Helping you find your financial path


When it comes to personal finances and ways to build your wealth it seems that everyone has an opinion – and a preferred pathway for wealth accrual. From your mate down the pub who likes to share his stock market tips to your friend at work who has a constant stream of ‘get rich quick’ schemes, to your mother-in-law who exposes a more prudent ‘slow and steady and sock it in super’ approach. 

The truth is there is no one-size-fits-all approach to generating wealth and setting yourself up for the future. Everyone has different objectives, preferences and levels of comfort. 

When deciding on your own financial path, there are a few things that you need to consider. 

Your preferred lifestyle

This is really about understanding what you value in life and what’s going to make your existence meaningful. Success means different things for different people. For some, it’s a big house, two cars in the garage and lots of space to entertain. For others, it’s being able to take an overseas trip once a year. Others still might be dreaming of a tree or sea change and an early retirement. You don’t have to fit into anyone else’s idea of an ideal situation. You just need to work out the lifestyle you want and to set financial goals that allow you to lead it. 

Stage of life

It’s also worth taking stock of what stage of life you’re in. You may be just at the start of your career and beginning to build your wealth, thinking of starting a family and saving for a home deposit or setting your sights on retirement and trying to maximize your nest egg. Your goals and needs shift as you move through life and the world’s a very different place to what it was thirty years ago, meaning the perspective of those in different generations may not be applicable to your own financial pathway. No matter where you’re at, it’s important to have a plan that enables you to meet your immediate needs as well as work towards your long-term goals. 

Focus on your goals and objectives

When it comes to goal setting the important thing is to make them precise and achievable. If goals have tangible outcomes they are easier to measure and reward. Rather than just hoping to ‘build your wealth’, set something concrete like ‘own my home outright within ten years’, or more immediately, ‘set aside enough to take the kids to the beach for the summer’. Again, keep in mind that everyone is different and your goals won’t necessarily mirror those of your peers or colleagues. 

Comfort with risk

Once you’ve set your goals, you need a plan of action. Incremental, actionable steps you can take to make your dreams a reality. An essential part of making a plan is understanding your comfort with risk. There are a lot of factors determining your risk tolerance: your own life experiences, the amount of time you have set to meet specific goals, your ability to cope with market volatility etc. In general, diversifying your portfolio helps mitigate risk (it’s seldom a good idea to have all your eggs in one basket), but the most important thing is having an informed risk strategy that works for you and doesn’t keep you up at night. 

Knowledge is power

As with anything, having a good investment strategy requires know-how. But with so many different people offering their opinion and the constant buzz of the 24-hour new cycle, it’s easy to get confused or worse, spooked. This is where a financial advisor comes in. Our job, first and foremost, is to listen – to be a sounding board for you to bounce ideas off and help you clarify your goals. We’ll then work with you to devise a plan that’s going to help you achieve them. 

And don’t forget, we are with you for the long haul. Your finances and investments can never be a ‘set and forget,’ for just as economic circumstances change so will your own. What you need then is an expert in your corner guiding you through the rough times and the windfalls. One who understands your dreams, attitude and resources – who has the skills to keep you on the right track.

Budget changes support a brighter retirement


With tax cuts grabbing most of the attention in the May 2018 Budget, some quiet tweaks to superannuation and retirement income were drowned out in all the noise. But these small changes could have a big effect on the amount of money that ends up in your nest egg when you retire. 

Here’s a rundown of some of the more significant proposed changes:

Income opportunities for retirees.i

The expansion of the Pension Loan Scheme will allow all Australians of Age Pension age to boost their income using the equity in their home. Under the scheme, retirees will be able to borrow up to 150 per cent of the Age Pension (currently 100 per cent), or $11,799 a year for singles and $17,787 for couples who are on the full Age Pension.

The loan is a reverse mortgage with an interest rate set at 5.25 per cent a year, about 1 per cent below the average commercial rate.ii The loan is typically not repaid until the home is sold and the Government guarantees that the debt can never exceed the value of the home. Currently, only part-pensioners can access the scheme. 

In addition, all age pensioners will be able to earn up to $300 a fortnight in employment income, or $7,800 a year, without reducing their pension. This is an increase of $50 a fortnight and, for the first time, self-employed pensioners will also be eligible. 

Recent retirees aged 65-74 with an account balance below $300,000 will be given an extra year to make voluntary super contributions without having to meet the work test.

Super help for young members

Younger Australians at the start of their working life could also receive a boost to their retirement savings – of more than $500 a year in some cases.iii From July 2019, insurance premiums won’t be taken out of your super (unless you request it) if you are under 25, your account balance is less than $6,000, or you don’t make contributions for 13 months and the account is inactive. 

While life insurance is not a priority and can eat away at small balances for many young, single people, the change will mean younger fund members with dependents will need to take extra steps to ensure they have adequate cover. 

Younger members will also benefit from a 3 per cent annual cap on passive fees for account balances below $6,000 while exit fees will be banned on all super accounts.

Finding lost super

The Government also hopes to reunite more people with their lost super by requiring super funds to transfer inactive accounts (where contributions have not been received for 13 months) with a balance below $6,000 to the Australian Taxation Office (ATO). The ATO will automatically reunite inactive accounts with active accounts where the combined balance will be at least $6,000. 

At the other end of the scale, people who earn more than $263,157 from multiple employers will be able to exclude wages from certain employers from the Superannuation Guarantee (SG) from 1 July 2018. This will help employees avoid unintentionally breaching the $25,000 a year concessional contributions cap. Employees may then be able to negotiate with their employer to receive additional income taxed at marginal tax rates.

Easing restrictions on SMSFs

Self-managed super funds (SMSFs) will be able to add more members, with the limit increased from four to six members. This will give larger families the flexibility to include more than two adult children. 

Well-run SMSFs will also be rewarded with a reduction in their administrative burden and compliance costs. Funds with three consecutive clear audits and annual returns lodged on time will be able to switch from annual to three-yearly audits from July 2019.

All these Budget measures are simply proposals for now and will need to be passed by both houses of Parliament. If passed, they should provide opportunities for many Australians to save more during their working lives to boost their income in retirement.


ii (3 August 2017) 

iii (9 May 18)






Ready...set... Are you good to go for the new financial year?


The end of the financial year is the cue for most of us to look at our financial position heading into tax time. Hopefully you’ve made progress towards your goals. But if you find that your expenses are trending higher than you’d like or—shock, horror!—higher than your income, this could be the perfect time for a fiscal makeover. 

The starting point is gathering up as much information as possible, beginning with the household budget. 

Take a budget snapshot

You can’t set realistic financial goals and savings targets without knowing how much money you have at your disposal. If you don’t already track your income and spending, then take an annual snapshot as you go through your records to prepare your annual tax return. 

Deduct your total spending from total income and what’s left is what you have to work with. Any surplus could be used to kick start a regular savings plan. If you discover a budget black hole, identify areas where you are overspending and could cut back. 

Pay yourself first

Did you manage to save anything this year or are you are constantly counting on this month’s income to pay last month’s bills? Do you spend first and hope to save what’s left? 

Instead of making saving an afterthought, pay yourself first and allocate a percentage of your income to a regular savings plan. Setting up a weekly or monthly direct debit will remove temptation and encourage you to live within your means.

Review your mortgage

If you have a mortgage this is likely to be your biggest monthly expense so it’s a good idea to check your progress at least once a year. Why not use some of the savings you’ve identified and increase your repayments to save interest? If your mortgage has a redraw facility you could use this to create a cash buffer for emergencies. 

While you’re at it, go online and compare interest rates. If your rate is no longer competitive ring your lender to negotiate a better deal and consider switching loans if they won’t budge. Just beware of any exit fees. 

Negotiate better deals

Your home loan is not the only expense worth haggling over. These days if you want to get the best deal on your electricity, phone, internet or insurance you need to ask. Before you do, ensure you understand what your current plan/policy covers and research what’s on offer elsewhere. 

Make a practice of doing this once a year, when your plan or policy is due for renewal. The savings can be substantial and can be put to much better use reducing debt or growing your wealth. 

Check your super

Do you know how much you have in super and how it’s invested? When you retire superannuation is likely to be your biggest asset outside the family home, yet almost one in four Australians don’t know which risk profile their super is invested in.i This can cost you thousands of dollars in retirement savings and takes only minutes to correct. 

Go to your fund’s website or call the helpline to ask for your current balance and where it’s invested. As an example, a 25-year-old woman on $80,000 in a conservative option until she’s 70 could improve her retirement balance by $294,000 if she switched to a risk profile more in keeping with her age and circumstances.i

Protect your wealth

Reaching your life and financial goals is not just about growing your wealth but protecting it. 

It’s important to review your insurance policies annually—or as your circumstances change—to make sure you and your family have adequate cover. Insurance can be a significant cost for families, but the income it provides when accidents or illness strike is worth every cent.

i MLC Wealth Sentiment Survey, 5 April 2018,

Tackling Financial Stress


You’ve probably heard of social stress – fear of fitting in, feeling anxious about meeting new people. Or you might have experienced stage fright – the stress of public speaking, performing, or presenting in front of people. But there’s another form of stress on the rise that’s potentially affecting Australians much more regularly and seriously than getting butterflies before giving a speech. It’s a different type of stress to… well… stress about. 

According to some researchers, close to one in three Australians suffers from significant financial stress. The consequences can be a lot worse than momentary embarrassment from tripping over your words. Alarmingly, nearly 35% of people experiencing financial stress have used drugs or alcohol to manage their negative feelings about money.i Chronic stress – something that’s experienced over a long time – can lead to physical symptoms, including sleep problems. 

What is financial stress?

The definition of stress is ‘mental/emotional strain/tension resulting from adverse or demanding circumstances’. Financial stress is when those circumstances have to do with money. As with other sources of stress, money problems can make people prone to withdrawing or lashing out at their loved ones. This in turn, detrimentally impacts family dynamics. 

One regular report series by an Aussie bank discusses a few types of financial stress that affect most of the population. The main one is housing payment stress, which is expected to worsen in the future. Then there’s bill stress; sadly, about 16% of households can’t always pay their power bill on time.ii Some families always have to work to make ends meet; they’re experiencing low level but constant financial stress, which can also be damaging. 

How to reduce financial stress

It’s all too tempting to say that the solution to financial stress is ‘more money’. In fact, many studies on financial stress talk about how participants pin the blame for their stress on other people. On partners not telling them about joint account activity, or kids needing things they can’t say no to. And therein lies an important clue on tackling financial stress. 

Sometimes (not always), arguments over financial matters – a cause of financial stress – are themselves caused by miscommunication. That said, talking about money is never particularly easy. Even when it’s with a partner or loved one. That’s why it can help to create parameters for these conversations. One common ‘rule’ that low-financial-stress couples have is that they agree to discuss purchases from the joint account over a certain amount. Some also like to set ‘free spending’ limits for each family member (taking the form of pocket money for kids) so everyone feels like they’ve got a bit of both accountability and freedom. This is basically a function of household budgeting. 

Some other simple ways you can reduce your financial stress levels as a household include: 

  • Revise your budget regularly. Every time your income or expenses change, it’s time to review your discretionary spending.
  • Thinking about large amounts of money and longer time spans can be overwhelming. If budgeting is stressful, try breaking it down to a daily or weekly calculation.
  • Sometimes, anxiety can be caused by thinking about the same things over and over. Get it out of your head and write down the financial problems you’re worried about.
  • Can’t keep up with which bills are due when? If you’re not already on direct debit (but could be), consider making the switch.
  • See how long you can go without buying anything non-essential. Introduce a bit of friendly competition with your partner or older children.
  • Approach each financial ‘problem’ as something that can, in fact, be solved. That’s the first step towards making an actionable plan.
  • If you have several different debts, make a plan to not take on one more debt unless you’ve paid off at least two. We can also assist you to decide whether debt management or consolidation is appropriate for your circumstances.

If you or a loved one are experiencing financial stress, let us help. Make an appointment today to discuss how you can tackle the source of your hassles head on. 



Downsizing – is it right for you?


Luxury inner city apartments marketed as ‘perfect for empty nesters’. TV shows where cool older divorcees live in luxury on the waterfront. The ‘grey nomads’ community selling up and taking off in their camper vans. 

Even twenty years ago, the idea of downsizing wasn’t really part of our culture. The parental home was something to be cherished and kept in the family as long as possible. Now, if the aforementioned signs are anything to go by, downsizing to a smaller property is completely normal. 

Naturally, the idea doesn’t resonate with every retiree – or even with every person actively planning for retirement. The truth is, everyone’s circumstances are vastly different. Even amongst those who do choose downsizing, the reasons for doing so vary dramatically. 

Common reasons for downsizing

A publication from the Australian Housing and Urban Research Institute (AHURI) reported that 43% of survey respondents had downsized in some way since turning 50.i They also found that downsizing was most likely to happen between the ages of 65-74. 

Of the older Australians surveyed by AHURI, 37.9% said they downsized for ‘lifestyle’ reasons, 17.2% moved because their children were out of home, 26.6% moved because they could not keep up with the maintenance on a big house and garden, 10% moved for financial gain. 

Financial implications

While improving your lifestyle is given as the primary motivating factor for downsizing, the financial implications also need to be considered and recent changes to legislation make downsizing more financially appealing. 

Under the new Downsizer Super Contribution Scheme (DSC), as of 1 July 2018, individuals aged 65 and over will be able will be able to put the proceeds from the sale of their family home of up to $300,000 into superannuation, or $600,000 for couples. This is intended to encourage baby boomers to downsize to release equity to fund their retirement and free up larger homes for younger families. To qualify for the downsizer contribution you must meet the following criteria: 

  • you must be over 65 years old;
  • the contract of sale must exchange on or after 1 July 2018;
  • you must have owned your home (excluding caravan, motorhome or houseboat) for at least 10 years; and
  • your home must qualify at least partially as your main residence.

The downsizer contribution can still be made if an individual has a total super balance greater than 1.6 million. The contributions are not tax deductable and will be taken into account when determining for the age pension. 

An emotional time

Even if the financial and practical reasons for downsizing stack up, there are emotional considerations. It can be hard to let go of the family home as every room is full of memories. As well as your attachment to your home you’ve built, think about the feelings of children and grandchildren. Your home could represent stability, safety and tradition to them. Dealing with emotions around the family home can take time and should be planned for. 

If you have been living in the one suburb or town for many years, you will have put down roots, made friendships and forged deep connections within the community. A new start can be quite intimidating and it’s important to make sure you are comfortable, both with the idea of starting anew, as well as the culture of the community you are moving to. 

There are a lot of things to consider if you are thinking about downsizing and we are here to help. Make an appointment today to discuss the financial pros and cons of moving to a smaller home. 


Federal Budget 2018-19 Analysis


Surge in spending ahead of election battle

The Federal Government has turned the spending tap back on, signalling the end of the revenue drought since the GFC and the end of the mining investment boom. 

As widely anticipated, Treasurer Scott Morrison’s third Budget has cut income taxes, boosted support for senior Australians, delivered $24.5 billion of new infrastructure spending and promised a return to surplus by 2020. That’s a year earlier than previously thought possible and would be the first surplus since 2007-08. 

In a call to arms, in what is likely to be the last Budget before the next federal election, the Treasurer urged Australians to ‘stick with this plan for a stronger economy and more jobs because it’s working’. 

The Big Picture

The Government expects this year’s budget deficit to shrink to $18.2 billion, down from a forecast before Christmas of $23.6 billion. The deficit is forecast to fall further to $14.5 billion next year before returning to a small surplus of $2.2 billion in 2020. 

Net debt is expected to peak at 18.6 per cent of gross domestic product (GDP) this year and fall to 3.8 per cent of GDP in a decade. Importantly, the budget surplus is not expected to top 1 per cent of GDP until 2026. 

The Budget’s major spending promises reflect a stronger economic outlook, with growth of 4.25 per cent now expected this financial year compared with 3.5 per cent in the last Budget update. GDP is set to rise $73 billion this year, fuelled by higher tax revenues, record job creation and fewer people on welfare. The government is assuming wages growth of 3.5 per cent a year from 2020, despite it currently tracking at just 2.1 per cent. 

The Treasurer has pledged to limit taxes to no more than 23.9 per cent of GDP, but with spending running at around 25 per cent of GDP, that still leaves a gap between money flowing in and flowing out. 

Major tax overhaul

In an attempt to win over middle Australia, the Treasurer announced major tax reform which will cost $140 billion over a decade. 

Ten million low and middle-income earners earning up to $90,000 a year will receive up to $530 in tax relief per year beginning on July 1. Wealthier Australians will have to wait a bit longer under a sweeping 7-year plan to create a single income tax rate of 32.5 per cent for workers earning between $41,000 and $200,000 a year. 

As a result, 94 per cent of taxpayers will pay no more than 32.5c in the dollar income tax compared with 63 per cent today. This would effectively eradicate bracket creep for millions of workers, so an increase in salary or overtime would not push people into a higher tax bracket. 

At the same time, the Treasurer confirmed that the government no longer needs to increase the Medicare Levy from 2 per cent to 2.5 per cent to fund the National Disability Insurance Scheme. This will avoid further pressure on family budgets but remove a significant boost to government coffers. 

The second phase of company tax cuts for big business remain in the Budget but face a rocky passage through the Senate. Meanwhile, small business will applaud the extension of the popular $20,000 instant asset write-off on new equipment purchases for a further 12 months. 

Tax cuts will be partially underpinned by a $5.3 billion crackdown on the black economy. Also, the ATO will receive a $260 million funding boost from July to pursue taxpayers who over claim on work-related expenses. 

Healthcare and support for seniors

Aged care is set to get big injection of funds as baby boomers move into retirement. The Treasurer announced an increase in aged care funding over four years, including $1.6 billion for 14,000 additional home care packages to help older people stay in their own home for longer. 

An extra $1.4 billion for listings on the Pharmaceutical Benefits Scheme will also be added to assist Australians with serious illnesses to afford necessary drugs. 

There’s also $1.3 billion over 10 years to a National Health and Medical Industry growth plan, which included $500 million for genome research. 

The Pensioner Work Bonus will be extended so retirees can earn more money without affecting their pension. Retirees and now self-employed seniors will be able to earn up to $7,800 a year before reducing their pension payments. 

The Pension Loans Scheme, a type of government-backed reverse mortgage, will also be expanded to include full age pensioners and self-funded retirees to the value of $17,787 per couple. Currently, the Government offers a reverse mortgage through the Pension Loans Scheme (PLS) to part age pensioners to allow them to 'top up' their Age Pension to the maximum rate. 

Money for roads and rail

The Government’s $24.5 billion infrastructure spend, designed to alleviate transport bottlenecks will provides a revenue boost for companies involved in the planning and construction as well as job creation for locals. 

In Victoria, major projects include $5 billion for a Melbourne Airport rail link and 1.75 billion to build Melbourne’s North East Link and new tunnels and lanes for the Eastern Freeway. 

In Queensland, there’s $1 billion for the M1 between Brisbane and the Gold Coast and $390 million to upgrade the Sunshine Coast rail network. In NSW, $971 million is earmarked for the Coffs Harbour bypass and $400 million for the Port Botany rail duplication. And in West Australia, $500 million to upgrade the Ellenbrook rail line. 

Education and family support

There are no new announcements on funding for schools and universities, although the government will break its freeze on university funding by granting around 2000 new places across three regional universities. 

The controversial school chaplains program will also be funded permanently at a cost of $61.7 million a year. 

The national agreement on childcare for 4-year-olds has been extended to 2019 and an extra $54 million has been allocated to tackle sexual assault, domestic violence, cyber safety and elder abuse. 

While there is no increase in the Newstart allowance for the unemployed, regional students will have easier access to Youth Allowance with a lighter parental income test. 

Science, innovation and the environment

As previously announced, $500 million will be allocated over 7 years to protect the Great Barrier Reef from climate change and pollution. 

Savings will be made by tightening the Research and Development (R&D) tax incentive amid mounting concerns the scheme is being rorted. Savings of $2 billion are pencilled in over the first 4 years. 

Ongoing focus on national security

The government will invest $294 million to strengthen aviation, air cargo and mail security. This includes enhancing security at regional airports, increasing the number of officers, dogs and full-body scanners at major airports and boosting high tech screening of inbound cargo and mail. 

Defence spending is on track to reach about 2 per cent of GDP by 2021, with $36.4 billion earmarked for Defence next financial year. 

The foreign aid budget will be frozen. A large portion of this will be spent in the Pacific region as security concerns grow in the area. 

Looking ahead

Australia is in a much stronger economic position than it was a year ago, but question marks remain over the sustainability of new spending promises and whether business tax cuts will make it through the Senate. 

If the Turnbull Government chooses to call an election this year, voters will want to be satisfied that business conditions that underpin spending promises reaching a decade into the future are more than a temporary phenomenon, and that a recent lift in tax revenues is not a passing trend.

A stronger economy. More jobs. Guaranteeing essential services. The Government living within its means.

Franking credits facing the chop

 Here we go again. Superannuation could be about to undergo more change with the federal opposition announcing it will end cash refunds of franking credits on share dividends if it wins the next election. The change would have a significant impact on people paying little or no tax, especially self-funded retirees in pension phase. Seniors groups are up in arms, but many Australians have been left wondering ‘franking what?’.   Dividends paid by Australian companies are not just a source of income for investors; they also offer potential tax benefits in the form of franking credits, also known as imputation credits. 

Here we go again. Superannuation could be about to undergo more change with the federal opposition announcing it will end cash refunds of franking credits on share dividends if it wins the next election. The change would have a significant impact on people paying little or no tax, especially self-funded retirees in pension phase. Seniors groups are up in arms, but many Australians have been left wondering ‘franking what?’. 

Dividends paid by Australian companies are not just a source of income for investors; they also offer potential tax benefits in the form of franking credits, also known as imputation credits. 

What is dividend imputation?

Dividend imputation was introduced by the Hawke/Keating Government in July 1987 to end the double taxation of company profits. Before then, companies paid tax on their earnings and shareholders were taxed on the dividends paid out of profits at their marginal rate. 

Under the current system, if the company has already paid tax on the income the Australian Taxation Office (ATO) gives shareholders a tax credit. 

Dividends on shares with imputation credits are called franked dividends and may be fully or partly franked, depending on the amount of tax the company has paid and in what country. There are no credits for tax paid on overseas earnings. 

The system was made more generous in July 2000 when the Howard/Costello Government allowed excess franking credits to be paid as a cash refund. The Labor Party proposal effectively restores the original tax treatment of dividends. 

How does it work?

If the proposal is adopted, it will have no impact on investors on a marginal tax rate above the 30 per cent company tax rate. But investors who pay less than 30 per cent tax stand to lose some of their share income. 

Say an Australian company ‘OzInvest’ makes pre-tax earnings of $1 a share. It pays tax at the company rate of 30 per cent, or 30c a share, and returns the remaining 70c to shareholders as a fully franked dividend. The level of benefit you receive depends on your marginal tax rate. 

High marginal tax rate

Sarah pays tax at the top marginal rate of 47 per cent including the Medicare levy. She has 100 shares in OzInvest and receives $70 in dividends plus a $30 imputation credit.

Sarah’s taxable income on the dividend is $100 (after adding the $30 imputation credit to her $70 dividend), so she’s liable for tax of $47. However, this is offset by the $30 imputation credit leaving her with only $17 tax to pay. 

Low marginal tax rate

Alice also receives taxable income of $100 from OzInvest, but she pays tax at the lowest marginal rate of 21 per cent (including Medicare levy). As the imputation credit of $30 is more than her tax payable of $21, she currently receives a tax refund of $9 cash. Under the new proposal, she would lose $9 a share. 

Paying no tax

Many retirees or people who earn below the annual tax-free threshold of $18,200 pay no tax at all on their fully franked shares. Because franking credits are fully refundable, they can claim a full refund from the ATO. 

David has a self-managed super fund in pension phase which pays no tax and he has no other income. He receives a $70 dividend from OzInvest and claims a cash rebate of the full $30 franking credit. Under the new proposal, he would lose this $30 a share. 

Still at proposal stage

Of course, the proposal is just that. With a federal election not due until next year, the earliest it could come into effect would be July 2019 and only if passed by both houses of parliament. Already there are hints of compromise, with Labor leader Bill Shorten saying full and part-pensioners and people on government allowances will be exempt from the change. 

It’s too early to be alarmed or to change investment strategy based on what may or may not happen in future. But it is important to understand how the proposed changes could potentially affect you and what alternative investment strategies may be beneficial. 

It's time to talk about debt

 Australia’s household debt is among the highest in the world and rising, thanks largely to worsening housing affordability and plentiful consumer credit. So how do we measure up and should we be worried?   Most global comparisons measure total household debt as a percentage of net income. At last count, Australia’s household debt to income was 213 per cent, the fifth highest in the developed world according to the OECD.i

Australia’s household debt is among the highest in the world and rising, thanks largely to worsening housing affordability and plentiful consumer credit. So how do we measure up and should we be worried? 

Most global comparisons measure total household debt as a percentage of net income. At last count, Australia’s household debt to income was 213 per cent, the fifth highest in the developed world according to the OECD.i

Good debt vs bad debt

Debt is not necessarily bad if it’s used to grow wealth and you have enough income to service your loans. After all, borrowing to buy a home has been the cornerstone of wealth creation and financial security for generations of Australians. Borrowing to invest in assets such as shares and property that repay you over the long term, rather than the reverse, is also regarded as good debt. 

Bad debt arises when you borrow to pay for things that don’t provide a financial return and that you probably couldn’t otherwise afford, such as that overseas holiday you paid for with your credit card. Unless you can afford to repay the debt in full when you get home, the debt can blow out and linger for years. 

Most people take on debt in the expectation that the assets they buy will grow in value and their income will increase over time, reducing their debt burden. But what if these expectations aren’t met? 

Wages not keeping up

Australian household debt has increased by 83 per cent in a decade, but our incomes aren’t keeping up.ii Wages growth has been stuck at or near 20-year lows since 2015. It’s currently tracking at around 2.1 per cent, barely above inflation of 1.9 per cent and half what it was a decade ago. 

Households are generally considered to be under financial stress when their mortgage repayments or rent account for more than 30 per cent of their income. In the December 2017 quarter, it took 31.6 per cent of the median family income to meet average loan repayments and 25.8 of median income for median rent payments.iii 

Despite this, most of us muddle through, paying our bills and trying to save a little extra to get ahead. But even good debt can turn bad if you’re not careful or your finances take a turn for the worse. Households with high debt are more vulnerable to financial setbacks such as unemployment or a large fall in house prices that could leave them owing more than their property is worth. 

So while interest rates remain low, now is the time to take control of your finances and get on top of debt. 

Tips for dealing with debt

  1. Do a reality check. Add up all your borrowings and the interest you are paying on each. That includes mortgages, investment loans, personal loans and credit cards. While the mortgage is likely to be your biggest debt, it’s also likely to carry the lowest interest rate.

  2. Complete a budget. Add up all income and expenditure for the past year. If you haven’t been keeping track of spending, make an estimate using your bank and credit card statements.

  3. Make a plan. Using your budget estimate, work out how much income you have left each month to reduce your debts. If you have several credit cards and personal loans, concentrate on paying off the debt with the highest interest rate and highest balance first, and when that’s repaid in full move onto the next highest. Look at the interest rate on your home loan, negotiate a lower rate with your lender or switch providers.

  4. Consolidate your debts. You might also consider consolidating ‘bad’ debts into one account after shopping around for the lowest interest rate.

Australia’s household debt may be high by global standards, but that only becomes a problem if you are struggling to meet repayments or sinking good money into bad debts. If you would like to discuss a debt reduction strategy, don’t hesitate to call. 

i Household debt to income, OECD, 2016, 

ii ‘Household income and wealth, Australia, 2015-16’, 30 October 2017, ABS, 

iii Adelaide Bank/REIA Housing Affordability Report, December 2017 edition, released 6 March 2018. 

    Weighing up the value of life insurance


    It probably comes as no surprise to anyone that there is a significant underinsurance gap between what we would need to maintain our standard of living should the unthinkable happen, and what we are actually covered for in the way of insurance. 

    Australia is one of the most underinsured nations in the developed world, ranking 16th for life insurance coverage.i

    There are lots of reasons people give for not buying life insurance, but top of the list is invariably cost. Sounds reasonable enough, especially when households are under pressure from increasing costs of living. But dig a little deeper and it turns out the way we weigh up decisions when outcomes are uncertain is not always in our best interests. 

    According to something called ‘Prospect Theory’, people fear a certain loss more than they value a larger but uncertain gain. We tend to view money spent on insurance premiums as a loss, unlike money spent on a daily cup of coffee, a pair of shoes or a weekend away, which deliver immediate rewards. 

    There’s also a disconnect between what we say we value and what we spend our money on. 

    Thinking about the unthinkable

    When asked, most people say the thing they value most is family. Yet when it comes to insurance many of us cover our car and our home but overlook our most important assets - our life, our ability to earn an income and the wellbeing of the people who depend on us. 

    Thinking about being diagnosed with a terminal disease, suffering a disabling accident or contemplating your own death or that of your partner is uncomfortable. Seeking cover for those possible eventualities is something that is very easy to put off or avoid altogether. 

    The real value of life insurance is the peace of mind, that if we die or become seriously ill and are unable to work then the right amount of money will go to the right people when they need it most. 

    Types of life insurance

    There are different types of life insurance. Death cover provides a lump sum if you die or are diagnosed with a terminal illness. Total and permanent disability (TPD) pays a lump sum if you are permanently disabled due to an accident or illness and unable to work again. Trauma Insurance (critical illness insurance) pays a lump sum on the diagnosis of one of a list of specific illnesses such as a heart attack, cancer or a stroke. Income protection provides a monthly payment if you can’t work due to illness or injury. 

    The amount of life insurance you need depends on your family circumstances, your income and lifestyle. While many working Australians have default cover in their super fund, that’s no cause for complacency. It’s often a basic level of cover, which may need to be topped up outside super. 

    Take Chris, aged 30. He has a partner, two children and the median level of default life insurance cover in super for someone his age. That is, $211,000 in death cover, $162,500 for TPD and $2,250 a month for income protection. According to a recent report by Rice Warner, the amount someone in Chris’s position needs is closer to $704,000 of death cover, $910,000 of TPD cover and $4,150 a month of income protection.ii

    Paying life insurance premiums won’t provide the instant pleasure hit of an espresso, but most people would be surprised to know that the peace of mind that comes from protecting their family’s financial security costs less than their daily cup of coffee. 

    Rice Warner estimates the cost of death cover and TPD cover for the average working Australian at less than 1 per cent of salary, and less than 0.5 per cent for white collar workers.iii Which begs the question, what cost do you put on the wellbeing of the people you love most? 

    If you would like us to help you work out the appropriate level of life insurance for your family, and the best way to achieve it, give us a call. 

    i Swiss Re Economic Research & Consulting, 2007
    ii Underinsurance in Australia 2017, Rice Warner. 

    Home and away with super


    Australians buying their first home or downsizing in retirement are about to receive a helping hand thanks to new superannuation rules which come into effect on July 1. From that date, first home buyers will be able to contribute up to $30,000 into their super fund towards a home deposit while downsizers can put up to $300,000 of the proceeds of selling the family home into super. 

    This new measure has been devised to assist first home buyers, many of whom have struggled to save a deposit as rising prices put even entry level properties out of reach.

    At the other end of the scale, the change is envisaged to help older homeowners who frequently find themselves in large houses while trying to survive on a modest super balance or the aged pension. 

    Here’s how the Federal Government hopes to improve the situation at both ends of the property market. 

    Buying a home

    Under the new First Home Super Saver (FHSS) scheme, individuals can arrange for up to $30,000 to be deducted from their pre-tax income and put in their super account. They can then withdraw 85 per cent of that money ($25,500), plus any interest they’ve earned on it, to use for a home deposit. In the case of a couple, both partners can save $30,000, meaning a deposit of $51,000 (i.e. 85 per cent of $60,000) plus interest can be accumulated. 

    So what’s the catch?
    It’s complicated.

    For starters, individuals can only contribute $15,000 into their FHSS account in any one year. What’s more, the compulsory 9.5 per cent super contributions made by employers can’t be accessed; additional voluntary contributions need to be made. The annual contributions cap of $25,000 cannot be exceeded; this includes all voluntary contributions plus employer’s Super Guarantee contributions. 

    When the money is withdrawn, it is taxed at the individual’s marginal tax rate minus a 30 per cent tax offset. Effectively, that means most people will pay little or no tax although higher-income earners on high marginal rates will still pay some tax.

    Selling a home

    Under the Downsizer Super Contribution Scheme (DSC), homeowners who are 65 or older can put up to $300,000 of their home sale proceeds into their super provided it’s their place of residence and they’ve owned it for at least 10 years. In the case of a couple, both partners can deposit $300,000 (collectively $600,000) into super. 

    What’s the catch?

    Unless you're a wealthy retiree looking for a tax break there doesn’t appear to be one. For those who already have more than $1.3 million in super, adding a $300,000 downsizer contribution will breach the $1.6 million balance transfer cap which is the maximum balance that can be held in a tax-free super pension account. Given the current generation of Australians have been retiring with average super balances of well under $300,000, that is unlikely to be an issue for most downsizers. 

    What do you do now?

    If you are looking to purchase your first home, you will need to check your super fund allows FHSS contributions and, more importantly, withdrawals. You’ll then need to arrange for your employer to deduct voluntary contributions of up to $15,000 a year. When you want to access your money, you will have to acquire a ‘FHSS determination’ (essentially a balance statement) from the Commissioner of Taxation before requesting your super fund to release the money. 

    Following approval of this request, your super fund deposits your FHHS money, minus any tax you’ve incurred, into your account. You then have 12 months to sign a contract to buy or build a home. 

    If you are looking to downsize your home, you will first need to check your super fund accepts downsizer contributions. If it does, you can deposit up to $300,000 within 90 days of receiving the proceeds of the sale. You’ll have to fill in and send your super fund a ‘downsizer contribution form’ before, or when transferring the money into your account. 

    If you’re hoping to either buy your first home or downsize, call us to discuss how the changes to super can save you money.