All posts by Robert Wright
How to reassess your spending and budgeting habits
By Robert Wright /June 11,2021/
There’s no denying the pandemic has significantly affected the finances of many Australians. Some of us are spending more, some are cutting back on non-essential spending and for others, the uncertainty has challenged us to save money for a rainy day, like never before.
According to AMP research, around one in 10 Australian employees feel that 2020’s unusual economic circumstances have had a positive impact on their financial health. However, 42% of employed Australians believe COVID-19 has had a negative impact on their financial health, whether through unemployment or underemployment.
Whichever category describes you, it’s likely you’ve seen your spending habits change over the past 12 months. This means that if you’re still working with your pre-pandemic budget, now might be a good time to review your situation and reassess your spending, so you can manage it with a revised and more realistic budget.
Changing spending habits
Over the past 12 months, have you been spending less money in restaurants, bars and department stores but more on food deliveries, online shopping and streaming? Or have you cut back across the board and started a savings surge?
With lockdown orders forcing many of us to stay home more, it’s unsurprising to learn that in December, our spending on transportation was 41% lower than the pre-pandemic norm. We did less eating out in restaurants and bars (down 30%) and are perhaps prioritising outdoor or in-home fitness over going to the gym (spending for this is down 19%).
But – stuck at home – we are spending on home improvements, 25% more than before the pandemic, plus we’re kitting out our home offices and spending on furniture, with these categories up 58%. We’re also consuming a lot more alcohol and tobacco (up a notable 53%) and relying on food deliveries – these have surged a staggering 245% on pre-pandemic figures. (All expenditure figures have been taken from the AlphaBeta and illion research.)
It’s generally thought to be a good idea to take a deep dive into your overall financial health at least once a year. And at a time when circumstances are changing so fast, there’s an opportunity to review your spending and saving habits and reassess your goals and budgets.
How to track your spending
Think about your spending habits; there’s likely to be a variation each month depending on how much you’ve earned and what your expenses are for things like rent, mortgage, car maintenance and insurance. So, to get a well-rounded picture of income and expenditures, try tracking your spending over a two to three-month period, then apply it to a full year.
How to do it? First, choose a method that’s convenient for you to quickly and easily maintain. This could be as simple as a paper ledger or Excel spreadsheet. Get into the habit of noting every dollar you spend. The simplest way is to review your bank and credit card statements, but don’t forget cash transactions such as a coffee or the vending-machine snack you grabbed on the run. Make a note of the item, amount, date and category, plus whether it’s an essential expense or a discretionary one.
If you want help tracking and analysing your data, there are plenty of apps and software that can help, depending on your goals. Some apps enable you to sync bank accounts, credit cards, loans, superannuation and more, with additional features to monitor larger expenses including bills and insurance payments. Others notify you of possible tax deductions and churn out easy-to-read spending habit reports. A number of these apps are free, while some have monthly charges – it depends on the depth of insight they offer.
How to create a budget
Once you have a good understanding of your new spending habits, it’s time to reassess that pre-pandemic budget and plan your financial future. If you’re not sure where to start, brush up on the basics and learn how to create a working budget.
Source: AMP
Learning the lessons of 2020: An extraordinary year
By Robert Wright /June 11,2021/
When the COVID-19 pandemic hit Australia in March 2020 it brought immediate and severe financial gloom. Shares plunged 37% and the economy slumped to its first recession in nearly 30 years. However against that backdrop, 2020 turned out far better for diversified investors than initially feared.
The development of vaccines became the good news of the second half of 2020 and offered hope of a return to life as normal. The anticipation of economic recovery, paired with ultra-low interest rates, drove a rebound in many investment markets and we did see a strong growth rebound in the second half of the year.
In 2021, we expect to see solid returns as markets shift from pandemic winners to cyclical investments, but the gains will likely be slower than seen coming out of the March pandemic lows of 2021.
For investors, 2020 was better than feared
The list of negatives brought about by the COVID-19 pandemic cannot be ignored. Unemployment surged, with severe disruption to industries like airlines, retail and the office sector. Globalisation took a further blow and tensions rose with China. Public debt skyrocketed. However there were a number of key positives.
The massive fiscal support provided by governments shielded businesses from collapse and saved jobs and incomes. Debt forbearance schemes headed off defaults, while plunging interest rates helped borrowers service loans.
Economies began to reopen after social distancing helped contain the virus, with nations like Australia, New Zealand and Asian nations doing better on this front than the US and Europe.
The November 2020 election of US President Joe Biden offered the prospect of less global policy uncertainty and reduced international tensions in 2021 and beyond.
Disruption caused by the pandemic massively accelerated a number of broader productivity gains. These include the faster take up of technology like virtual meetings, e-commerce and use of the cloud to cut costs and boost output for business.
As a result, the pandemic has shown it is possible for people to work from home and enjoy a more balanced lifestyle – increasingly in regional areas where property prices are generally more affordable.
The benefits of science – typified by the rapid development of vaccines – has also served as a rebuke to populist politicians and offers hope for better management of issues like climate change in the future.
The lessons of 2020
- Timing market moves is hard – getting out at the top of the share market in February 2020 was hard, but getting onboard again for the rally in March last year was even harder.
- Don’t fight the central banks – while they could not prevent the magnitude of the fall in share markets, their massive money easing was a key driver of the recovery.
- Investment valuations need to be assessed relative to interest rates – low rates make shares relatively attractive.
- Depressions can be avoided – 2020 showed that a large, rapid, well-targeted economic policy response can protect an economy from a significant shock and enable it to rebound quickly.
- Turn down the noise – stick to a long-term investment strategy.
Reasons for optimism through the remainder of 2021
Recent bumps in the road of vaccine roll out has not stifled the overall goal of achieving herd immunity in many developed countries by the second half of this year. Fiscal stimulus and easy monetary policy continue to work through the system, with even more fiscal stimulus being injected into the US economy. Continuing high saving rates indicate significant spending potential as confidence improves. Low inflation, and hence low interest rates, mean we are still in the “sweet spot” of the investment cycle.
After having run up so hard since early November 2020, shares are still vulnerable to a short-term pull back. We are likely to see a continuing shift away from investments that benefitted from the pandemic and lockdowns (technology, health care stocks and bonds) to investments that benefit from recovery (resources, industrials, tourism stocks and financials).
We expect global shares to return around 8% this year, but we anticipate there may be a rotation away from tech-heavy US shares to more cyclical markets in Europe, Japan and emerging countries.
Australian shares are likely to be relative outperformers returning around 12%.
Australian home prices are likely to rise 10-15%, boosted by record low mortgage rates and government incentives, but the pause in immigration and weak rental markets will likely weigh on inner city areas, and units in Melbourne and Sydney.
Nine things for investors to remember
- Harness the power of compound interest – under the principles of the ‘Rule of 72”, it takes 144 years to double an asset’s value if it returns 0.5% p.a, but only 14 years if the asset returns 5% p.a.
- Don’t get thrown off by the cycle – investors can often abandon a well thought out strategy at the wrong time during falling markets – as some may have done in March last year.
- Invest for the long term – get a plan that suits your wealth, age and risk tolerance and stick to it.
- Diversify – don’t put all your eggs in one basket.
- Turn down the noise. As discussed earlier.
- Buy low, sell high – the cheaper you buy an asset, the higher its prospective return, and vice versa.
- Beware the crowd at extremes. Don’t get sucked into the euphoria or ‘doom and gloom’ around an asset.
- Focus on investments that you understand. It’s probably best to avoid companies that have complex and hard to understand valuations or business models.
- Accept it’s a low nominal return world. Historically, when inflation is around 1.5%, the average return of 7% for super funds begins to look pretty good.
Source: AMP Capital
Why insurance is important: real benefits for you and your family
By Robert Wright /June 11,2021/
Insurance plays a central role in providing financial security for you and your family when it’s needed most.
You insure your car and your home. But nothing is more important than your life and your ability to make a living. So it makes good sense to insure your greatest asset – you!
As we move through life, find a partner, raise a family, and maybe start a business, the importance of insurance in a long term plan increases. That’s because insurance is all about providing a financial safety net that helps you to take care of yourself and those you love when you need it the most.
5 reasons why insurance matters
Why is insurance important? Let’s look at five key reasons.
1. Protection for you and your family
Your family depend on your financial support to enjoy a decent standard of living, which is why insurance is especially important once you start a family. It means the people who matter most in your life may be protected from financial hardship if the unexpected happens.
2. Reduce stress during difficult times
None of us know what lies around the corner. Unforeseen tragedies such as illness, injury or permanent disability, even death – can leave you and your family facing tremendous emotional stress, and even grief. With insurance in place, you or your family’s financial stress will be reduced, and you can focus on recovery and rebuilding your lives.
3. To enjoy financial security
No matter what your financial position is today, an unexpected event can see it all unravel very quickly. Insurance offers a payout so that if there is an unforeseen event you and your family can hopefully continue to move forward.
4. Peace of mind
No amount of money can replace your health and wellbeing – or the role you play in your family. But you can at least have peace of mind knowing that if anything happened to you, your family’s financial security is assisted by insurance.
5. A legacy to leave behind
A lump sum death benefit can secure the financial future for your children and protect their standard of living.
Case Study
Tony and Karen – Young Family
The following scenario is illustrative only to demonstrate the importance of insurance and is not based on an actual event.
Tony (34) and Karen (33) recently upgraded to a new home to allow their twin boys Nicholas and Rocky (aged 4) more room to play. This also meant taking on a bigger mortgage on one income, as Karen is a homemaker. To protect the family, Tony decided to take out Income Protection Insurance.
During a simple Saturday afternoon game of backyard cricket with the twins, Tony tripped and broke his leg. What appeared to be a simple break was more complicated than initially realised and Tony required several reconstructive operations followed by physiotherapy.
It meant Tony was out of the workforce for over six months, and while his employer was sympathetic, Tony only had two weeks of sick leave owing to him.
Thankfully, Tony’s Income Protection insurance meant he received a stream of payments equal to 80% of his regular wage (including super). The couple needed to tighten their belts a little until Tony was back on his feet but they were able to keep up with their home loan repayments, which would not otherwise have been possible without their Income Protection cover.
Source: BT
Transfer balance cap set to increase to $1.7 million
By Robert Wright /June 11,2021/
The amount of super savings that can be transferred into a retirement pension (whether you have one or more than one) will increase from $1.6 million to $1.7 million on 1 July this year, but not for everyone.
Currently you can transfer a maximum of $1.6 million from your super savings into a retirement pension (or pensions) to generate an income after you’ve finished working.
However, from 1 July 2021, this limit (known as the transfer balance cap) will increase to $1.7 million. While this is good news for some, the higher cap won’t apply to everyone, and other caps and limits will also be affected.
What is the transfer balance cap?
One of the main benefits of transferring super savings into a retirement pension is that the investment earnings within your retirement pension account are tax-free, and from age 60 onwards, so are any pension payments you receive.
The transfer balance cap is a limit on how much can be transferred from your super savings into a retirement pension, regardless of how many retirement pensions you hold. Note, these are not to be confused with the government’s Age Pension, or a transition to retirement pension.
Also, once you’ve transferred the maximum amount into a retirement pension (according to your personal transfer balance cap), you typically won’t be able to top up your retirement pension a second time, even if your balance reduces over time. If you transfer more than your relevant transfer balance cap into a retirement pension, tax penalties may apply.
Why is the transfer balance cap changing?
The reason the transfer balance cap is increasing by $100,000 to $1.7 million in the 2021-22 financial year is because changes to the cap are dependent on the cost of living, as measured by the Consumer Price Index, which recently went up.
Who does the new $1.7 million transfer balance cap apply to?
While the general transfer balance cap is changing, your personal transfer balance cap could remain at $1.6 million, could increase to $1.7 million, or it could be somewhere in between.
What that will come down to is whether you move, or have already moved, money from your super account into a retirement pension before 1 July 2021. How much you’ve moved will also have an impact.
What this means is, if you’ve never moved money from super into a retirement pension, and do this for the first time after 1 July 2021, the new transfer balance cap of $1.7 million will apply to you.
However, if you move, or have already moved, money from super into a retirement pension before 1 July 2021, this will not be the case. Instead, your personal transfer balance cap will be determined by how much you’ve already transferred into retirement pensions.
If you transfer (or have transferred) less than $1.6 million, your personal transfer balance cap will be anywhere between $1.6 million and $1.7 million.
If, by 1 July 2021 you fully use, or exceed, the transfer balance cap of $1.6 million, your personal cap will remain at $1.6 million.
These changes could affect what you do before and after 1 July 2021, so please contact us to discuss whether you may be affected.
Source: AMP