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

Opal Card - Sydney, NSW

A quick comparison of the Opal Card vs periodical tickets.

I'll admit it, I was quick to dismiss the Opal card as a gimmick seeing how it is more expensive than a quarterly ticket over a 90 day period. For example MyTrain 2 costs $32.80/week for Opal, but only $27.22 for a quarterly. It looked like we waited so long to get this ticket-less system and it appeared to be more expensive, and thus useless to those that want maximum value.

I've always espoused the benefit of a quarterly ticket. I mean, what's not to love?

- You get the convenience of being able to plan your holidays around your train ticket (unlike yearly)

- Only difference between a quarterly and yearly is 5 extra free days with a yearly

- Much much cheaper than a monthly and weekly

- Only have to line up 4 times a year (so much win on Mondays or after long weekends)

- Can lock in old prices before announcement of price hikes

- Nice, durable plastic ticket

- Can register the ticket so if it does get lost, can order a replacement one

I find it hard to be friends with those that continue to buy weekly tickets when they work full time. There is simply no reason for it. If you want to hand over money necessarily, I will gladly give you my banking details on where to deposit the money you don't want.

However, I looked deeper into the specifics and conditions of the Opal card and stumbled across something quite interesting. There are a few perks of the Opal system to entice users to adopt this new technology.

Some of them include:

- 30% discount when travelling during off peak (any time outside 7am - 9am and 4.30pm - 6.30pm weekdays)

- After 8 paid trips in a week (Monday to Sunday), all modes of travel is free after that, no matter how far you go or how often, called a weekly bonus. This is the key to maximising value off Opal. Why not catch a free ferry just for kicks on a nice sunny day?

- Sunday all day travel costs only $2.50 

- You can do transfers at different stations within 60 minutes and you will only pay one fare, instead of 2.

Eg, Central to Wolli Creek. Meet up with a friend to return their book. Within 60 minutes, Wolli Creek to Rockdale. You will only be charged Central to Rockdale fare and it counts as 1 trip toward your weekly bonus.

One big concern though would be privacy. When you login to your Opal account, every single trip you take, at the precise time you tapped on (and presumably tapped off) is recorded and who knows what the information will be used for. You cannot travel anonymously using Opal. (Update: August/September 2014 - unregistered Opal cards can now be bought at retailer such as convenience stores and news-agencies)

Why is the Weekly reward interesting? Well think of it almost as like a membership card where if you get 8 stamps, you get free coffee or burger the next time you visit. The Opal card counts 8 trips and then after that, your trips are free and it doesn't matter how much each trip costs you. If you make 3 trips in 1 day, that's 3/8 trips taken care of to reach the weekly bonus.

It's easier to see with a few examples. For simplicity sake, I will use MyTrain 2 (10-20km travelling distance). Keep in mind, a quarterly ticket equates to $350 for 90 days or $27.22 a week

Scenario 1: Typical week, travelling during peak hours Monday to Friday

	Monday	Tuesday	Wednesday	Thursday	Friday	Saturday	Sunday
Morning	4.1	4.1	4.1	4.1	FREE	FREE	FREE
Lunch time					FREE	FREE	FREE
Evening	4.1	4.1	4.1	4.1	FREE	FREE	FREE
				Total cost $32.80

Scenario 2: We adjust our schedules so that we tap on after 6.30pm when we go home to get the offpeak discount.

	Monday	Tuesday	Wednesday	Thursday	Friday	Saturday	Sunday
Morning	4.1	4.1	4.1	4.1	FREE	FREE	FREE
Lunch time					FREE	FREE	FREE
Evening	2.87	2.87	2.87	2.87	FREE	FREE	FREE
				Total cost $27.88

Scenario 3: No way you want to stay back at work, even to get the offpeak discounts? What if you had alot of errands to run during your lunch time (offpeak) and needed to travel to a station closeby? *Assuming the station you travel to is within 10km

	Monday	Tuesday	Wednesday	Thursday	Friday	Saturday	Sunday
Morning	4.1	4.1	4.1	FREE	FREE	FREE	FREE
Lunch time	2.31	2.31	2.31	FREE	FREE	FREE	FREE
Evening	4.1	4.1	FREE	FREE	FREE	FREE	FREE
				Total cost $27.43

Scenario 4: Okay you're on tight budget so you will stay back at work, but you also like to go to nearby stations during lunch because the lunch is better at the other place

	Monday	Tuesday	Wednesday	Thursday	Friday	Saturday	Sunday
Morning	4.1	4.1	4.1	FREE	FREE	FREE	FREE
Lunch time	2.31	2.31	2.31	FREE	FREE	FREE	FREE
Evening	2.87	2.87	FREE	FREE	FREE	FREE	FREE
				Total cost $24.97

Scenario 5: Who needs sleep? Travelling only during offpeak and taking some sightseeing trips during lunch

	Monday	Tuesday	Wednesday	Thursday	Friday	Saturday	Sunday
Morning	2.87	2.87	2.87	FREE	FREE	FREE	FREE
Lunch time	2.31	2.31	2.31	FREE	FREE	FREE	FREE
Evening	2.87	2.87	FREE	FREE	FREE	FREE	FREE
				Total cost $21.28

Summary

The main take out of this is not to discount Opal too quickly. If you schedule your travel outside peak hours and take some cheaper trips, it may be worth your while. It may even motivate you to travel and explore Sydney because all the trips are free after your 8 paid trips!!

Credit Cards - Balance Transfers - How does Balance Transfers Work?

Hi all,

Hope everyone is on track with their financial goals during January of this new year! If you have been, congrats, it is easier than you thought right? If not, February is new start and a new month to regroup and focus your energy to making your finances work for you.

In previous posts, I've elaborated on the benefits of using a credit card (with the proviso that you have self control and don't change your spending habits drastically because of the new found plastic in your wallet).

Today I will discuss a feature of credit cards that some people may not know about and that is ' BALANCE TRANSFERS'.

Balance Transfers (BT) as the name suggests is where your new bank will accept to take on your existing debt from a different credit card, at a special rate that is lower than the usual credit card interest rate.

Often banks and other credit providers will offer special promotions with balance transfers. eg. 0% for 6 months, or 0% for 15 months, or 5% for 5 months. There is usually a lot of deals around in January or February, as people try to take control of their finances as part of the new years resolution.

Let me illustrate with an example.

Let's say you had a mind explosion and you somehow ended up with a Credit Card Debit with ANZ $5,000. Purchase interest rate at 19.95% p.a.

Take up new credit card with NAB using their 0% Balance Transfer for 15 months. Interest rate 0% for 15 months on balances transferred. I've highlighted this because this is an important distinction. There are different rates applicable for balance transfers, purchases, and cash advances.

To transfer that $5000 credit card debt to NAB, you would need to be approved for a credit limit of at least $7142.85 (being $5000/0.7). NAB will give you a balance transfer up to 70% of your credit limit.

*note different banks will have different rules regarding how much of the credit limit you can balance transfer.
Some may also charge a fee for doing balance transfer, eg 1% of the transferred amount (Citibank 12 month promos), please read the conditions carefully.

So ANZ $5k -> NAB $0, the transaction leaves you with
ANZ $0 - > NAB $5,000 balance transfer used out of your credit limit, eg $5000 / $8000 of your limit is used now.

Sure you have $3000 left to use, but any purchases or cash advances will be charged interest from day 1. ie. YOU WILL NOT GET ANY INTEREST FREE PERIOD IF YOU USE THE CARD FOR ANYTHING OTHER THAN THE BALANCE TRANSFER. Any purchases you make will incur interest at the relevant interest rate immediately, and any payments made to the card will be applied to the highest interest rate on the card (so cash advances then purchases then balance transfer).

Immediately put the new credit card that has the balance transfer debt on it, into a draw somewhere and do not use it again until the balance transfer period is over - in case you accidentally buy something on it!

What's the catch?
Well you still have to pay the monthly minimum repayment fees, generally about 2 or 3% of the closing balance. So if you had done a BT of $5k, then at 3%, you would pay $150 for that month. This is not interest. This is paying back the principle of the balance transfer assuming you took advantage of 0% special balance transfer rate. At the end of 6 month 0% interest period, you would have paid 6*150 = $900, leaving $4100 to pay off immediately.

Will this work for you?
Well you need to have enough salary to justify the bank to offer you a high enough credit limit
A good credit history will work in your favour
If you have too many other credit cards or too many expenses, this will work against you as banks take that into account when deciding if they want to give you a credit limit.
Access to easy credit is dangerous in the wrong hands. You must absolutely be sure you will not be tempted to spend irresponsibly and make sure that you have enough at the end of the promo period to pay off the FULL BALANCE!


Current special promo deals going on:
- NAB 0% for 15 months balance transfer (cheapest card is $30 a year annual fee)
- ANZ 0% for 12 months balance transfer (ANZ Platinum CC has the fee waived for the first year - usually $87)
- Citibank 0% for 6 months balance transfer - (Friends and Family promotion with their Signature and Platinum offer (annual fees of $299 signature / $199 platinum waived for life of loan)


What? I'm responsible and have no CC debt...
Well the current credit reporting agencies only have information on which credit providers you have applied to and defaults and that sort of thing. It doesn't show what the limit is, when it was opened/closed and rating. That is changing in MARCH 2014 this year. So it is likely this will not work after March 2014 for cards that have no debt - will still work fine for negative credit card balances .

What if we do a balance transfer from one card to another, but we don't have existing debt on the credit card? Well, the credit provider does not know how much you owe on the other card, so you can still request for the balance transfer. When the balance transfer goes through, your credit card will be in POSITIVE balance. That is, the credit card company owes you money because you have topped up your card.

You can use the positive balance credit card as normal, and the balance will slowly reduce as you spend your credit. You save money because you're not using your own money for however months the balance transfer is available for, leaving your money sitting in the bank earning interest or in the offset account reducing interest you need to pay. eg $5k positive balance from earlier example, to use as my spending allowance, where otherwise I would have had to use my savings money. Each month, I'm paying the minimum principle off the balance transfer, and at the end, I pay everything off in full.

However you can also use the hidden feature of credit cards - you can usually transfer the positive balance that has been created (from the BT) into your savings account, offset account or any other account for that matter really. Because it is technically your own money due to the positive balance, there is generally no fee to take the money out, or if there is a fee, it is usually a one off small amount like $2.50.

Let's say you have a mortgage at 5% interest p.a. If you chuck in $5k in the offset, that's $250 in interest a year that is saved. Your only repayments during the period is the 2 or 3% minimum repayment amount on the balance, and obviously the remaining principle at the end of the period.

You'll need to check with your bank, but some banks allow you to withdraw cash without any fees (or minimal fees) when your credit card is in positive balance. DO NOT TRY to take out cash if it is $0 or negative balance because you will be slugged with 'cash advance' interest rates immediately.

One cool thing is with Citibank, they have an option to get 80% of your credit limit in the form of a Cheque to Self balance transfer. Let's just say when you do request to have the cheque posted out to yourself, you don't necessarily have to deposit it into a credit card account ;) *wink wink*.

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!