Wednesday, March 30, 2016

Home is where the heart is (and the media room, and the third bathroom, and the four bay garage....)

Attention all home owners.  I have some bad news.  Contrary to popular belief, your home is not your biggest asset, it is actually your biggest expense.  I'll just let that sink in while I introduce our next lesson from George Samuel Clason's "The Richest Man in Babylon".

Lesson 5: Make your house a profitable investment

Yes, a profitable investment.  To do this, we need to draw on a couple of the previous lessons.  When looking for your house, do not go in with a "Keeping up with the Jones'" mentality.  Work out what you need space wise, and where you would like to live.  I live in a unit, which suits me well because I'm never home and enjoy low maintenance living.  However, it is not in a ritzy part of town because it doesn't make sense to sink that amount of money into something that is not creating an income.  Make a list of your wants and your needs with your significant other (if applicable), and purchase wisely.

The next thing we need to consider is living within your means.  What are the ongoing costs associated with your house?  This includes your mortgage payments or rent. Now, I'm not saying that it's possible to live for free, because it's not.  I'm just saying that you need to be realistic with your expectations.  Let's go through an example:

Asset value $350,000, mortgage at $320,000 at 4.99% = $15,968 in interest per year.  Insurance, body corporate, rates etc. = $3,684. Stamp duty (Queensland) and legal expenses = $4,500. This means that I am down $24,152 in initial expenses for the first year.  To put this in perspective, I am negative 6.9% for the first year and, all things being equal, I need to make at least 5.6% every year in capital gain to cover my mortgage, body corporate and insurance expenses. 

If I want to break even when I sell the property in 10 years, then the property market needs to have increased by 5.7% year on year, or a value increase of $201,020.  So I will need to sell my dated, used asset for $551,020, just to recoup the expenses, not turn a profit.  Not impossible, but definitely something to think about when looking at possible purchases.  Remember, you are sinking your hard earned cash flow into this asset, hoping that the property market moves in the right direction and you get it back.  That's a lot of eggs in the one basket, and every dollar that gets eaten up in your mortgage is a dollar that could be out there working for you and bringing in an actual income.

So, before you get tied up in the colour of the blinds, stop!  Will this property help you reach your goals, or become a hindrance?  It may be pretty and in the "right" area, but you can't sell the bathroom to pay the paper boy.
By Erin Wright B.Int Bus Dip. FS(FP), Accredited Aged Care Specialist
Find Erin at Achieveit Financial Planning or call for an appointment on 07 4638 5011

Monday, March 14, 2016

Life is a game of Russian roulette

How many times have you been watching the News and heard of a family whose house has burnt down and they didn't have insurance?  Did you shake your head in disbelief?  They have nothing now.  Not even a toothbrush.  How could you not have insured your possessions?  Your house?  "Not me", I hear you say.  "I'm a responsible adult.  My car, house and contents, they're all insured.  I've got this."  But have you?

Lesson 4: Insure your wealth

This is the next lesson from the Richest Man in Babylon, insure your wealth.  And do you know what your greatest source of wealth is?  It's you, my friend.  If you are earning an average of $70,000 pa over a 40 year working life, that's $2.8 million (not accounting for inflation).  That's a lot of money.  So, if you're willing to insure a $40,000 depreciating asset (your car), perhaps you should also consider insuring a multi-million dollar, appreciating asset (your income).

Other things to consider are Life cover, which will provide a lump sum if you die or are terminally ill, Total and Permanent Disablement cover, which provides a lump sum if you are totally and permanently disabled and can no longer work, and Trauma cover, which provides a lump sum if you are diagnosed with a specific illness.  Each of these cover a slightly different area and work together to protect your current position.  Risk mitigation is just as important as building your wealth.  There is nothing more distressing than seeing a family liquidate their hard earned assets, and try to start again, all for the sake of a simple life insurance policy.  You don't believe me?  Give me a call, I have all of the horror stories and I'm more than happy to share.

Life is a game of Russian roulette; we can't stop bad things from happening, but we can limit the financial consequences by being prepared.  Insurance buys your family the time it needs to recover.  Give your family financial security, review what you have, because it's probably not enough.

By Erin Wright B.Int Bus Dip. FS(FP), Accredited Aged Care Specialist
Find Erin at Achieveit Financial Planning or call for an appointment on 07 4638 5011