7 October 2009
A selection of 10 Golden Rules for managing your finances - Part 2
In last week's Investment News, we, we looked at five Golden Rules of
managing your finances that the Sydney Morning Herald looked at about four years
ago. In this edition, we look at the final five rules.
Get your pay before the taxman
Salary packaging involves taking part of your regular pre-tax income and using it to contribute to your superannuation.
The remainder of your income after these payments is then taxed.
Whether and what you can salary sacrifice will depend on your employer,
but it never hurts to ask and it can mean substantial savings.
For example, if you earn $1,000 a week and you are taxed at an overall rate of 10%,
the income tax payable on that is $100. But if you salary sacrificed $250 of your $1,000,
your taxable income falls to $750 and so the tax you pay falls to $75, a saving of $25.
There may be fringe benefit tax payable on salary sacrifice arrangements,
so it is best to check before taking any action.
However, with superannuation, there is no FBT.
Provided that the 15% rate at which superannuation contributions are taxed is lower than your marginal tax rate, you are immediately ahead.
Borrowing to buy property
Borrowing, or gearing, increases the amount you can invest and so increases any gains on your investment.
But it's risky because your losses can multiply when the asset falls in value.
Let's say you have a $100,000 investment property,
$10,000 of which is your money and $90,000 of which is the bank's.
If the property rises in value by 5% in a year,
then you've made $5,000 on your $10,000 investment - a gain of 50%.
Of course, it works the other way too.
However, if you are willing to make a long-term commitment and do your research,
it can be an effective way to build wealth,
especially for people in high tax brackets.
Negatively gearing into property allows you to offset your costs against tax.
This includes interest on the loan, travel to inspect the property,
management fees and repairs and maintenance.
Borrowing to buy shares
Borrowing to increase your returns can apply to investments in shares and other financial products.
Many people use margin loans to invest in shares. These allow you to borrow between
30% and 70% of the market value of your investments.
The shares are the security for the loan and if the price of the shares falls,
you may fall below the gearing ratio allowed by your lender. When this happens,
it will make what is known as a "margin call", which requires you to make
partial repayment of the loan. So, you will either need to find extra cash to
pay, or sell some of your shares to raise the money or find other security for the loan.
As we all know from the Global Financial Crisis,
borrowing to buy shares can be extremely dangerous.
However, it is still a legitimate investing strategy, which, if managed properly,
can generate better returns than simply investing your own capital.
Because the stock market is volatile,
it is suggested that you take out this type of loan only if you know what you are doing,
have a strong appetite for risk and have strong cash flow.
Make your bad calls work for you
In your portfolio of shares,
you will have those that you can sell at a profit and those that will make you a loss.
If you sell the shares that make a profit,
you will end up with a capital gain and this will attract capital gains tax.
But if you have a share investment that hasn't made any money, and it's a good time to exit the share,
you can offset any capital gains with your capital loss.
Capital losses can be carried forward indefinitely and it's handy to remember this because
you may need to sell poorly
performing shares before you are happy to sell the ones that are making you a profit.
And note that you will pay capital gains tax on only half of the capital gain
if you have held the stock or the property for more than 12 months.
If you placed a fixed dollar amount into an investment that fluctuates in price,
when the unit price is low, you can buy more of the investment.
Also known as "dollar cost averaging",
this usually involves investing the same dollar amount in shares or a managed fund over time,
say $5,000 each month. Over time, the price paid for the shares or the units averages out,
and you will generally end up with
more shares or units than if you put all your money in at the one time.
The investment adage "time in the market is better than trying to time the market" applies.
By investing regularly,
you remove the risk of investing a lump sum right before a market slump.
We hope that these rules are helpful in helping you manage your finances more effectively.
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Head of Funds Management
t +61 3 8610 2811
Chris Andrews is the Head of Funds Management for the La Trobe Group and has responsibility for the La Trobe Australian Mortgage Fund.
Read full profile here.
La Trobe is one of Australia's leading independent specialist mortgage Financiers. Its business includes residential mortgages, commercial mortgages, and investment services operating one of Australia's largest Mortgage Funds under AFSL 222213. It employs over 115 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.
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