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Christmas Club Savings Accounts

You have probably never even heard of a Christmas Club Savings Account.  They are an account that helps you save for Christmas by allowing you to make direct deposits of your savings during the year but you can’t access the account without penalty until Christmas time, generally from the 1st of November.  Christmas Club  Savings Accounts were really popular in the 1970s and 1980s and are now becoming harder to find.  The big banks no longer offer them but you can still find them with some of the smaller banks and credit unions.   So are Christmas Club Savings Accounts worth it?

Well, the biggest pro for a Christmas Club Savings Account is that they allow you to start a regular savings habit for Christmas, while restricting your access during the year.  Generally speaking most accounts allow you to access your money for free from the 1st of November until the 31st of January.  You can set up a direct debit from your regular account when you get paid, straight to your Christmas Club Account.  Even at $10 per week for a year you will have $520 by the time Christmas rolls around.  Another pro is that these accounts generally have no account keeping fees and when you withdraw the money it does not have to be used on Christmas, the money can be used for bills or birthday presents, whatever you like.

The downside is that if you do need to access your money before the specified period you will be penalised.  Each account has different rules around this so make sure you are aware of how your specific account works.  Also, generally speaking, the interest rate on these accounts is not as good as other types of savings accounts.

So are Christmas Club Savings Accounts worth it?  It depends what you are after, like all accounts there are pros and cons.  If you are interested in a Christmas Club Savings account make sure you shop around for the one that suits you the most.  And given each one is different make sure you understand all the terms and conditions of the one you choose.  There are also loads of other ways to save for Christmas, apart from using a Christmas Club account so click here check to some of them out.

What is your favourite way to save for Christmas?

If you liked this post, you might also like:

How I Raised An Extra $910 To Pay For Christmas

Chrisco Hampers Are They Good Value?

5 Ways To Save For Christmas

How To Pay Off Your Mortgage Faster

5 Websites That Will Help You Make Or Save Money

 

Disclaimer:

The information contained in this post is general in nature and does not constitute financial advice.  Please see your financial advisor for advice specific to your individual circumstances

20/11/2014 11 comments
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Sort Out Your Superannuation

Yayyyy!  Spring has sprung (not that you can tell from our recent weather!) and it is time to get cracking on sorting out all those things you have neglected over the cold winter months.  Now I am not just talking about getting rid of the dust bunnies hiding behind the furniture (guilty) but spring can be a great time to sort out your superannuation too!  I know most people would rather poke their eyes out with hot sticks than think about their superannuation.  However, the truth is that superannuation is your friend; it is there to help you out when you get older and want escape from the world of work forever.  Unfortunately nowadays you cannot rely on the pension to save you as governments creep the qualification age further and further away.  So do it!  Follow these five easy steps and sort out your superannuation for spring and keep yourself off the cat food in retirement!

(1) Get to know your superannuation

Ok so if superannuation is your friend then you need to check in with it and get to know it a little better.  The more you know about your superannuation, the more comfortable you will feel in making decisions about it.  Most funds allow you to access your account on the internet, and some on your phone or tablet.  Login and check your balance.  Knowing how much you have in your super account is a fantastic start to your spring clean.

(2) Check which option your money is invested in

Now take a look at which option your money is invested in.  Which option you choose can have a big impact on how much you will have at retirement.  Which option is right for you is entirely an individual choice and is influenced by factors such as your age, stage in life and risk tolerance.  Get your fund to explain to you what each investment option means and the risks involved.  Many industry funds offer free financial advice.  So if you are the member of an industry fund, ring them and see if you can access that service.

(3) Check your insurance

Super funds offer three types of insurance: life; total and permanent disability (TPD) and Income Protection (IP).  Ask yourself the important questions: do you have the right type/s of cover?  Do you have the right amount/s of cover?  Which is the right cover and how much you should have is entirely an individual choice.  What is right for one person might not be right for another.

(4) Track down any lost or unclaimed super

Apparently there is over $18 billion in lost and unclaimed superannuation that is waiting to be found.  Some of it could be yours!  Superannuation often gets lost when you change address, jobs or name and let’s face it most of us have done one of those things at some time or another.  The Australian Tax Office’s SuperSeeker site will find any of your lost or unclaimed superannuation.  You can use SuperSeeker to claim the lost funds and consolidate them into your current superannuation account.

(5) Consolidate your accounts

Many Australians have more than one superannuation account and we all know superannuation companies like to charge fees.  Over time these fees can eat away at your retirement savings.  Consolidating your accounts can help reduce the amount of fees you are paying and make your superannuation easier to keep on top of.  The SuperSeeker site from the ATO can also consolidate your accounts for you.  It is quick, easy and free.  Even better you do not have to fill out any paper forms!  Yay!!  Alternatively you can contact your fund and they might have a service where they can do it for you.

Spring is a time of renewal.  So lavish some of your spring cleaning attention on your superannuation.  You won’t regret it as it could save or make you thousands of dollars in extra retirement savings.  Which is a much bigger payoff than spring cleaning the hall cupboard or sorting out your wardrobe! Oh, which I must get on to! 🙂

Which area of your finances do you think deserves a spring clean?

This week I am linking up with the lovely Hope from Nanny Shecando for “Step Into Spring!” post series!!

Click here to pop over and see my other fab spring post on her blog called “5 Ways To Spring Clean Your Finances!”

If you liked this post, you might also like:

The Superannuation Co-Contribution – How To Get An Extra $500 Superannuation For Free

How To Pay Off Your Mortgage Faster

5 Websites That Will Make Or Save You Money

How To Save On Your Health Insurance

 

Disclaimer:

The information contained in this post is general in nature and does not constitute financial advice.  Please see your financial advisor for advice specific to your individual circumstances.

08/09/2014 18 comments
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find your lost superannuation.

Loads of people I speak to have lost superannuation.  Actually, I think most people do, you simply change jobs a few times and lose track.  Easily done.  Well, until recently one of those people was my husband.  Yes, my husband had superannuation that had been lost in the system from a job he had ten years ago!

I cannot tell you how much this irked me.  Finding your lost superannuation is the quickest and easiest way to boost your superannuation balance, and it helps keep you off cat food in retirement.  Having explained this to my husband, I started a campaign to get him to move his superannuation.  So year one, not wanting to be the nagging wife, I would gently remind him that he had a new job and that he should move his superannuation.  Nothing.  Year two, I stepped up the campaign a notch and I printed out the switch form a couple of times and left it next to his computer.  Nothing.  Year three, giving up on the idea of not wanting to be the nagging wife, I gave regular, not so subtle reminders to move his superannuation.  Still nothing.  Year four, sigh, I gave up my campaign.  Like they say you can lead a horse to water but you can’t make them drink.  Then about a month ago, out of nowhere, after reading one of my posts my husband declared he was going to find his super.  Hooray! I wasted no time and got him on to the computer and over to the ATO SuperSeeker site.

It was so easy and took very little time at all.  All he needed was his name, date of birth, tax file number and a previous notice from the tax department to register for online services.  (He just used last year’s tax assessment).  When he got on to his account and did a search for his lost superannuation there it was, waiting for him.  Just a few more clicks and he had transferred it to his current superannuation account.  A few weeks later, his current superannuation provider sent us a letter saying the money had been received.  Yay!  So simple.

However, you don’t just have to use SuperSeeker there are a couple of other ways to find your lost superannuation too.  A great way is to contact your current superannuation provider or check their website and get them to do it for you.  Most have a service to find your lost superannuation and they will also help you combine superannuation accounts.  Combining your accounts into one is a great strategy as it not only helps save on fees but it also makes your superannuation much easier to keep track of.  Over the long term, fees eat into your retirement savings.  Also you can click here to contact AUSfund, they look after the lost super of many Australians for some of the biggest super funds in Australia.  They can tell you if they have any of your lost superannuation.

So, don’t wait ten years like my husband did, click here to go to the ATO’s SuperSeeker site and find your lost superannuation today.

If you liked this post you might also like to read the following:

How To Boost Your Superannuation Balance For Free!

How To Boost Your Superannuation Balance While You Are A Stay At Home Mum

Your Superannuation And Your Children: One Thing You Really Should Know

Women And Superannuation: How Do You Make Sure You Have Enough?

* Please note this is for your general information only and does not constitute financial advice.  Please see a financial planner or accountant to get advice specific to your individual needs.

24/09/2013 12 comments
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Financial tips for parents

Let’s face it parenthood changes everything.  From your social life to your ability to go to the bathroom in peace.  Things are no longer just about you and your partner, there are other considerations that must be made.  With parenthood also comes extra financial responsibility, there are extra costs and quite often less income coming in the door as one partner stays home or changes to part time work.

So here are five financial tips that you need to know now you are a parent:

  1. You should make sure you have a Will. I know you don’t want to think about it, but a Will is crucial in making sure that your children are well looked after should anything happen to you, your partner or both of you.  It gives you the ability to say how your assets will be distributed and even who should have custody of your children should the worst case scenario occur.  If you have complicated family relations then a Will is even more crucial to ensure that your wishes are clear.  A Will doesn’t have to be expensive, you can get a Will kit from your local newsagents, do it online or do it through your solicitor (definitely worth the money if your affairs are complex).  If you already have a Will make sure it is updated to account for any changes in circumstance such as additional children or divorce.
  2. You should consider Life Insurance.  If it would be difficult for your partner to raise your children without your income, then you should have life insurance.  The same is true if you couldn’t afford to raise your children without your partners income, then you need life insurance on your partner.  Without trying to sound like a bad daytime TV ad, life insurance will give you peace of mind.  If you already have life insurance, you must check it and make sure it is enough now you have children.
  3. Get rid of your credit card debt.  There are several things the banks won’t tell you about your credit card.  Number one is that credit card debt is crazy expensive.  Generally speaking the banks charge you about 19% on your credit card, compared to official interest rates of 2.75%!  Secondly, if you pay the minimum repayment it will take you an eternity to get rid of it.  Just check your statement.  The banks now have to tell you how long it will take to pay off your balance at the minimum repayment.  Last time I checked mine, it was 64 years and 7 months!  The only way to use a credit card is to pay it off every single month.  If you can’t do this then cut it up and ramp up repayments to pay the debt down.  Please click here to see my top tips for getting rid of your credit card debt.
  4. Make sure you have an emergency fund saved.  You should aim to have six months of after tax income saved to ensure that you have the confidence to deal with any bumps in the road that life might bring like another baby or losing your job.  My mother always told me that when financial problems walk in the door love flies out the window.  Having an emergency fund helps to relieve financial stress when things inevitably do not go to plan.
  5. Be aware of the huge tax rates that can be charged on savings in your child’s name.  Most people don’t know this but investing directly in your child’s name is unlikely to be the most tax effective way of saving for your child.  This is due to tough penalty taxes for minors.  The penalty tax is applied to “unearned income”, that is money the child has not worked for and includes income such as interest, share dividends and distributions from trusts.  If you invest under your child’s name, the first $417 of unearned income is tax free but after that tax is charged at 66%!  Any unearned income after $1,308 is taxed at 45%!  Ouch! (Click here to see my full post on tax rates applied to children’s investments)

Parenthood changes everything.  I hope these tips help to better navigate the financial responsibilities that come along with it.

If you liked this post you might also like to read:

How To Teach Your Children About Money

3 Things You Really Should Know When Saving And Investing for Your Children

How To Pay Off Your Mortgage Faster

How To Boost Your Superannuation Balance While You’re A Stay At Home Mum

* Please note this is for your general information only and does not constitute financial advice.  Please see a financial planner or accountant to get advice specific to your individual needs.

20/08/2013 37 comments
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How to get the most from your savings account

Your savings are an investment.  They are not something that should be plonked into the same old  savings account because that is what you have always done.  You can, and should make your savings work harder.  With the latest round of interest rate cuts, interest rates are low and it is now even more important to make sure you are getting the best possible return for your savings.  “Don’t I just pick the account with the highest rate?” I hear you say.  Yes, generally speaking, but like most things it is not as easy as just that.  So here are a few things you need to look out for in choosing the best possible a savings account for your cash.

  1. What is the interest rate?  I know it is an obvious one.  The higher the better but there are a couple of tricks when looking at the rate.  Firstly, you have to be clear whether it is a bonus rate or not.  Bonus rates are an introductory offer which lasts for a period of time before the account reverts back to the regular interest rate.  The bonus period generally lasts from 3 to 6 months.  The trick is that once that period is over the difference in interest rate can be quite large.  For example one account I was looking at had a bonus rate of 4.6% but then reverted to 2.75% after 5 months!  There is nothing wrong with taking a bonus rate just as long as you know that is what you are doing and you are clear what rate the account reverts to.  In fact, you can take advantage of them then move when the rate ends if there is a better deal on offer.  Just make sure the account allows you to do this.
  2. How often is the interest paid? The trick is, the highest interest rate is not always the best as how often the interest is paid is an important factor too in determining your investment earnings.  Generally speaking the more frequent the interest payments the better off you are.  This is due to the power of compounding (click here to find out more about compounding).  So, when looking at two investments at the same interest rate, the one with the more frequent interest payments is better.  For example, a $10,000 investment at 4.7% paying interest monthly will make you $10 more interest over 1 year than the same investment paying annual interest.  It doesn’t sound like much but run that investment over 5 years and the difference is $61.  We all know every little bit helps!  Click here for a calculator to check out the impact of compounding and interest rates on your savings and to help you compare accounts.
  3. Fixed vs variable interest rates?   Most basic online savings accounts and cash management accounts pay variable interest rates.  This means that the rate of interest that you will be paid will rise and fall with changes in official interest rates.  Fixed rate investments, such as term deposits pay the same rate of interest during the term of the investment, regardless of what happens to official interest rates.  Fixing your rate is a good strategy when interest rates are falling because you lock in a rate but when rates are rising you miss out on higher rates during the term of your investment.
  4. Are you locked in?  In financial speak we call that the term of the investment.  Most online savings account give you easy access.  Term deposits lock your money away for a specified period of time.
  5. What fees are involved?  Fees eat away at your returns.  Given the low interest rate environment it becomes even more important to make sure you have a fee free account.
  6. Is there are minimum balance?  Be clear on whether the account has a minimum balance and whether you make that criteria.
  7. Other features.   Be clear on what sort of other features you would like to have on the account.  Do you want ATM access or do you want to limit access so you are less likely to raid the cookie jar :-).

So as you can see there are lots of factors that need to be taken into account when choosing the best savings account for you.  One of the best ways to compare all these factors is to use a comparison site.  These site don’t cover the whole market but they can certainly give you a good idea of what is out there and help you on your journey to get more out of your savings.

If you liked this post, you might also like:

 10 Easy Ways To Save Money

How To Pay Off Your Mortgage Faster

How Interest Rates Impact You and Your Family

How To Boost Your Superannuation Balance For Free!

* Please note this is for your general information only and does not constitute financial advice.  Please see a financial planner or accountant to get advice specific to your individual needs.

15/08/2013 19 comments
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Top Tax Tips

No one likes tax time, well maybe except accountants (they love that sort of thing), so I have decided to put together my top tax tips to help you get through tax time as painlessly as possible.   Here goes:

(1)    My number one golden rule when it comes to tax is that if the Taxman owes me money, (think refund), I get my tax done as quickly as possible.  If it is likely that I owe the Taxman, for example I have made extra cash through saving or investments, I don’t submit my return until the 31st of October if I am doing it myself.  If you use a tax agent, you can push it out even further.  Most tax agents have an extension until the 31st of May, but confirm with your agent to be sure.

(2)    Consider using the ATO’s online tax preparation and lodgement service called e-tax.  It’s free and scarily enough, you can get a lot of your data prefilled in from the tax departments records.  This means that for a lot of things such as your income from your employer, centrelink payments and bank interest, you just have to check that it is correct.  It means that relatively simple returns are pretty easy to handle yourself and most refunds through e-tax are issued within 12 business days.  Check out their website at http://www.ato.gov.au/Individuals/Lodging-your-tax-return/E-tax/ to decide whether it is for you.

(3)    Make sure you are on top of what deductions you can claim.  The ATO outlines specific deductions for many occupations including nurses, hairdressers, teachers and even “Adult industry workers” so check out the fact sheets at http://www.ato.gov.au/Individuals/Income-and-deductions/In-detail/Deductions-for-specific-industries-and-occupations/ and make sure you are not missing out on any deductions.

(4)    The  ATO considers electronic records to be just as valid as paper ones.  This is true of both documents that were electronic to start with (for example receipts for online purchases) and documents which you have originally received in paper form. This means that you can now scan all your relevant paper receipts and throw away the original.  Just make sure you also keep an additional electronic back up :-).

(5)    Car usage is the biggest single deduction that you may be able to claim as an employee.  Travel to work is generally not allowable, but you can claim the cost of using the private motor vehicle if it is being used for work purposes such as travel between work locations visiting clients/customers etc.  If you want to make a claim the best way is to keep a log book to substantiate your claim.

(6)    If you have a flexible employer who allows you to work from home you may be able to claim this through your tax.  To cover expenses such as heating, cooling, lighting and depreciation of general office furniture, you can either claim your actual expenses (but you will need to keep a diary of those expenses and hours worked) or you can claim a fixed rate of 0.34c per hour worked.  If you use the fixed rate, you will need to keep a diary to record the amount of time you use your home office for work purposes.  Expenses such as stationary, telephone, internet and computers are claimed separately.

(7)    Make sure that any investments or savings you have are in the name of the spouse paying the lowest tax rate.  This is because dividends and interest are taxed at your marginal tax rate.  Watch out for investments in the names of your children as they may attract punitive tax rates as explained in my previous post “Three things you really need to know when saving and investing for your child”

(8)    Click here to see the latest marginal tax rates.  You can now earn $18,200 before you have to start paying any tax.

If you liked this post, you might also like:

How To Teach Your Child About Money

10 Easy Ways To Save Money

How To Pay Off Your Mortgage Faster

Top Tips For Getting Rid Of Your Credit Card Debt

 

*Please note this is for your general information only and does not constitute financial or tax advice.

17/07/2013 8 comments
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Property Investment

The Money Mummy Guide to Investing is back and this week we are going to look at the risk and return characteristics of property investments and how these could fit into your overall investment strategy.

Now as Australian’s we are renown for being in love with property.  It is easy to see why, residential property has been an amazing performer, such that we now have some of the most expensive residential property in the world.  I will have to admit, I have a bias against Australian residential property as an investment, right now.  Simply because on most measures it is simply unaffordable.  How many people do you know who are struggling to buy a property?  So despite low interest rates, in my view there is little room for property prices to keep on climbing.   (I will also admit that I said this five years ago when we brought our family home, at the height of the global financial crisis (GFC) and was proven completely wrong as property prices continued to climb!)

Now I am no expert in property investment (given my bias I have never brought an investment property) but here are some of the main advantages of investing in property:

  1. It is an investment that you can see and touch, so in that sense it is easier to understand than say an investment in shares
  2. Property returns, over time are seen as less volatile than shares
  3. You can earn rental income as well as benefit from capital growth, if the price of your property increases over time
  4. In Australia there can be tax benefits in purchasing an investment property, if the property is negatively geared (ie. the cost of the interest on the loan is larger than the rental income received)

The main negatives of investing in property include:

  1. The rental income, particularly nowadays, quite often does not cover your mortgage repayments or other expenses so you might have to use other income to cover these costs.
  2. Your returns from your property investment may be vulnerable to changes in interest rates, depending on the structure of your loan.
  3. If you urgently need to raise cash, selling the property might take a long period of time.
  4. You will have to cover all the costs if the property is left untenanted for a long period of time or if the tenants do not pay the rent.  You are also at risk that the tenants may not look after the property as you expect.
  5. Entry and exit costs are high, for example stamp duty and real estate agents costs.
  6. Residential property is a chunky investment.  If this is your main investment plus your family home you might lack diversification in your investment portfolio.  This means you are very exposed to any decline in residential property prices.  This was a hard lesson learnt by many American’s during the GFC (Global Financial Crisis).

It is often forgotten that property investment does not just have to be about buying a house or a flat.  There are many different types property investment that can be accessed through a managed fund or investment on the stock market (I will talk about these two forms of investment in a later post).  For example, within the property segment you can invest in retail property (ie. shopping centres), office buildings or industrial buildings.  Some investments offer you pure exposure to these segments or a mix of the three.  Each segment is driven by the same overall characteristics as residential property, it is all about collecting rent and capital gain in the overall price of the property.  However, each segment has slightly different drivers, for example shopping centres (retail) is more related to how much consumers are shopping, where as office buildings are more related to the growth in business spending.

If you are considering an investment in property right now, make sure you get some good advice.  Beware, there are many property spruikers out there who encourage you to borrow heavily and build large property portfolios quickly, this will leave you dangerously exposed to any fall in property prices.  Prices are high, so be careful and think hard before you commit my fellow investors!

If you liked this post check out the rest of the series by clicking on the links below:

Investing: How Do I Get Started?

What Is My Risk Tolerance?

Risk and Return

What Are My Investment Choices?

Fixed Interest Investments

 

Happy Investing!

 

Money Mummy

 

* Please note this post is for your general information only and does not constitute financial advice

04/07/2013 0 comment
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Fixed Interest Investment

This week we are going to look at the risk and return characteristics of fixed interest investments and how these could fit into your overall investment strategy.  When you make an investment in a fixed interest product you are essentially agreeing to lend an institution (say a bank in the case of a term deposit), or a government (in the case of a government bond) or a company, money.  In return they agree to give you regular interest payments and at the end of the period they will give you your initial investment (capital) back.

Common examples of fixed interest investments include:

  • government and semi government bonds,
  • corporate bonds,
  • term deposits,
  • secured and unsecured notes
  • hybrid investments.

Generally speaking, fixed interest investments are considered to be more risky than holding your money in cash but overall are considered quite low on the risk spectrum.  But it should be noted, just because an investment is in the fixed interest area this does not necessarily mean that it is low risk and that you will get all the capital you invested back or that you are guaranteed to receive interest payments. As always, you need to understand the true nature of the investment and the risks associated with the investment.

So here are some things to look out for when making a fixed interest investment:

(1)    How often are the interest payments made?  Some investments pay monthly, some quarterly and some annually.  Make sure the timing of interest payments meets your investment needs.

(2)    Are the interest payments fixed or variable?  Just because the sector is called fixed interest, it is not necessarily true that your interest payments are fixed, it depends on the type of investment.  Some investments in this sector make variable interest payments.  This means that the amount of interest you receive rises and falls with movements in the level of official interest rates set by the Reserve Bank of Australia.  So if you had made one of these investments a couple of years ago, your interest received would have reduced in line with official interest rates falling.  If the interest rate is fixed, then you will receive the same amount of interest over the life of the investment, regardless of what happens to official interest rates.

(3)    Is the investment for a fixed term or at call?  At call investments mean that you can access your money at any time (although some products may require a day or two’s notice).  If your investment is for a fixed term, it means you are invested for a specific length of time.

(4)    Ultimately who are you lending your money to?  Knowing this will help you judge how likely it is that you will get all your interest payments and your capital back.  So in the case of a term deposit, as you are lending your money to a bank.  This is considered one of the lowest risk forms of fixed interest investment.  In the case of a government bond, you are lending your money to the Government.  Nowadays, this is more tricky to judge how safe your money is, as it depends on which government :-).  If you are lending your money to a company, the amount of risk you are taking is very dependent on the type of company, their own individual financial situation and the industry they are in.  It is very important to understand who you are lending your money to as this very much determines the overall level of risk you are taking in your investment.

(5)    Watch out for the term “secured” in the name of your investment, it doesn’t necessarily mean that your money is safe it simply means that the issuer has provided some form of security to the trustee of the note issue.

So if you want a relatively safe investment, giving you regular interest payments, the fixed interest sector might be for you.  But like with all investments you need to understand all the terms and conditions to make sure that the investment meets all of your needs.  As despite the name, fixed interest investments can be very different in terms of risk and return.

Next week we will look at the characteristics of investing in an old Aussie favourite – property!

If you liked this post check out the rest of the series by clicking on the links below:

Investing: How Do I Get Started?

What Is My Risk Tolerance?

Risk and Return

What Are My Investment Choices?

Fixed Interest Investments

Investing In Property

Happy investing!

 

Money Mummy

* Please note this is for your general information only and does not constitute financial advice

23/05/2013 0 comment
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So now you have an idea of your risk profile (tolerance) and you understand the relationship between risk and return, it’s time to look at characteristics of the broad asset classes or types of investment.  It is important to understand the different investment types as each category has different levels of expected risk and return.  Understanding what to expect from the different asset types will help you decide which categories of investments best suit your investment goals and your timeframe.

Generally speaking, there are considered five broad investment types or asset classes:

  1. Cash – investments like savings accounts, high interest accounts, bank bills
  2. Fixed Interest – includes government bonds and bond like securities issued by companies called hybrids
  3. Property – includes residential, retail, industrial and office properties.
  4. Australian Shares – are shares listed on the Australian Stock Exchange which cover many different sectors such as mining, healthcare, banking and retail.
  5. International Shares – are shares listed on exchanges outside of Australia including places like the United States, Europe or Asia.

I have listed the asset classes in order of risk.  Generally speaking, cash is considered the least risky investment type and international shares are considered the most risky.

Given the Reserve Bank of Australia (RBA) cut rates again this week it is appropriate we kick off our look at the different investment types with a look at what is considered the safest but lowest return option, cash.

Cash generally refers to investments in high interest bank accounts, term deposits, bank bills and other securities which have a relatively short investment time frame.  An investment in cash provides a stable, predictable income, in the form of regular interest payments.  This category is all about income, with very little risk.

You might have heard the saying “cash is king”?  This saying is usually used when the share market is very volatile.  During these periods, such as the global financial crisis (GFC), investors move into cash for its safety and security.  The problem with cash right now is that interest rates in Australia are at their lowest level since 1960, this means the returns on cash are at very low levels.  However, if safety and security are your top priority or your investment time frame is short, then you can’t go past cash as an investment option.

Inflation is the other issue you need to be wary of when investing in cash, especially when interest rates are low.  Anyone who goes shopping knows that, generally speaking, the price of things goes up every year.  This is called inflation.  It means that a dollar today will buy less goods and services in one years’ time as prices have increased.  At the moment inflation is around 2.5%.  So if you invest in an online account with an interest rate of 3.5%, then your post inflation return is only 1% (the difference between the interest rate earned and the inflation rate).  If inflation is high and interest rates low, then it is possible to make a negative return after accounting for inflation.  For example if inflation is 5%, but the interest rate earned on your account is only 2%, then you will earn a negative return of 3% after accounting for inflation.  This is because the increase in the general level of prices, inflation, is greater than the increase in value of your investment through the interest earned.  This is why it pays to shop around for the best cash rate possible and look out for any bonus interest deals.  One of the best ways to do this is to use a comparison site.  Two of my favourites are:

Canstar

Mozo

They both can give you comparisons on rates for online savings accounts and term deposits, including any bonus rates.  Don’t be afraid to take the best bonus rate then move your money after the bonus period has finished.  But remember, like with all investments read the full terms first before making any investment.

Next week we will look at the characteristics of fixed interest investments.

If you liked this post check out the rest of the series by clicking on the links below:

Investing: How Do I Get Started?

What Is My Risk Tolerance?

Risk and Return

Fixed Interest Investments

Property Investments

Happy investing!

 

Money Mummy

* Please note this is for your general information only and does not constitute financial advice.

09/05/2013 2 comments
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There is a trade off between risk and return.  Anyone who tells you any different is lying.  If I had a dollar, for every time a client told me about a no risk investment returning a guaranteed 20%, I would be on a beach somewhere, right now.  My advice is always the same, it is highly likely you are being scammed, run!

Remember risk is the chance that an investment won’t give you the return you expect.  It is the chance of losing some or even all of your investment.  Higher risk investments are generally associated with higher potential returns.  Low risk investments are generally associated with lower potential returns.  This is the risk/return trade off.  No one in their right mind would take on a high risk investment for a low potential return.    It makes no sense, the return you get at the end of the day does not compensate you for the high probability that you will lose your money.  A low risk investment doesn’t need to offer a big return because it is unlikely you will lose you money.  Markets all day, everyday are pricing risk.

So, why do so many people get scammed?  It is human nature to focus on the outcome, the big return rather than the risk involved.  People want to believe that high return investments, exist without risk, but I guarantee (after 16 years in the industry) they do not.  If someone tells you they do, then they are either lying to you or they do not fully understand the risks involved in the investment.  Too much of a focus on return and not enough on risk, was the downfall of many an investor during the global financial crisis (GFC).

In general, cash is considered the lowest risk investment.  The cash rate set by the Reserve Bank is  called by the industry the “risk free” rate.   So if something has a return close to the cash rate, which is currently 3%, it “should” be relatively low risk, although you still need to understand the exact nature of the investment to be sure.  On the other end of the scale, I consider a 15% return from the share market to be a very good return.  According to the ASX,  the Australian share market has averaged 9.3% over the last twenty years to 31 December 2012.  Shares are considered one of the higher risk investment types (more on this next week).  Anyone guaranteeing investment returns anywhere in the double digit range are to be viewed with great caution.  I’m not saying you can’t make double digit returns – it is just that is it is highly unlikely to be guaranteed (ie. low risk), especially in the current low interest rate environment.

The key is to always focus on the risk involved in any investment and to make sure that the potential return makes sense given the risk.  The only way to truly understand how much risk you are taking in an investment is to understand exactly where and how your money is being invested.  This should be done for each and every investment that you make.

Gearing or borrowing to invest always increases risk, as well as potential return.  I am quite a conservative investor so my golden rule is to never put your family home at risk when investing.  For me it is a risk not worth taking.  Many people have lost their family homes in investments gone bad, when they never really understood the level of risk they were taking, or were scammed by the offer of generous returns.

Next week we are going to start going through the different investment types or asset classes as they are known in the industry.  We are going to look at their key characteristics and where they sit when it comes to risk and return.

If you liked this post check out the rest of the series by clicking on the links below:

Investing: How Do I Get Started?

What Is My Risk Tolerance?

What Are My Investment Choices?

Fixed Interest Investments

Property Investments

Happy investing!

Money Mummy

* Please note this is for your general information only and does not constitute financial advice.

02/05/2013 4 comments
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