tomorrow
Tell themselves that they are ‘living for today’ when in reality their decisions put a strain on their day to day living
Budget for unexpected expenses and are not surprised when they arise. Have cash or available funds on hand to pay for these expenses
Blame ‘unexpected expenses’ for their inability to save
Might have one or two credit cards that are repaid monthly – they never pay credit card interest
They typically hold a number of credit cards and/or personal loans – most of which are maxed out – costing them thousands of dollars in high interest charges
Allocate a portion of their savings to short term expenses such as holidays
Leave things like saving for holidays or schooling expenses until the last minute and then resort to the credit card
Take responsibility over their financial future
Happy to blame others for their position:
Have a good mix of long term investments
Are more likely to be attracted to ‘get rich quick schemes’
Have generally received little financial assistance from family
Are relying on an inheritance to get them out of trouble
|Their own home||
Often own an affordable home with no, or a rapidly reducing, non tax deductible debt
Often have an expensive home – with a correspondingly high mortgage – but couldn’t possibly move or downsize
Every time their home goes up in value they take on additional debt – the resulting cash disappears within 12 months
Typically pay cash for their second hand car.
Often have an expensive car – with a correspondingly high car loan/lease and think that it makes sense to buy a new car with a lease ‘for tax advantages’ or because they ‘will save on repairs’
The Difficult Years
There will always be times in our lives when it is more difficult to save more than we spend. These periods often occur at times such as:
- When having children takes you from two incomes to one income.
- If you are paying for private education.
But these periods are largely foreseeable and voluntary, and The Budget Conscious would have planned for these periods and will know that they can afford it.
Of course, an unexpected illness can be another trying time – although again, The Budget Conscious will have planned for this event such as savings and/or insurance.
I encourage you to honestly reflect on whether you are more B1 or more B2. For those of you that fit the bill of the Budget Conscious, well done and thank you – you make our job easier and more enjoyable, and we love to see the progress that you make.
For those of you that fit the bill of the Big Spender, thank you for your honest reflection – please take the time to fill out the budget in the Personal Financial Profile and get it in to our office. We would love to help you develop the key habit to financial success - SAVING!!
For more customised individual advice please book a consultation with your Hudson Adviser online now, or call our free number on 1800 804 296 to book.Read in full + comments 0 Comments
Written by a Hudson Adviser
The returns we get on our investments can often be largely out of our control. Investors can choose in what asset class they place their savings, but beyond that have very little control on the return. For example, investors have three main choices for their hard earned savings.
- They can invest for the interest rate (cash or fixed interest securities) or,
- They can invest in companies to become part owners (Australian & international shares), or
- They can invest in property/real estate (residential or commercial properties).
But the investor has very little control over how those assets perform after the initial investment decision. (For example, interest rates are set by both a countries central bank, and also the supply and demand forces of the global credit markets).
The returns of the share and property markets are affected by a whole myriad of factors completely out of control of the investor from the prevailing economic conditions - to supply and demand fundamentals - to choices made by company management and political and environmental disasters.
Below are a list of factors that have influenced investment returns across the three main asset classes over the past few years that where completely out of the investors control
- Debt levels in the US.
- Geopolitical tensions in the Ukraine.
- Huge unemployment levels in Europe.
There are many other examples I could have used, but the above factors have all had a recent profound influence on both the level of interest rate set (and hence the return from cash and fixed interest investments), and the local and global economy, thus influencing returns on shares and property investments.
It can be frustrating to do all the right things and suffer poor investment returns due to events that where completely unforeseeable, and beyond an investors control. The bottom line is, that all investing in risky. Some assets have a higher risk profile than others and they tend to compensate the investor for taking this risk over the long term with a higher return.
There ARE however, a number of things an investor can control that can give guaranteed risk free benefits. The objective of this article is to highlight a few suggestions for those wanting to take control of their financial position.
Cut spending - Your mother was only half right when she said, “a dollar saved is a dollar earned”. A dollar saved is actually worth more than a dollar earned as we pay tax on dollars we earn, but not initially on dollars we save. Creating a surplus cash flow and then investing or saving this surplus for future spending, is basically the reason for financial planning.
It is now the 2014/2015 financial year. This presents the perfect opportunity to look at your expenditure and try and trim any fat possible, and create or increase your surplus cash flow that you can then save or invest. Below are some suggestions that might help:
- Cut back on the takeaway café lattes and cappuccinos (saves around $20 p/w based on $4 a coffee 5 days a week)
- Cut back on the takeaway lunches and bring lunch to work instead (saves $40 plus p/w based on $8 per day, 5 days a week)
- Think ahead and buy petrol during the middle of the week and not on the weekends. (Petrol companies aren’t fooling anyone when the say they don’t increase the prices on weekends)
- Call up your utility and energy providers and see if they can’t offer you a better deal or threaten to go elsewhere
Doing all these things may only save you $30-$60 a week, but that is $1,560 - $3120 over the course of a year, and a lot more over the long term if invested appropriately in an investment that will give compound returns.
Earn More Money
This may be a bit obvious and easier said then done but it is possible. Employers value skills that are in demand. Perhaps look to see if there is any short courses or training you can do in your particular line of work to increase your value to your employer, or other prospective employers. Many employers will even pay for completely or partially for training of skills that are relevant to their business.
Hold Assets in the Correct Tax Entity
Again, this may seem like an obvious one, but it is something that is commonly overlooked. The Australian tax system has a number of different tax entities that are treated differently for tax purposes. We are also a little unique in that members of married and de facto couples are taxed as individuals, when in many other countries they are taxed as a family unit. What this means in regards to tax effectiveness is that assets that produce a positive taxable income should, more often then not, be held in the name of the person with the lower income.
John is a dentist and earns $200,000 a year. His wife Julie is an ex paralegal but is not working at the moment as they have 2 children under the age of 3, and she stays home looking after the kids. Julie and John have cash savings of $100,000 that pays interest of $5,000 over the course of the year. John takes care of the family finances so the savings account is in his name. At the end of the financial year he must declare this $5,000 as income to him, and it is added to his $200,000 taxable income. He pays tax at the highest marginal tax rate of 46.50% (45% + 1.5% medicare levy).
John therefore pays $5,000 x 0.465 = $2,325 in tax on the interest earned.
Julie has no taxable income. In Australia, you can earn up to $6,000 and not pay tax. If John changed the name of the savings account to Julie’s name, the interest income would be earned in her name. As the $5,000 interest income is less then the $6,000 tax-free threshold, Julie would pay zero tax on this income. Therefore, by just having the account in the name of the correct tax entity, John and Julie can save themselves $2,325 in tax.
Use Superannuation to invest tax effectively
The tax effective ways to utilise super to build your wealth is a topic in itself, but the main ways are the following:
- Government Co-Contribution (for low to middle income earners): For the 2014/15 financial year if you earned less than $34,488, you may have qualified for the government co-contribution. You can earn up to $49,488 and still potentially qualify for some of the government co-contribution. If you do qualify for the government co-contribution, it is worth contributing some after tax money to superannuation to get a guaranteed risk free return from the government.
- Salary sacrifice (for middle to high income earners): The tax rate for salary sacrifice contributions is 15%. Any one who earns over $37,000 per year will pay at least 34% tax and Medicare for every dollar they earn above this threshold and some have a marginal tax rate as high as 49%. The higher the marginal tax rate you are on, the more benefit you gain by sacrificing some salary to super. This is a guaranteed way to save tax and increase you net wealth. Of course, there are limits to the amount you can contribute to super and receive these generous tax concessions. For those over 50 the concessional contributions cap is $35,000, and for those under 50 the concessional cap is $30,000.
Increase your mortgage payments
This is a risk free way for conservative investors to increase their wealth. The average standard variable home loan rate (with a discount) is currently about 4.6% (NB If you aren't paying this you should give our mortgage broker Matthew Kerr a call). By paying extra off your home loan or placing the money in a mortgage offset account, you are effectively getting a guaranteed return of 4.6% at current rates. Paying extra off your mortgage and paying the loan down quicker also provides a cash flow buffer should mortgage rates continue to rise.
In conclusion, as investors, our returns no matter what asset class we invest in, are at the whim of a myriad of factors that are largely out of our control. However, here are steps we can take to increase our net wealth in ways that are not dependent on investment returns.
So take control of your wealth and contact your Hudson Adviser today for a consultation – If you are not certain you are getting the most out of your hard earned income and investments, then contact your adviser today! - Book your consultation online now or call and make an appointment on 1800 804 296.Read in full + comments 0 Comments
Do you have a
Ask our advisers now
'Dear Adviser' question?
Issues by month/year
- Adviser hints and tips (46)
- Budget update (3)
- Budgeting Tips (13)
- Centrelink update (3)
- Consider this (63)
- Dear adviser (7)
- Dear editor (1)
- Did you know? (23)
- Estate planning (1)
- Finance matters (22)
- Hudson haha (52)
- In the news (21)
- Insurance corner (18)
- Interesting Topics (36)
- Investing fundamentals (46)
- Let us help you (9)
- Property investing (57)
- Retirement planning (11)
- Share market update (50)
- Something different (23)
- Special Alert (4)
- Superannuation (37)
- Talking solar (1)
- Tax time (6)
- Weekly share market (1)
Search all issues
Enjoy reading the Hudson Report?
Let us know your views on our news.Contact Hudson Online