Introduction to Shares

Business is the art of extracting money from another man’s pocket without resorting to violence. - Max Amsterdam

 

Introduction to shares

Shares, stock, equity, whatever you call it; shares are an integral part of any investor’s portfolio. Most superannuation accounts are heavily geared toward stocks if you have balanced or growth options selected. A share gives you partial ownership of a company. When you own part of the company, you are generally entitled to part of the profits (dividends). Some stock have more voting rights than others (different classes) but for the most part, for each share you own, you have one vote on the outcome of where the company is headed. Easy.

So when you have majority ownership eg >50% of the shares, you effectively decide what goes on in the company. You can apply this to private companies, where there could be 2 shares, up to the biggest listed companies which have hundreds of millions of shares outstanding.

You can imagine that say a big bank like Westpac which has more than $100 billion market cap (the amount of shares on the market multiplied by the share price), even if you had $1 billion worth of Westpac shares (30.3 million by my estimations), you would only have 1% ownership of the company and its profits.

Most of the top 100 companies (ASX 100) are owned by investment companies and banks because, A – they have the money to splurge, but B – they are required to purchase these companies so that they mimic the performance of the top 20, 50, 100 etc companies overall. These are called indices, with the ASX 200 number and All Ordinaries (Top 500, making 98% of all market cap) the most common terms you always hear in the news. It is a number that reflects the overall movement of the top 200 / 500 companies – companies like BHP and CBA which make up a lot of the market cap for the top 200, contribute more to changes in the index than a smaller company.

Shares in Australia are listed either on the Australian Stock Exchange (ASX) or the Chi-X. ASX is by far the most popular and biggest exchange.

Why bother with shares? Aren’t they risky?

With risk comes reward. Think about it, why do companies need to pay higher interest to attract investors compared to government bonds? It all has to do with the higher perceived risk of companies vs a government.

Companies typically don’t pay out 100% of what they make to shareholders. Whatever they don't pay they use for working capital, paying down debt, but also it can increase the cash reserves that the company accumulates, much like savings that you and me do each week. So what’s left over is used by the company to grow and expand. If the company can grow the money faster than you can, it should be left inside the company to compound and make more profits. Companies are after all, designed to make profits. The biggest proponent of this is Warren Buffet. Other than the first time he paid dividends, (mind you, he regretted the decision ever since) he has always reinvested the profits within the company because he knows he can generate higher returns using the company than outside the company.

Performance of asset classes over the last 10 years to 2012

Since 1900, over a 20 year rolling term, there are only a handful of occasions where the returns on cash and bonds are higher than shares. If you look at 40 year periods since 1990, shares outperformed cash & bonds in every single period. Of course past performance is no indication of further performance, but with over 110 years worth of history, it is hard to ignore.

Ongoing stream of income

For as long as you hold the shares, you continue to enjoy the dividends and hopefully capital gains. Most large cap companies pay dividends twice a year, and so long as you hold the shares, you will continue to receive the dividends each time they are paid (assuming the company stays profitable and has profits to distribute).

Tax benefits – franking credits and capital gains tax (CGT) discounts

Franking Credits

The company tax rate is 30% and when businesses pay tax on profits, they then distribute profits to its shareholders via dividends. When individuals receive these dividends it would be unfair if they had to pay tax on these profits again seeing as how the business has already paid tax on these profits. This is the basis of franking credits.

At tax time, to account for the dividends, you include in the dividend income the amount of the dividend, but also the amount of the franking credit.

So my most recent Westpac dividend statement looked a bit like this:

Dividend per share: 98 cents

Participating shares: 200

Unfranked amount: $0

Franked amount: $196.00

Total Amount: $196.00

Franking Credit: $84.00

What I include in my tax return: $196.00 + $84.00 = $280.00.

Don’t worry. On your tax return there is an item called Franking Credit offset, which is equal to the sum of franking credits. Given the above example, it would be $84, assuming the above was the only dividend I receive during the financial year.

So if you had a marginal rate of tax of 30%, you would not pay tax on these dividends because the company tax rate is 30% and assuming this is fully franked dividends, it completely offsets the tax you would have had to pay.

If the marginal rate is <30%, then the investors are entitled to refunds from the ATO, if higher, say 45% marginal rate, then you would still benefit in that 45 – 30%, leaves 15% tax liability.

The above example has the total amount equalling the franked amount because there was no unfranked amount. Sometimes you may get a company which only has partial franking, eg 30% franked, as opposed to fully franked (100% franking credits). What determines the franking level of a company depends on the source of income and profits for the company and whether they paid enough tax to be entitled to pass on the franking credits to investors.

Also, we use the date that the dividend was paid to determine which financial year to include the income to.

CGT Discounts

Shares like many other assets are entitled to 50% discounts on the capital gains if you hold the shares for over 12 months. How this works is, for example you bought CBA and held them for 2 years. Hopefully you would have made a profit on these shares. Sold @ $75, bought at $55, profit of $20 each share times 100 shares is $2000 profit.

Gains that is reported in your tax return would be $2000 less the transaction costs x 50% discount, and that is your capital gains.

More liquid than property

Everyone knows how awesome property is as a wealth creating investment vehicle. You’ve heard it all the time about property prices exploding and how unaffordable it is. Well for property owners, this is just music to their ears. The only issue with property is that there is comparatively large transaction costs involved when buying and selling property. Stamp duty, legal fees, conveyancing fees, and so forth. Not to mention the time it takes to proceed with the trransactions, with settlement periods on average 6 weeks.

With shares? Every time you buy and sell you incur brokerage costs, about $19.95 for trades up to $10k usually. Shares trade under a settlement period of T + 3. What this means is that you need to fund the shares by 3 business days after the day you make the share transaction (or get the funds when you sell shares).

Won’t people think of the Shareholders!

If you can’t beat them, then join them. Whenever there is an interest rate move by the RBA, and the big banks don’t pass on the rate cut in full or even increase their rates independent of the RBA, their main excuse is that they have to balance the needs of their customers (their savers, mortgage holders and loan holders) and the needs of their shareholders who want the best return possible. So if you own part of the company, you own part of the record profits that banks always seem to enjoy, despite their “difficult trading conditions”. Hmm.

Difference between gambling?

Well with gambling, you’re either right or you’re wrong. If you’re wrong, you lose. Most of the time, you lose all of your bet. With shares, even if you’re wrong, you won’t lose everything. Sure it might go down, but if you’re confident in the company and its ability to generate profits, then it should recover in time.

You can also gamble with shares through speculating, but that is different from investing, as will be discussed below. Not a viable strategy in the long term in my opinion.

Basics

Buy (Long) and Selling (Short): Buying shares is also known as being LONG shares, where selling is known as SHORTING or being Short.  This is done either through a broker (middle man) or more commonly today – online trading (some options are listed at the end). You have 2 options when you are buying and selling. The market price, this would instruct your broker or online trading company to buy the shares at the current market price. You are guaranteed to have your order go through when you do the market price. Alternatively you can specify the exact price for the transaction to be done at.

A sale only occurs where the buyers and the sellers can agree on a price with which to do the trade. How the market is organised is that the Buyers of the shares will be prioritised first with the people willing to pay the highest will get priority. Then the sellers, the ones willing to offer to offload their shares for the lowest price will get priority as well. If you set the buy price too low or the sell price too high from what the current market price is, your trade may not go through.

Because of the fact that buying and selling incurs brokerage costs (generally $19.95 up to $10k worth of shares), i.e. a round trip would mean $40 down before you break even, it is important that your trades are big enough so that brokerage does not make up a large portion of the costs.

Let’s say you buy a parcel of NAB shares for $2000. Because of brokerage costs, the share price needs to be up 2% just to break even. Now if it were $10,000 worth of shares, then the shares need only advance 0.4% for you to break even.

Borrowing money to buy shares: Also known as buying on margin or using leverage. I wouldn't recommend doing it unless you really know what you’re doing and understand the full risks involved. Leverage will increase your profits during booms, but will exacerbate your losses if it should go down.

Dividends: With dividends, you can elect to receive it via cash to your bank account or via a dividend reinvestment plan (DRP). Cash is easy enough to understand, so I’ll skip straight to DRP. Most companies give you the option to reinvest the dividends through their DRP. You can elect to choose how many shares participate in the DRP (eg 50% of your shares, then 50% will be paid as cash), or full DRP plan. The price at which the DRP purchases the new shares is usually some weighted average price of the shares over a certain number of days chosen by the company. It is important to note the price as it forms your cost base for the dividends if you ever decide to sell them in the future.

Some advantages of the DRP is that it is an easy way for you to buy more shares in the company without brokerage costs. It will also buy more shares when the share price is lower, and less shares when the share price is higher.

A few companies even offer discounts to the market price as an incentive to choose DRP and stick it out with the stock.

For tax purposes, regardless of whether you take the cash or more shares, you treat it in your tax return the same. You treat it as if you received the cash, and do what was described above in the section for franking credits.

Dollar cost averaging: This technique involves buying shares regularly regardless of the share price. You don’t pretend to know when it is a good share price to buy at, so you will buy at both high prices and low prices, but keep at it long enough and you get to an average share price for a particular share.

When prices are high, fewer shares are bought. When prices are low, more shares are bought. You will then have ensured that you have not paid the highest price, but also not the lowest price either.

This also works if you buy some shares, and then it goes down. Nothing has changed for the company and you believe that it is still a worthwhile investment. You then purchase more shares at the lower price, thereby lowering your average purchase price of the shares.

Diversification: The idea around this is that you should look to have many different parcels of shares spanning many different industries so that if some industries go down, hopefully the others would have gone up (aka, not keeping all the eggs in the same basket). Should you suffer from big losses in one share, the hope is that the profits from your other shares will ease the pain.

Keeping records for tax time – Because of the tax implications and capital gains tax rules, it is important to keep accurate and up to date records of everything relating to shares. Keep a separate binder for all things share related. Some things to keep track of include:

·         date
·         price
·         which company
·         reason why you purchased it

Investing vs speculating

The first rule to remember is that don’t invest what you can’t afford to lose. Also, if you have a mortgage, owning shares could be an opportunity cost for you as it could otherwise be used to reduce interest on your mortgage. You will need to weigh up the benefits of diversification and expected returns to the cost of owning shares.

The second rule is that shares is a long term investment. Not as long term as houses, but generally you should be thinking a few years investment horizon. A really smart guy called Benjamin Graham, which incidentally happened to be Warren Buffett’s mentor in finance, once noted that during the short term, the sharemarket is a voting machine. In the long term it is a weighing machine.

In the short term, the sharemarket is very volatile. No escaping that. Prices seem to move independent of things that the company does or its earning potential. Some riots or uprising in Syria manages to bring the share price down. Some numbers for USA non-farm payroll come out better than expected. Share prices go up. Humans are invariably controlled by emotion and the emotion of fear has the potential to cause the sharemarkets to do crazy things.

This brings us to opportunities. If prices of sound, consistent, profitable companies get hammered for no fault of their own, then if you’re sure it will bounce back, perhaps it is a good time to get some of the action. In the long term, the market will go back to equilibrium, will reflect all available information, and share prices will reflect the value of the company and its future earnings capabilities.

One of my favourite quotes from Warren Buffett is:

“Be greedy when others are fearful and be fearful when others are greedy.”

Where do we start

I can't tell you what to buy, but can give you an idea of how to choose shares

Fundamental and value investing: Fundamentals pretty much implies what it means. We are looking at the insides of the company. The annual report, balance sheet, the income statement, etc.

Look at the various ratios, and the numbers, the economics of the business – does the business stack up? Good market position, hard for new entrants to get in? What about challenges that the business could face going forward. These are some of the questions that need to be looked at.

Evaluate shares as if you were evaluating a business. You are actually purchasing an ownership right of a miniscule part of the company.

Technical: involves looking at charts of the share prices and trying to extrapolate information from that. Don’t ask me how, I prefer looking at the fundamentals, but this is also something you can read up on if you are interested.

2 Books you can start with:

Peter Lynch – One up on Wall St.

(Beginner to intermediate)

Lynch proposes we look at investment opportunities closest to home. Look at successful businesses in your daily life for ideas. Huge lines at JB Hi Fi every time you go? Perhaps it is worth investigating further. Upon further investigation, JB Hi Fi looks undervalued – maybe now is the time to pull the trigger to buy. Is Myer always deserted? Maybe not wise to buy the stock

Alice Schroeder – Snowball

(Beginner level – biography on the life and investment habits of Warren Buffett, the world’s greatest investor, philanthropist and 3^rd richest person in the world)

3 Key messages:

•    Circle of competence – stick to companies that you can understand. Chances are if you don’t know what the heck a biometrics company does or how it earns its money, then it is unlikely you understand it well enough to have a good idea of investing or not
•      Business moat – does the business have something that gives it a competitive advantage, but also prevents other businesses from being able to compete.
•     Good value – Buffett is a huge proponent of getting value for his money and not paying more than necessary for a business. If a company has $50 million in cash reserves with no debt, and the whole market cap of the business is $48 million, then that could be something to look into. It could be that the business is facing some scandals, but that doesn't change the fact that it is being sold for less than the value of realisable cash!

Big players

All the big banks offer online trading for shares on the ASX. From time to time, they offer free brokerage up to $600 for a certain amount of trades for a certain amount of time.

Commsec (CBA) – the most popular and arguably the most user friendly. Their cash management account comes with a debit card making it convenient to spend your profits!
E-Trade (ANZ)

Westpac / St George

NAB

Disclaimer

Everything in this post is general information. I am not giving any recommendations of particular stocks nor have I taken your personal circumstances into account when typing this post. You should only use the information as a general guide and not rely solely on what I have posted, but make your own enquiries that are suitable to your needs.

Thanks!

Maximise every dollar, Minimise every expense

“Money is not the most important thing in the world. Love is. Fortunately, I love money.” 

– Jackie Mason

So, you've reduced your re-occurring expenses to the bare minimum. You want to do more. What else can you do?

Join up to the rewards programs at the super markets. 

They are free to join and yes they take years to get decent rewards, but scanning the card takes an extra second or two. They will often also send you coupons and other incentives to visit the store.

My personal favourite is the flybuys rewards program from the Coles/Westfarmers group of companies.

You can do an online survey every month, to get 1000 points. With 2000 points you can redeem $10 flybuy dollars that you can pay for your goods at Coles, Kmart, etc.

https://www.tellcoles.com.au

It takes 5 minutes to do the survey, so extrapolating that, you are actually making $60/hour once a month from doing these surveys. $10 free every 2 months in my pocket certainly beats using my own $10. Make sure you do it every month, put it as a monthly calendar event or do it when you get paid (assuming paid monthly)

  

Everytime you buy something, think to yourself if the short term satisfaction is worth the money. 

I like going out to eat with friends as much as the next guy and I'm happy to spend on occasions. What I don't do is make it a habit to go out 3+ times a week and eat out. I'm also less likely to eat out if it is just myself. Yes, the momentary satisfaction you get when you bite into that delicious burger and chips is so gratifying, but that only lasts the 10 minutes that it takes to down the food. After that, the remorse that is felt is as stuffing as the food in your belly. The remorse from eating junk food, but also the remorse from spending money un-necessarily when you have food at home and the potential to save money. 

The money that you save gives you long term enjoyment because of the compounding effect money has. This $10 you didn't spend generates 10% return this year, then 10% next year, and so forth.

Get a credit card, but never spend a cent in interest.

A lot of people are scared to get credit cards. They think they have no self control and will just go crazy spending on anything and everything. Well let me just tell you this. Everything in life requires self control and dedication. We would all go over the speed limit on a clear road if we could, but we have to use our self control for the safety of ourselves and others. We need to rein in our impulses with credit cards so as to also stay safe - financially.

I have 3 credit cards - all with a different purpose for a total combined limit of over $20k. My spending habits are the same irrespective of how much my limit is. I spend like a guy with a limit of $200, not $20,000. Since having a credit card at the age of 18, I have paid total interest of $0 on my cards.

There are many free ones out there - why pay an annual fee when you don't have to?

My personal favourite is the 28 degrees credit card by GE Money. No annual fee, up to 55 days interest fee, and the biggest draw card: no international purchase fees. Normally, your usual bank will charge 3% of the purchase price if you buy from overseas. With 28 degrees, no fee AND also very favourite exchange rate.

 So you must be thinking, why bother with a credit card if I can just use cash - and it is easier to budget? Well. It all goes back to self control again.

•  It is actually easier to keep track of your expenses if it is all itemised and dated on your statements, so you can look back and see where the money has been going. This is easier to do than keep daily expense tallies on your phone
•  Up to 55 days interest free. Every company seems to offer this these days. TAKE ADVANTAGE OF IT. The money on your credit can be sitting in your savings account, first home saver account, your offset account during the interest free period. Once your period is up and statement is due, pay just before the due date. RINSE AND REPEAT. This is perfect for expenses that you would have had to incur anyway. eg Quarterly train ticket, rego, insurance. Seriously, sometimes my bills come to $2k in a single month. I know I would much prefer to hang onto $2k in my offset account, than having my balance immediately be deducted $2k. Interest is calculated daily but compounded monthly. Remember that!
• Many cards offer many complimentary insurances when you purchase it with your credit card. I recently signed up to Citibank Platinum credit card, usually a $199 annual fee, but signed up to a promo that gives free annual fees for life. It offers free travel insurance, free purchase price insurance, free extended warranty.
•  Fraudulent / Incorrect deductions are infinitely easier to dispute with credit cards compared to debit cards. Handy when you have the monthly direct debit coming out of the credit card. Think about it, when its the credit card company's own money, they will move mountains to fix up the issue. When its money from your own personal account, what incentive do the banks and finance institutions have to fix it up straight away?

Do note though, that when applying for credit, lending institutions will take into account your credit limit, not how much you owe, to calculate your serviceability to the loan. You can however close your accounts prior to applying for more credit and problem solved.

Examine where your money is going each month

Some people I know go to the movies at least once a week. In a month, that is at least $40 (assuming you use coupons) and more because you need drinks, snacks, dinner afterwards for the day/night out. Not only is the movie experience dulled because you go so often, but there's just not that many movies worth forking money on. There is a thing called the internet where you can entertain yourself for free. Instead, borrow some blu-rays from friends, go visit some people once a while.

Alcohol and Smokes - may as well pour money down your throat, because that is what effectively happens. The single biggest money trap for Australians. $10, one glass of Asahi in the city pub. Yep.

I'm not against going out having a good time, but don't make it a weekly thing where you go all out and lose track of how much you've spent. It is better for your liver and your wallet if you do it occasionally.

Smoking - there is absolutely nothing you can say to convince me that it is a good idea. Bad for your health. Bad for your breath. Bad for your wallet. Is there any surprise the the government taxes the hell out of it? It is after all an inelastic demand product. No matter how much the prices go up, people will still buy it and pay through the nose for it.

"How long have you been smoking for?" the colleague asks.

"Thirty years," says the smoker.

"Thirty years!" marvels the co-worker. "That costs so much money. At three packs a week, you're spending $3120 a year. Had you instead invested that money at a 9 per cent return for the last 30 years, you'd have $460,000 in the bank today. That's enough to buy a Ferrari."

The smoker looked puzzled. "Do you smoke?" he asked his co-worker.

"No."

"So where is your Ferrari?"

Don't be fooled by "sales"

Read up on a thing called the anchoring effect. Basically, something you want catches your eye. Be it a nice dress, new jacket, new electronic gadget. The price tag shows $500, but then you hear there is a sale and it is now $320. Wow. Must buy it. Nowwwww.

 Check out this interesting article on the subject

http://youarenotsosmart.com/2010/07/27/anchoring-effect/

Don't be afraid to chase the highest interest rate or sign on bonuses

Banks and financial institutions are not unlike other businesses that offer promotions to get customers in the door. When there is more competition, that means more interest from them in getting your attention.

Don't get complacent - always be on the lookout for new deals and promotions from the banks.

The big 4 banks offer ridiculously low interest rates, check around the on-line only institutions to see what rates they are offering. I have had accounts with

• Virgin Money
• St George
• ING Direct
• Rabo Direct
• Suncorp
• Bankwest
• UBank

just to name a few

When the 4 month introductory high rate expires, look for a new high rate. Banks will often offer sign on bonuses, so when you create an account and deposit a certain amount they will credit your account money after a certain time. If they are fee free accounts, what do you have to lose from joining up and having it open? 1 hour of your time is certainly worth $50.

In this regard ING Direct have been the most generous. When I signed up, they were offering $120 in bonuses for creating the account and doing some transactions, then $250 for referring 5 friends to the bank. This is real actual money, not fake money! Always be on the lookout and ask around, ask your friends what they recommend, ask your work colleagues - you'll be surprised.

It's all mind games

“An investment in knowledge pays the best interest.”

– Benjamin Franklin 

Savings Habits and the Savings Mentality

The following are just some small things you can do in your daily life that can help you in your path to financial enlightenment. Some are harder than others, some take much longer than others, but all can be achieved by anyone that is willing to change for the better.

Do and implement the easiest tasks first. This is called the low hanging fruit, because of how easy it is to do and it can give you a lot of result for little effort.

Out of the 2 ways to increase your savings (more money coming in, or less going out), it is far easier to control what is going out.

1. Get to work early and eat the free breakfast (toast, cereal, milk, fruit etc).

Key Message: Utilise the things around you

Not only will you show your boss/manager/ team leader that you are a committed worker by coming in early, you will save so much money each day by turning up a bit earlier and eating the free food, and making your own coffee. Coffee and toast outside is about $5 right?

$5x 250 working days a years = $1,250. How many more hours of work do you have to do, to recoup that amount?

You’re thinking – Kai, you are out of your mind. Even 20 minutes earlier to work means 20 mins less sleep. Well, do you really notice any difference in how alert you are with 20 minutes extra sleep?

If you plan to arrive early at the office, you generally can make it on time to work even if there are delays on your train or other circumstances, because of that time buffer you have created. You are also known in the office to be dependable and punctual, which never hurts ones’ reputation.

This plan is very good, as it can BOTH increase the inflows (potential raise) and also stem the outflows (saving money spent on food). DOUBLE EFFECTIVENESS. Oh Yeah.

2. Think of expenses not in monetary terms but in terms of how many hours are needed to work to afford it.

Key Message: Don't delay retirement for too long, you workaholic!

Okay so daily morning coffee $3 x 5 times a week is $15. Let us assume this makes up 80% of your hourly after tax pay per hour. 48 minutes of your life each week is consumed by your need for coffee.

That means your retirement is delayed by 48 minutes EVERY WEEK that you spend $15 on coffee. Over a year that is 2,304 minutes or 38.4 hours of extra work required to afford the morning coffees.

3. Think of money, not just in the present, but in the future value of money.

Key Message: Why work yourself, when your money can do it for you?

When most people think of money, they think in pure dollar terms. This cash can buy me that dress or game on sale.

In economics there is a term called opportunity cost, which measures the real cost of one decision by forgoing the other path.

So that purchase of the $2000 LV bag not only includes the hard earned cash you outlaid but the opportunity cost of having that $2k generate compound interest or other returns for you. The opportunity cost of you not staying back late to do the overtime is the money forgone and management seeing you in a good light as a team player.

All the potential money savings can be used to MAKE MORE MONEY or at least cost you less money. Shares, property, online savings accounts. These can all make money for you if you put aside some money. It sounds silly, but it is so true. Money can make more money.

The $15 a week savings you find, can be compounded, month after month, year after year. $100 in your hand could potentially be worth $300 in 5 years time. Obviously the rate of inflation plays a big part of this, so it is also important to find ways to protect your capital in the event of high inflationary environments. 

Think about this - $500 in my offset account saves me interest this month, but it also saves me money again next month, so and and so forth. The interest on my loan would be compounded by a lot more if I had not put that money there. You don't need me to repeat the power of compounding over a long period of time.

To sum up:

These things, when viewed individually may make a slight difference in your finances and views on money. But if you implement them regularly, and fastidiously, you will end up seeing results.

As your savings build up, use that capital to make even more money.

First Home Saver Account (FHSA)

"Personally, I tend to worry about what I save, not what I spend." - Paul Clitheroe

Update: May 2014
As of the 2014 Federal budget, the government has announced they will be closing the FHSA to try to get some budget savings. Those that created their accounts before the announcement can still get their bonus for this financial year, but the account will automatically lose the benefits and withdrawal conditions from 2015. (the previous 4 year holding rule)

For those saving up for a house and have a few years (at least 2 – 4+ years) to save up - you cannot beat this savings account in terms of high return and low risk profile.

I highly recommend you look into it. This account is so good that I am making a separate post for it.

You have to be sure you will buy property sometime down the track, it doesn't have to to be in 4 years, if you need more time, that's fine, however note that you can't touch the money after the qualifying period unless you use the funds to buy your first property. If you don't, the money will be sent to your superannuation balance.

§  This is separate from the First Home Owners Grant. If you are eligible for that, you still get that in addition to the earnings on this account.

§  You will get a guaranteed 17% interest for every dollar you put into the account up to $6000. The maximum government co-contribution is $1020 for each financial year (indexed, so the figure will increase over time). This year, if you put in $6000, the government will add $1020. You can contribute more if you like, but only the first $6000 is eligible for the government’s 17% co-contribution.

Obviously you can put in more, its just that the initial $6k will get the special 17% return, but this is each financial year. $6k should be the bare minimum.

§  The government contribution will be received in the financial year after you lodge your income tax return and the FHSA provider files its reports with the tax office.

§  You still get interest from the bank on top of the government 17%.

§  15% tax applies to the interest or growth of the account, but not the government contribution part.. Tax is paid by the account provider.

§  You must keep the account open for at least four separate financial years (they don’t have to be consecutive years) and contribute at least $1000 each year before withdrawals can be made. 4 financial years does not mean 4 years. It can theoretically be 2 years and 2 days if you time it perfectly. For example.

Year 1: Deposit $6k 29 June 2013

Year 2: Deposit $6k 29 June 2014

Year 3: Deposit $6k 29 June 2015

Year 4: Deposit $6k 2 July 2015

Total real world time elapsed 29 June 2013 - July 2015 (just over 2 years)

When you actually deposit the maximum amount that can is eligible for co-contribution, whether right away or all of it just before the cut-off period depends on your marginal tax rate.

If you were on a low tax rate, say 15% or less, then you may be able to get higher interest rates outside of the FHSA, such as online savings or shares, and then dump the earnings into your FHSA before the cut-off. But what if your marginal tax rate was 40%. If you received 7% interest from online savings, your after tax return is actually (7% x 0.6) = 4.2%. If the FHSA account provider was paying 5%, then if you put the funds in your FHSA, your after tax return is (5 x 0.85) = 4.25% - higher than what you would achieve outside of the FHSA environment. In this case it makes sense to deposit your funds periodically throughout the year.

Of course, it is easier said than done to consistently save money. Some may find it hard to save a large amount of money as it is too tempting to use. In that case, I would recommend you periodically set aside money from each pay packet to be sent to your FHSA. Divide $6k or however much it is by the frequency of your paypacket to gauge how much you should be setting aside for savings. eg $6000/12 monthly =$500/month for those that get paid monthly.

Purchase first property 10 July 2015 and able to transfer 4x $6k deposits + 4x $1020 (even more due to it being indexed each year) + 4x interest from the bank for each of the 4 years.

§  The maximum account balance is currently $90,000 (including any government contributions, interest earned, your savings, etc). The figure will be indexed over time and can increase in $5000 increments. Once you hit the max cap, you cannot deposit anymore. $90k is 20 deposit on a $450k house/unit, but you need to factor in any potential stamp duty and other legal fees.

§  You can only withdraw money to buy or build your first home. If you close the account for another reason, its balance is automatically transferred to super. Withdrawals after four years to buy a home, or transfers to super, are tax-free. You cannot make partial withdrawals, it has to be the full balance.

From the ATO website:

Income year	Contribution threshold	Maximum government contribution
2013-14	$6,000	$1,020

Income year	Account balance cap
2013-14	$90,000
2012-13	$90,000

Still not convinced?

Here is a very simple example.

The following graph is from NAB’s savings calculator

Assumptions: Start off with $500 right now. Put this in online savings. For the next 5 years (that is 60 months), we are going to save $500 a month every month for 60 months, and let this earn interest at 5% compounded monthly.  Total cash deposited $30,500, the rest is the interest we made. At the end of the rainbow, you have saved $34,644.72. Not too shabby right? However this is before tax, so you will have to minus out the amount you paid in tax as well over the 5 years.

Now, what if this was the FHSA?

Again, $500 initial deposit, ongoing $500 a month, every month for 60 months. Total deposit again $30,500. The difference this time is that for each financial year you put in the $6k deposits, the government will co-contribute $1020 (indexed each year). That’s at least an extra $4080 over 4 years, even more because you earn interest on the contributions too!

So lets just add up the contributions made to the account, NOT EVEN ANY INTEREST we made on the account. $30,500 + 5*1020 = $35,600. Without any interest being even factored into the equation, you can see that the FHSA has eclipsed the savings of the ordinary savings account.

Change your mind? What were you thinking? Well there is a Cooling-off period

Each first home saver account comes with a 14-day cooling-off period. This means you have 14 days to change your mind, close your account and get any contributions back. In this circumstance you are still eligible to open another first home saver account in the future.

First home owner grant

You can still apply for a first home owner grant if you decide to open a first home saver account. However, being eligible for one doesn't automatically mean you're eligible for the other - there are different rules.

More info: http://www.ato.gov.au/Individuals/First-home-saver-account/

Some of the FHSA account providers include: (Interest correct as of Dec 2013)

IMB 3.82% interest

http://www.imb.com.au/personal-everyday-banking-what-we-offer-savings-accounts-first-home-saver-account.html

ME Bank 3.25% interest

http://www.membersequitybank.com.au/personal/savings_accounts/first_home_saver.html

Hume Building Society 2.5% interest

https://www.humebuild.com.au/personal/accounts/saving-accounts/first-home-saver

AMP 2.5% interest

https://www.amp.com.au/wps/portal/au/AMPAUProduct3C?vigurl=%2Fvgn-ext-templating%2Fv%2Findex.jsp%3Fvgnextoid%3D3cef7fad10112210VgnVCM10000083d20d0aRCRD

Total List of Approved FHSA providers as per APRA

Under the legislation FHSA providers could commence offering FHSAs from 1 October 2008. Authorised Deposit-taking Institutions and Life Companies that are providing FHSAs (according to their websites and by contacting their customer service centre) are listed below.

·         AMP Bank Limited - ABN 15 081 596 009

·         Australia and New Zealand Banking Group Limited (note) - ABN 11 005 357 522

·         Big Sky Building Society Limited (note) - ABN 30 087 652 079

·         Commonwealth Bank of Australia (note) - ABN 48 123 123 124

·         Community CPS Australia Limited (note) - ABN 15 087 651 143

·         Credit Union SA Ltd - ABN 36 087 651 232

·         Defence Bank Limited (note) - ABN 57 087 651 385

·         Hume Building Society Ltd - ABN 85 051 868 556

·         Hunter United Employees' Credit Union Limited - ABN 68 087 650 182

·         IMB Ltd - ABN 92 087 651 974

·         Members Equity Bank Pty Limited - ABN 56 070 887 679

·         MyState Financial Limited (note) - ABN 89 067 729 195

·         Police Financial Services Limited - ABN 33 087 651 661

·         Railways Credit Union Limited - ABN 91 087 651 090

·         Teachers Mutual Bank Limited - ABN 30 087 650 459

·         The Police Department Employees' Credit Union Limited - ABN 95 087 650 799

·         Victoria Teachers Limited - ABN 44 087 651 769

·         Wyong Council Credit Union Ltd - ABN 29 087 650 897