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The latest news from LBW.....

...... includes tax and technology updates and general business information.

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Investing for the L O N G term!

Remember you don't invest for today, or even tomorrow ...it's really for a lifetime.  So what has happened in the last 20 years ..... this year's ASX/Russell report into long term investments returns shows how five major threats to long-term wealth creation could potentially play out for millions of Australians.

  1. Rear-view mirror investing
  2. Lack of portfolio diversification
  3. Reliance on residential property
  4. Investing in over-priced traditional assets
  5. Setting and forgetting.

All the signs point to a future where savvy investors will increasingly use diversified multi-asset strategies, designed to efficiently capture new sources of return opportunities to help build their long-term wealth.

Download the report from our downloads page.


GBU of Debt (The Good, Bad, and the Ugly)

 

Debt, like with most things, can be good for you if taken in moderation. But not all debt is the same, and some debt can be very bad for you in deed. But what is good debt and how do you avoid the bad?

In general, good debt carries a few simple traits - low interest rate and/or tax deductibility. Lowering the rate of interest can be achieved by either using some of your assets/property as security (as in most home loans) or by improving your credit score (more applicable to businesses and homeowners in the US). Being able to claim tax deductibility on most occasions comes down to what the loan was used to pay for - i.e. the loan needs to pay for an asset that has the the main purpose of deriving you an income.

Bad debt on the other hand usually has neither of these qualities (higher rate of interest and not tax-deductible).  

Ranking of Debt (for illustration purposes only)

  1. Money owed to parents - Most parents forget about interest altogether, though non-financial costs may be high; 
  2. HECS - Though this is not tax-deductible, the low rate of interest (generally inflation, which is currently below 3%) means for most people this is the lowest cost debt.  Also, the reason for taking on the debt is generally a very good one.  Furthermore, in some cases it may be a debt that you will never have to actually repay (i.e. compulsory repayments depend upon your taxable income exceeding a certain level);
  3. Investment loan secured against property - Whether the investment is the property itself, shares or other asset, this type of debt generally has a low cost (mortgage rates) and is tax-deductible;
  4. Margin loan - This would have a higher rate of interest than the above, but it does avoid the need to place another mortgage over you home or other property;
  5. Business debt - Most business loans have a higher costs than personal investment loans, but are tax-deductible.  Costs may become lower if appropriate security offered, but covenants required by lenders may also be high.  For many businesses, such debt is used as an engine for growth;
  6. Home loan - A very useful source of debt, and usually comes at a low rate of interest.  But its non-tax-deductability means the after-tax cost can be higher than the above;
  7. Car loan - Debt to purchase a much needed vehicle usually comes with a rate of interest 2-3% above mortgage rates and is generally not tax deductible (except the portion used for business use);
  8. Personal loans - This type of debt generally comes at reasonable costs without any tax deductability;
  9. Credit cards - Though you can get away with paying no interest for very short term balances, any medium to long-term debt can be very costly in deed; and
  10. Loan shark - Interest costs may be high.  Non-financial late payment penalties may also be high.
It is useful to understand the difference between your own debts and how to rank them as you can use this order to figure out how much to pay towards each of them.  In eliminating debt, the process is quite simple.  Pay-off as little as you can from the higher ranked debts (without incurring penalties), and pay as much as you can off the lowest ranked debt.  Once that debt is gone, you continue the process, paying off the new, lowest ranked debt as much as you can.

So some debt may be necessary, and some not so necessary.  Some good, and some not so good.  The trick is to avoid the bad and unnecessary debt by living with your means, and if that  fails, make sure you get rid of the bad before worrying about the good. 

3 Big Rocks

Some of you may already be familiar with the following object lesson, which goes something like this:

  • You have a jar, a pile of sand, small pebbles and 3 big rocks
  • Objective - put all of the sand, pebbles and rocks into the jar

The lesson is quite simple. If you start with the sand and finish with the rocks, you will not be able to fit it all in and you risk the big rocks falling out. You need to start with the big rocks first.






The 3 big rocks represent what we should focus on first and for most families, the 3 big financial planning rocks are:



Three Big Rocks
(1)Living Comfortablythroughout your Working Life;

(2) Saving for aComfortable Retirement; and

(3) Paying off theFamily Home.

This is by no means an exhaustive list, and many have more rocks (e.g. some of the 'pebbles' below) or less rocks (e.g. retiree may only have 1 rock left). When filling your financial planning "jar" these rocks should be the focus and have priority over lesser goals or wants.


Small Pebbles
Children's Education, Family Business, Overseas Holidays, Domestic Holidays, Bequests, Gifts, Donations, New Car, New Furniture, Self Education, Family Support, New Phone, New Computer, Family Activities, etc.


Again, some of these may very well be big rocks and not pebbles and should demand a higher focus in your financial plans. A private school education for your children may be a must or contributing to the family business may be necessary. The important thing here is to understand which goals are necessities (big rocks) and which can be foregone or delayed if necessary.




A Pile of Sand
Finally, after you have put in your rocks and then your pebbles, you can now fill any free space in your jar with sand. These are the luxuries in life, the wants, but not the musts. These may include:

 

Luxury Cars, Art Collections, 5-Star Holidays, First Class Travel, Top End Consumer Goods, and so on.



So what are your big rocks? And have you prioritised them appropriately? Have you put first things first?

Though it would be great to satisfy all our needs and wants, as most of us know, the latter can be a long and never ending list. By focussing your financial planning on your major short-term and long-term goals (your big rocks), you are likely to have more success in securing your financial future and minimising unwanted surprises