When you save, you really save

New blog post - testing out Microsoft's new Sway

https://sway.com/Gv_rp2jYHLAZRzGA

Negative Gearing - What is it all about?

Negative Gearing

"Money frees you from doing things you dislike. Since I dislike doing nearly everything, money is handy. - Groucho Marx"

You'll often hear about rich investors utilising negative gearing to purchase investments (such as property or shares). Negative gearing is simply getting less income from an investment than what you incur in expenses. The most common example is the income you get from property (i.e. rent) is less than the cost of holding the property (includes interest cost on the loan, strata, and outgoings). Keep in mind these expenses are accounted for in your tax return and reduces the tax you will need to pay. 

On the face of it, it sounds strange. Having an investment which ultimately is losing you money. Let's say if your rental income is $400 a week, which is about $1732 a month. During the same month, your interest charges is about $2000 a month. For simplicity we will assume no other expenses or outgoings for the time being. We can see that the deficit is $268 a month ($2000-$1732) which we have to pay out of our own pocket.

So in your tax return, you declare the $20,800 in rent that you received during the financial year. Expenses, for simplicity, would be $24,000 resulting in a yearly loss of $3,200.

Now, let's say your taxable income from salary/work is $60,000 a year. Adding the $20,800 rent, but then deducting the expenses of $24,000, results in taxable income of $56,800. So we will pay tax on the $56,800 at your own marginal rate (you'll immediately see we will pay less tax as we have lower taxable income). Effectively we save tax of $3,200 times your marginal rate. At 2014-2015 rates, this is on the 32.50% tax bracket, so $1,040 tax reduction is obtained. The net cost of this investment is $3,200-1,040 = $2,160 a year.

This is the main reason why investors have a big advantage over someone that buys a house to live in, also known as the principle place of residence ('PPOR'). While the investor can deduct the interest expense they incur in their tax return, the PPOR purchaser does not have this same benefit. This is also a reason why interest only loans appeal to investors. They can have the maximum deductions on their tax return due to maximising the interest they pay. They want to maximise tax deductible debt, while minimising non tax deductible debt such as the one on the PPOR. 

Now, there's a few scenarios that can occur over time:

After a while, 2 things occur which should hopefully mean your once negatively geared investment becomes positively geared. The first is that as your loan balance reduces, your interest payments to the bank also reduce. The second factor is that rents are expected to increase over time to reflect inflation and market demand for the area. These factors can mean the income you receive from the investment is more than the expenses you incur from having this asset in your possession.

The return on investment has 2 sources of value – one is the income stream from the rent, and the second is the potential capital gains from the increase in value of the property. In a few years, the investment may still result in yearly losses for you. However, as the Sydney property market has shown, property prices can increase significantly over the course of a few years and this has been the case for pretty much every suburb in the state. Heck, most of the country has experienced surging property prices. The ‘gamble’ is that property capital gains will outweigh any loss during the waiting period or that the income stream will increase by enough.

• o   Let's say after 5 years, your property has increased by $250k. Assume that during this time the rent hasn't increased as much as the home value so chances are your property may be still negatively geared
• o   If we continue with our example, with yearly after-tax expense of $2160 a year, then over 5 years, we are $10,800 out of pocket due to the investment
• o   Should we decide to sell, the after tax profit at year 5 would be $250k increase in value, less tax on the discounted capital gains balance (‘CGT’), less the $10,800 we incurred over the 5 years. A very simplistic explanation of how CGT is calculated is that it is the difference in value when we sell the investment and when it was purchased. When it is held for over 12 months, you pay tax on 50% of the gain at your marginal rate, instead of the total difference.
• 
  

Now, here’s the kicker. You don’t even have to actually SELL to unlock the value from the investment when it has increased in value. What many people do is refinance their existing loan to borrow more money. The value of the property has increased so the bank is generally willing to lend more to you. Where previously you borrowed 80% of the original value, if your property did increase by $250k over this period, you then can borrow up to 80% of the new value which the bank will decide based on a valuation. If we use an original value of $500k and new valuation of $750k, the amount you can borrow is up to $600k (which is 80% of $750k). If you use these funds to pay out the old loan, you have potentially $100k to play with – to contribute to your next investment.

Why I believe property prices will continue to increase:

1.     Simple supply vs demand. Majority of people want to own their own place. There is only limited amount of houses/land in Australia in the desirable suburbs, so you will have to compete with others to secure the place you want. Sure – there’s heaps of apartments being built, however they too are limited in how many can be built in one location and apartments may not suit everyone eg, families.

2.     As the population increases, demand for property increases which places increased pressure on prices. Why will the population increase? Well Australia is a fantastic country – we always get net increase in migration. People live longer.

3.     Property has done exceptionally well for investors and PPOR owners alike, and there is nothing to suggest to the good times will stop anytime soon. People stick with what works and what they consider to be safe.

4.     A lifetime of rental is not practical or smart. You’re effectively paying someone else’s mortgage and a prisoner to their choices. If you’re still renting and approaching retirement age, with minimal savings, you’re gonna have a bad time. If the pension or personal savings doesn't sufficiently cover the ever increasing rent and outgoings, you will have to supplement your income via work or other money making ventures, when you should really be looking forward to your retirement

Always be prepared when shopping at Woolworths and Woolworths group companies

This post will discuss the various ways people can obtain groceries from Woolworths stores and from Woolworths online at a 5% discount. You have up to 12 months to use the value of the card before it expires!

EDIT** 06/01/2015 - only Cash Rewards has it now since Groupon and Woolworths has stopped offering the 5% off.
Currently I know of 3 ways to obtain the 5% discount eGift cards as follows:

• Via Groupon - http://www.groupon.com.au/deals/national-deal/gg-woolworths-limited-8/719574565
• Via Woolworths cards themselves - but can only purchase the discounted cards until end of Dec 2014 - http://everydaygiftcards.com.au ** Please note, once you have added the card to your cart, you need to enter the promo code WOW5 to get the discount **
• Via Cashrewards - https://www.cashrewards.com.au/search/woolworths

Note that physical delivery of the cards cost $5.50, however you can get eGiftcards which are exactly the same, but a printed voucher, for free! Once you have made payment, it will take a few hours, and then they will email the giftcard to your chosen email address.

How to use:

- In store tell them you would like to use eGiftcard. Then enter the shortened account number in the keypad, along with the PIN, and that's it.

- Online - input the full account number and PIN that is shown on the giftcard

Where you can use it:

• Woolworths Supermarkets
• BIG W
• BIG W Vision
• Caltex Woolworths
• Masters Home Improvement
• BWS
• Dan Murphy's
• Cellarmasters
• THOMAS DUX Grocer

Final Tips:

1. You can generally buy these giftcards using your credit card without surcharge and obtain the points from your CC spend. Then at Woolworths / Big W, combine it with the everyday rewards, and get more points for a spend over $30
2. Always have a printed copy in your wallet so you will always save at least 5% off everything at the participating stores.
3. Don't buy too much that you can't use it all within the 12 months. 
4. Always top up Opal at Woolworths  - 5% off and rewards :) To see if your closest Woolworths allows Opal topup, visit http://www.retailers.opal.com.au/list.html and type in Woolworths

Happy shopping!

Regards,

Kai

Opal Hacks (Sydney, Australia)

"The successful warrior is the average man, with laser-like focus" –Bruce Lee

Since my last Opal card post I have fine-tuned and honed in my money saving skills in relation to this system. I've learnt new tricks from others so I only feel it is fair I share this with others. 

(http://smarterwithmoney.blogspot.com.au/2014/04/opal-card-sydney-nsw.html)

For those of you that have not had a chance to read up on it yet, I suggest you have a read of the original post to give you more context on this post.

Everyone can save using the Opal with these hacks. They aren't even really hacks because they are perfectly okay and within the rules of using the card. According to a recent SMH article, the transport minister was happy for people to exploit it. Who am I to argue with the minister?

Ms Berejiklian said she wanted people to use more transport and was glad they were finding cheaper ways to travel.

"I love hearing people tell me 'I am catching transport more now because it feels like I am not paying for it' ", the minister said.

http://www.smh.com.au/nsw/transport-minister-backs-commuters-who-beat-the-opal-man-20140908-10dv5f.html

The only cost is your time, so if you are patient enough, then be prepared to have additional cash in your account each and every week you travel to work.

I estimate that I spend about 1 hour 40 minutes doing my Opal hacks each week, but I save about 40% off my weekly Opal trip. Some of you might think 1 hour 40 minutes is a complete waste of time and I'm completely out of my mind - and you might be right. BUT if I can retire just that tiny bit earlier, I'm going to try to do it!

Let me try to defend my actions - Most of the 40 minutes involves walking and or waiting for the trains/buses. The 1 hour part is all about waiting for the offpeak period on Mondays, which start after 630pm. I'm not the fittest person around by any means and I have little motivation to exercise normally. Opal is a great way for me to get some exercise, but also save a lot on an unavoidable expense each week. To pass the time, I am often walking around and exploring the great city of ours. Just this week I estimate I would have clocked up 90 minutes worth of walking exercise alone.

Without further ado, here is the a simple plan that you can copy to maximise how much you can save.

Monday

1.     Pre-7am tap on: Off Peak

2.     Lunch tap on: Off Peak

3.     Lunch buddy tap on: Off Peak (ensure >60 minute gap between trips)

4.     Pre-530pm Bus: One or 2 stops (this actually costs $2.10 - cheaper than any train)

5.     After-630 Off Peak (ensure >60 minute gap between trips)

Tuesday

6.     Pre-7am tap on: Off Peak

7.     Lunch tap on: Off Peak

8.     Lunch buddy tap on: Off Peak (ensure >60 minute gap between trips)

Voilà! 8 Trips in time for Tuesday evening home trip. Enjoy the rest of the week free. The further out you live, the more you can save.

Once you have your 8, why not take a leisurely ferry trip out on the harbour? Take time out and smell the roses, - enjoy the beautiful city we are lucky to live in.

How the lunch time buddy system works:

If you work close by to the train station and can go to lunch times that are different from your colleague, you can assist each other in getting an off peak trip.

Tap on using your card to go to your destination. Tap off using your own card

Return to your original destination by tapping on using your friend's card. Remember to tap off using their card as well.

During their lunch time, they will repeat the favour :)

Maximise the savings:

• Use the off peak times for trains to save 30% off your fares (Travel outside of the times 7-9am & 4-6.30pm). The bosses will think you're super hard working by coming in early and staying back late!
• Lunch time trips
• Lunch time trips with buddies
• Try to fit in as many short trips as possible. Catch a short bus trip if you need to
• If you go from station A to station B, but then walk to another station that is NOT B and tap on, if you go to station C, it will count as 2 trips, while bypassing the 60 minute transfer window. e.g. Station A > B. Then walk to Station C > A will count as 2 trips apparently. DOES NOT work for city stations, so don't bother trying for any city circle ones, it is meant to only work for suburban stations
• $15 is the maximum amount you will be charged per day on the Opal system as an adult. You can use this to your advantage by clocking up enough trips to hit the $15 cap. Let's say that your 6th trip put you at $14.85. The last trip you make that triggers this cap will count, but you will pay a discounted fare - saving you even more! In this example, the 7th trip will only cost $0.15 as you don't pay any more than the daily cap. I can get 7 trips for $15 using this method if I get all off-peak fares. 
• If you recharge your Opal card at any Woolies that allows you to top up your card, you will earn 1 Qantas Frequent Flyer point for every dollar you top up over $30. It is then in the best interest to top up less frequently, and in bulk once your balance gets low. You also get the fuel discounts!
• If you have a paywave % cash back rewards on your transaction account, you can get discounts by using paywave at Woolies top up

Superannuation in Australia - Why you should care about your super balance

"It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong"

 - George Soros

For most people under 50, superannuation is equivalent to a pot of gold that is not able to be touched until they are retired and in their 60s. Currently the rate stipulated by the government for compulsory super is 9.50%, with the view to increase by 0.5% each year from 30 June 2018 until it reaches 12%

Because of this extreme long term view, especially for anyone just starting out in their career or only a few years into their career, superannuation can seem like the last thing they should be concerned about. Admittedly, at the young age when you need to start thinking about responsibilities - buying a home, getting married and having a family of your own - super is generally not on the top of your priority list.

However, small changes now while you are young and have a long term horizon can significantly impact your ending super balance and thus your quality of life during your retirement years. It can mean the difference between holidaying every 6 months to exotic locations, or eating baked beans 5 days a week because the pension doesn't stretch far enough.

Assuming a person has gone to university for a standard 3 year degree, they enter the workforce around 21 or 22. If someone retires when they reach the age of 67, then that is 45 years worth of super contributions and your pot of gold has been compounding for 45 long years.

Let's say you're 25 and you decide to get serious about your super. At 25, you have probably 40 years worth of super contributions and work years in front of you. Check out the 2 graphs below to see just how much 1% difference compounded over 40 years can yield. We compare the difference of $500 starting balance, and monthly contributions of $500 each month over 40 years.

The difference is simply amazing for 1%. The money difference of getting a 6% return instead of 5% return is $234,534.80. Having that extra 234k, means that during your 20 years of retirement, you can draw income of over $50k a year. Not bad right?

$500 initial balance, with $500 a month in super contributions from the employer. Assuming 40 years of compounding at 5% growth rate

$500 initial balance, with $500 a month in super contributions from the employer. Assuming 40 years of compounding at 6% growth rate

So - what can you do to ensure you get that extra 1% return?

What I recommend, and what a lot of financial advisers recommend is that you structure your super in such a way that during your earliest years, you set your super investment option to the most risky option, and as you get older, slowly step down and change it to more risk adverse options.

For example:
20 -30 years old: Highest risk-highest reward option (Growth). Invest in property, Australian Shares, and International shares
31-40: Slightly less risky, but still growth portfolio. Still property, and shares, but more allocated to cash and other safer options
41-50: Moving away from shares and property and more towards annuities and less risky options (Balanced).
51-70: Most, if not all the money towards cash and the lowest risk options (Cash).

Your own super fund might call it different names, but in general they should be similar in name/type - they will definitely be sorted by risk profile of the portfolio allocation.

The reasoning behind this is quite simple: During your earlier years, you can afford to take big risks - you have 40 years where the money will be constantly compounding and you want the highest reward possible, so you'll inevitably assume the highest risk. But that is okay. It's better to have 70% chance of getting 6%+ return than a 100% chance of getting 3% return when you are in this age bracket. As you approach retirement age, it is more important to preserve your nest egg, so that is the reasoning behind moving towards cash as you get older. You simply cannot afford to have wild swings when you're that close to retirement as you don't have that same luxury of a long time horizon.

If you think you can predict the market and change to high risk during booms and then cash just before recessions, then you should be actively trading the markets and not worrying about super so much, because clearly you can predict the future. For the rest of us that can't predict the future and can't time the market, it makes sense to adopt the life stages approach as per above. During good times, you will buy less units with each contribution, but during bad times, you will buy more units. Overall it will even itself out over time.

Below is a screen shot of my super investment. I have it invested in the high growth option, which is the riskiest but also the highest chance of above average returns when the market is performing well. I am in the first age bracket and I have heaps of time to weather the storm in terms of the ups and downs of the stock market.

You'll notice from the pie chart, that my selection of this high growth super option has meant that my super fund has allocated less than 1% of my super portfolio into cash or fixed interest. It is almost completely made up of shares and other investment options that yield higher return than simply keeping the money in the bank. Over the last 12 months, I have been fortunate enough to enjoy over 10% return using this structure, and finger crossed that this rate of return can continue for the long term.


There are a few other things about super that not everyone may know about - one of the most important facts is that you can salary sacrifice additional super contributions at a reduced tax rate of 15%. I'm not going to go into specific details as these rules and thresholds are constantly changing - but know this; super is treated favourably if you are on the highest tax brackets. Why else would they cap the amount you can contribute at the concessional tax rate?

Also for those on lower incomes, such as students or part time workers, you can take advantage of the super co-contribution payments. Basically if you are a low or middle income earner, and make personal after tax super contributions, the government will make a co-contribution of up to $500 automatically and for free when you lodge a return. You just need to earn the money from a business or employment and earn less than $48,516 and less than 71 years old. For example, to get the max $500, you would deposit $1000 in your super after tax, and have to earn $33516 or less.

see https://www.ato.gov.au/individuals/super/in-detail/contributions/super-co-contribution for more info on the co-contribution.

Finally, one last thing to remember: if you change jobs and subsequently change your super fund, make sure to consolidate all your different super funds into the same fund to avoid paying unnecessary fees which can eat away at your profits/returns. On that note: if you had a choice of funds, look for those that suit your needs but also charge lower fees. It will certainty impact your ending balance if the compounding period is long enough.


Disclaimer: While every effort has been made to ensure all the information in this post is correct, you must not rely on it to make a financial or investment decision. Please make your own further enquires into this or consult a financial planner professional who can take into account your personal situation and investment needs. Everything above is general in nature and not a recommendation to proceed with a particular investment strategy.

Rainchecks - An easy way to save money

“While money can't buy happiness, it certainly lets you choose your own form of misery.” 
― Groucho Marx

Have you ever gone to the supermarket or store when they have a good sale on and found that what you were looking for has been sold out and there is no stock left at all?

It feels crappy because (A) you wasted time going to the store and (B) you couldn't buy what you wanted at the cheap price.

Well that is when 'Rain-checks' come in. Not everyone may know what a rain-check is, so I am here to explain it briefly. 

As you can tell from the picture above, a rain-check gives you the opportunity to purchase the products that were on sale but sold out, at any time within 12 months, or however long the store stipulates. The rain-check above gives me the option to purchase up to 6 quantity of 4 pack Red Bull 250ml cans for $4.99. (FYI - this 4 pack usually retails for twice as much, so I will stock up when I need that additional burst of energy for study or overtime at work) - works out cheaper than a cup of coffee!

This is handy because when the product is not on sale, there is usually a lot of stock available for you to purchase - now with the rain-check you can purchase at your leisure and at the sale price point. This is also handy if you don't have the money right now, but wish to purchase at the lower price point later on perhaps, and you want to lock in the savings.

Some sales may state no rain-checks due to the nature of the sale and if the store wants to clear out old stock. In these cases, the prices are not to be replicated later on and you cannot ask for a rain-check. 

Next time your desired product is on sale at the stores, why not ask the front counter if you can get a rain-check for the product at the sale price. 

Enjoy! 

Freebies! Oh and credit reports

“The best things in life are free. The second best things are very, very expensive.”

― Coco Chanel

This brief post will be about freebies but more generally grabbing the things in front of us when the opportunity presents itself. Why do I have such a fascination about freebies? Probably because I'm slightly insane, but I think just having something for free is very tempting to me. I get to enjoy something that normally costs money - for free, thereby saving my own money for other stuff like investments or presents. Also because I did something small like signing up to a membership, it doesn't feel shameful or "bad" to collect free things!

If you work in the city, you will know about those freebies that people are constantly handing out. I've received so many free things such as red bull, ice coffee drinks, packets of chips, fruit, stress balls, and so on. These all pale in comparison to the freebies that you can collect during your special day of the year - your birthday!!

Here is a list of all the freebies I collected on or around my birthday time this year:

- Free original size Boost Juice

- Premium 6 inch sub with bottle of coke from Subway

- Large pearl milk tea from Chatime

- Regular burger meal from Nando's

All of the above are easily obtained by anyone on their birthday if you sign up to their membership program before your birthday. They are also all free to sign up - the exception being Chatime which costs 50 cents to join their membership.

The other thing I do and recommend other people to do during their birthday, is to run a free credit report on themselves. VEDA and Dun and Bradstreet - 2 of the major credit reporting agencies in Australia offer once a year free credit report for anyone as long as you are willing to wait about 10 days to receive your report.

To get the VEDA one, simply go to http://www.mycreditfile.com.au/home/free-credit-file.dot and send in the required information to VEDA and they will send you your report in 10 days. I schedule it so that I request the report 10 days before my birthday so that it is ready for my birthday as a birthday present. Also keeps it easy to remember - almost like clockwork!

Why bother having a credit file report run? 

Well any time you apply for a credit card or other type of loan, the telco, utility company or financier will list the request on the various credit reporting agencies' database. Too many enquries in a short space of time will be inferred by these lenders as if you took each and every one, even if you were declined - making it harder to obtain more lending in the short term.

Any defaults, specific late payments and bankruptcies will all be shown on your report for them to view and make a decision on whether to lend you money or services. If you know your credit file is "clean" and you haven't been applying to too many places in a short space of time, and assuming you will be able to comfortably service the loan you are requesting - there should be no reason why you would be denied credit.

Knowing what is on your file is also important to ensure your identity hasn't been compromised and that someone hasn't used your identity to obtain loans through fraud. 

You don't have to wait until your birthday to request a report - you can request it any time and get it within 10 days. I just time it close to it so that it triggers my memory to run one!

All the best