7 October 2009

Dear Investor,

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.

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. Invest regularly

    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.


Best regards,
Chris Andrews

QUICK LINKS

> Home
> About Us
> PDS - Want to invest?
> FAQs
> Subscribe Free
> Independent Ratings
> Mortgage Shopping List



Chris Andrews
Head of Funds Management

t  +61 3 8610 2811
e  candrews@latrobefinancial.com.au

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.

Copyright 2010 La Trobe Financial. All rights reserved. No portion of this may be reproduced, copied, or in any way reused without written permission from La Trobe Financial. Disclaimer



* La Trobe Financial Asset Management Limited ABN: 27 007 332 363 and AFSL No: 222213 is the issuer and manager of the La Trobe Australian Mortgage Fund. It is important for you to read the Product Disclosure Statement for the Fund before you make any investment decision. You can get a copy of the PDS by calling 1800 818 818. You should consider carefully whether or not investing in the Fund is appropriate for you.
(1) The rates of return from the Fund are not guaranteed and are determined by future revenue of the Fund, and may achieve lower than expected returns. Past performance is no guarantee of future performance. Investors risk losing some or all of their principal investment.
(2) Withdrawal rights are subject to liquidity and may be delayed or suspended.
(3) As at 30/11/10 the La Trobe Australian Mortgage Fund had received a Morningstar RatingTM of 5 stars. The Morningstar Rating is an assessment of a fund's past performance - based on both return and risk - which shows how similar investments compare with their competitors. A high rating alone is insufficient basis for an investment decision. © 2010 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use or distribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.pdf
(4) 3.75 star rating out of a possible 5 star rating indicates that Adviser Edge believes that La Trobe has performed in line with its peers and exceeded its peers on some fronts.
(5) The Standard and Poors rating of 4 out of 5 stars indicates that S + P has high conviction that La Trobe Financial will consistently generate risk-adjusted fund returns in excess of its relevant investment objectives and relative to its peers.
(6) The award was given to the La Trobe Australian Mortgage Fund, Pooled Mortgages Option.
Research Ratings are subject to change. To view the latest research information please visit www.adviseredge.com.au or www.standardandpoors.com.au. Ratings issued by Adviser Edge Investment Research AFS Licence No. 236783 and Standard & Poors Information Services (Australia) Pty Ltd AFS Licence No. 258896 are solely statements of opinion and not statements of fact or recommendations to purchase, hold, or sell any securities or make any other investment decisions. The ratings are only one factor to be taken into account in deciding to invest. Research Houses receive a fee from La Trobe for rating the product. The Adviser Edge rating is generally a measure of the rated entity's capacity to meet its repayment obligations in all market circumstances.
IMPORTANT: This message, together with the La Trobe Financial website (www.latrobefinancial.com.au) and all its contents have been prepared for general information only and should not be taken as legal or financial advice, and as such the specific needs, investment objectives or financial situation of any particular user have not been taken into consideration. Individuals should therefore talk with their financial planner or advisor before acting on any information present on this message or the La Trobe website.