debt - burden or benefit

There aren’t too many people today without some debt. The thing about a debt is that it can be a benefit or a burden. What is it for you?

From my experience most people don’t understand how to manage debts so for them it becomes a “burden”.

When is a debt a burden?

When it is used for purchases that don’t generate income or it does not suit your personal circumstances such as expensive cars, trips overseas or shopping sprees. These expenses do bring much joy in the short term BUT in the long term, if you don’t pay it off fairly quickly, this debt can become a burden. A debt that becomes a burden can have disastrous effect on relationships, work and general everyday life.

I understand that events in life make it necessary for many to take on debts for education, medical treatment or on loss of employment and while some of this type of debt is a necessity, it’s important not to borrow too heavily.

Know what suits your needs, what you can afford to borrow and keep within a budget.

When is a debt a benefit?

When it is to purchase an investment property or shares. In this case you will benefit (hopefully) from any increase in the value of the investment, while potentially reducing the amount of any income tax to be paid along the way. You can also use the rental income or dividends to reduce the debt.

How do you make debt a benefit?

The first step is to prioritise your debts. Work out which is the most urgent debt that needs to be paid off, because not all debt is borrowed under the same conditions. Think about the fees, penalties, interest rate and the term of each debt.

Secondly, consolidate your debts. Simply put, combine your loans into one. It makes repayments more manageable and can reduce the amount of interest you have to pay. But you need to make sure that the interest on the new loan is less than that of the old loans and that you don’t use your credit card to take on additional debt.

If you have savings, it may help to pay off whatever debt you can. This may be practical if you’re paying more in loan interest than you’re earning through interest on your savings or share dividends.

And finally!

Dispose of all credit cards, except for one that has the lowest interest rate, because you may need a credit card in an emergency. And learn how to spend less – this always helps.

If you are in or may be falling into a serious debt situation, tackle the issue head on – ignoring debt won’t make it go away. Talk to me – I can help you get your finances

gifting of assets

I have noticed recently an increase in the number of financial planning clients who want to arrange their affairs so that they can eventually get their Age Pension. And some of these clients are those that have accumulated many assets, including numerous rental properties.

Of course there is a way of achieving this result but the process is not a quick, one-line answer – the whole process is a little more complicated and time consuming because in each case I will need to assess the implications of the Centrelink gifting rules, taxation and of course the State Revenue Office (SRO) if there is a transfer of properties as a gift. The gifting of rules are not that complicated.

What is a gift?

A gift is any money or property that is given away and for which a person does not receive adequate financial consideration. Gifting may also be referred to as disposal or deprivation. 

How much can a person give away?

Both a single person and a couple can give away $10,000 per financial year, up to a maximum of $30,000 over a rolling five-year period.

So what happens if a person gives away more than these levels?

This is the most important question to answer because unless it is done correctly it can cost the clients a lot more than the pension benefits that they may receive.

What are the implications of gifting properties?

1. Capital Gains Tax
2. Stamp Duties and
3. Centrelink “deeming rules”

So if you are getting close to retirement, you have accumulated some assets and your intentions are to live on the Age Pension – then you need to plan your affairs. am afraid it is not as simple as “let’s transfer the property and we will get a pension”.

Errol Flynn

Almost, on a daily basis, after I meet with clients I am reminded of an old article that I have kept about Errol Flynn, which referred to his wild lifestyle of women, drugs, alcohol and over spending (man, why cant I do that?)

One of his quotes caught my eye and for the first time I realized the secret to why most of us just don’t know how to handle money:

“The problem is I can not reconcile my gross lifestyle with my net income”.

How true is that? Are you in the same situation of not being able to reconcile your gross lifestyle with your net income? Here are some of my suggestions that may help you:

ACCEPT that you can not afford everything in life.

ACCEPT that you must give up some things in order to have others e.g. if you want to buy something then you may need to cancel dinner for that week so you can use the money for the purchase.

ACCEPT that you need to learn to be smarter with your finances:

- if you have a debt then you must work towards reducing it. Don’t worry about tax deductions, negative gearing etc. A debt is a debt – it is not a tax benefit.

- understand Cash Flow v Tax Benefits – you will be surprised how much better you will be.

- don’t wait until 2 days before the end of the financial year to ring your accountant and ask how you can reduce your tax - ring him in July so you will have 12 months to prepare for it.

- if you are in business and you have been thinking of buying assets for the business - think about it now – so many people have rushed in before the end of the year to buy cars thinking that they will “reap” the tax system. Not true – tax deductions will only work for genuine expenditure not for the forced expenditure.

- think about your investments - learn about the timing of markets and the great opportunities when the markets are down. 

- and finally, keep buying those Tatts tickets

25 years

Early this morning I received a phone call from the Managing Director of AMP. This is a person that I have known to exist but he has never spoken to me directly – so my first reaction was “Oh, oh – I am being sacked!” Why would the Managing Director be calling me first thing in the morning?

It turns out that tomorrow, 6^th April, I complete 25 years employment with AMP. Traditionally, the financial planning industry has high turnover, so to find people around for 25 years is a great achievement - a milestone. And I have noticed it myself as every time I attend AMP functions I am seeing less and less familiar faces – the old timers are retiring in droves.

Now let me tell you that 25 years may sound like a long time but not to me. I feel like I have blinked and here I am. I remember the first year very clearly – our three children were aged 5, 2 and 1. And now they are 30, 27 and 26 and I am also a grandfather. The kids wouldn’t know much about what I had to go through to build up my business, as they were too little, but in those days I had to make lots of “cold calls” in the evenings, set up my appointments and then go out and meet people in their homes. Every now and then I would be lucky to make a sale. I started with no clients, no income and little savings and from memory it took me more than 3 years before my income reached the level of my previous employment. It was tough.

Of course, things are different now. I no longer have to make calls and I no longer get paid commission for any sales I make. Today, it is all “fee for service” which has been quite difficult to come to grips with as most people are not in a position to pay for financial planning. This is how the Labor Government wants the industry to be in the future so who am I to complain – I will just keep going….

While I miss the old system of working my business I am also aware that things do change over time – as Bob Dylan sang – “times, they are a changing”.

So here I go - looking forward to the next 25 years………