In this week's column we focus on financial success strategies for people aged 25 to 45.
A new year is always a good time to make a new start.
Unfortunately, research shows that Australians under 25 typically think it's too early to start investing; those aged 25 to 45 believe that home loan repayments and school fees take all their spare money so they can't invest; and the over-45s think they have left it too late.
Of course, none of these beliefs are valid, so today let's make a plan to get you on track for a great financial future.
First you need to realise that at your age you have a precious resource - time.
It's compound interest that drives investment returns, and because of the way the maths work, a portfolio will increase exponentially with time.
Imagine you invested $2000 a month into a fund that matched the All Ordinaries Accumulation Index, returning an average 9 per cent per annum.
After five years the portfolio would be worth $143,000; after 15 years, $705,000; after 25 years $2.1 million; and after 30 years $3.3 million. There is more growth in the last five years than in the first 15 years. And that's no accident.
The big lesson is: the sooner you start, the better the long-term result will be.
So decide now that you will take your future into your own hands, set some goals, and get on track. A great starting point is my website www.noelwhittaker.com.au, which contains some fantastic resources. I recommend you first go to the "free downloads" and download Noel's Action Plan.
This asks you to list your financial assets, your debts, detail your income and expenditure, and set some goals. Then it prompts you to think of actions you can take to achieve your goals.
For example, when you write down your home loan amount, the interest rate and the monthly payments, you may decide that you can save money by switching lenders, and pay it off much faster by maintaining or increasing the repayments.
If you are aged 35 now, with young children, you may wish to set up a fund to pay for their education. There are various products around which enable you to do this, but one simple method is to set yourself up to pay off your home loan by the time the kids get into the expensive years.
Suppose your home loan is $400,000, with an interest rate of 3 per cent. Make sure your repayments are at least $8 per $1000 per month - that's $3200 a month.
This will bring the mortgage down to a 12-year term. Imagine what a great feeling it would be if the home loan is paid off when the kids are in their early teenage years, and you've got the use of the loan repayments no longer needed to fund their education.
The name of the game is to get as many assets under control as possible at as early an age as possible. If you don't have school fees to worry about, you could look at borrowing to invest, once your mortgage is under control.
Start by investigating the regular gearing products now available, in which you combine a monthly investment with a matching borrowed sum. It's a more conservative approach than borrowing the whole lot in one go, and can be a good way to start.
Above all, don't miss the opportunity to get your finances in order, and your money working for you, while you still have plenty of time on your side. The next 15 years will be gone in a flash.
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Noel answers your money questions
I'm reading your new book Retirement Made Simple and hope you can clarify something I'm confused about. I thought, irrespective of whether you are income tested or asset tested, you could only earn $300 a fortnight as a pensioner couple.
We will be asset tested and I have worked out using your superannuation calculators that I will probably have about $600,000 in super. Given those circumstances, can we earn more than $300 a fortnight without our part pension being affected.
You have highlighted an issue which confuses many people. The pension eligibility tests work on an asset test and an income test and the one that produces the lowest pension is the one that Centrelink uses. From 1 July 2020 a couple can earn $316 a fortnight combined and still be eligible for the full pension under the income test.
Once income exceeds this level the pension reduces by $0.50 for every additional dollar earned. The tests are way out of kilter - the lower limit for a homeowner couple for the assets test is $401,500 after which the rate reduces by $1.50 a fortnight each for each $1000 of assets in excess of that threshold.
If we assume your assessable assets are $640,000, which includes your financial assets and items such as vehicles and furniture, you would be eligible for a pension of $708 a fortnight combined.
You could earn a combined income of $1800 a fortnight, and still be assessed under the assets test. In short, the income test is not relevant for anybody who is asset tested.
My wife and I are in our mid 50's and have about $500 a week each for investing. Neither of us has much super - we are both reluctant to pour money into super.
What can we sink our money into that will give us the best return over the next ten years - super, an investment property, a property trust or syndicate, managed funds, blue chip shares, anything else?
There are two important factors to consider - the type of investment to hold and the best entity to hold it in. For a person in their mid 50s earning more than $37,000 a year the perfect investment is super because you can usually invest in pre-tax dollars using salary sacrifice.
Because salary sacrificed contributions lose just 15 per cent and money taken in hand loses at least 39% you are making big tax savings immediately. Once the money is inside super you and your adviser can decide what sort of asset mix is appropriate for you. The cream on the cake is that income tax on the fund earnings is just 15 per cent per annum while you are working - and then zero tax once you retire and start a pension from the fund.
I am 65 and will be applying for my UK and Australian aged pensions on my next birthday in May. I left UK at aged 35 and have been advised I shall receive £80 per week from UK as part state pension.
In addition I receive a monthly pension for life from my former UK employer Nat West Bank £438. I only have $200,000 in Australian super. Will I have to pay Australian tax on my pensions?
The pension income will be taxable, but you will get a credit for tax paid in the UK as well as an 8 per cent deduction for return on capital. Also, thanks to the range of offsets available, you may find that zero tax will be payable on your overall income.
- Noel Whittaker is the author of Making Money Made Simple and other books on personal finance. Email firstname.lastname@example.org