10 September 2012

Dear Investor,

10 Golden Rules for managing your finances - Part 2

In last month's Investor Insights, we looked at five of the ten "Golden Rules" of managing your finances that the Sydney Morning Herald looked at several years ago. In this edition, we look at the final five golden rules considered by the Sydney Morning Herald.

  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 benefits 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. However your losses can also 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 75% 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 volatile. However, it is still a legitimate investment strategy, which, if managed properly, can generate better returns than simply investing your own capital.


  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 share or the investment 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 units averages out.

    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.


As always you should seek your own professional investment advice before making any investment decision.


Best regards,
Chris Andrews




The following award and ratings were given to the Pooled Mortgage Option within the La Trobe Financial Mortgage Fund

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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 145 staff and has raised over AUD$10Billion to assist over 100,000 customers since inception in 1952.

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