The road to future wealth starts here
IT’S important to re-evaluate your position regularly when you are travelling the road to financial success. And what better time to do it than at the start of a new financial year?
It has been an interesting year — the first full year of the reign of President Trump.
In general, his policies have been good for share markets all over the world, at least in the short to medium term — mainly due to tax cuts and spending increases. The Australian share market produced a total return of 13 per cent if you include dividends, which is much better than leaving your money in the bank.
But that’s history. Your job now is to look at your personal balance sheet and put strategies in place to ensure you finish the new financial year in a better position than you started it.
Interest rates are at historic lows, but don’t think these rates will continue forever.
Rates are already rising in most developed countries, and while an imminent rise in Australia is unlikely, the only way is up, so it must happen. The big question is when.
Obviously, it is far better to prepare for a rate rise in advance than to find yourself in a financial bind when it happens. This is why I suggest you try to maintain home loan repayments of at least $8.50 per thousand a month — that’s $2550 a month on a $300,000 loan. Repayments at this rate will have your loan out of the way in 15 years if interest rates are 6 per cent. If they don’t reach this level, your loan will be paid off much faster and you will have given yourself a valuable safety buffer.
But if that’s too much of a stretch for your budget, start to pay fortnightly. Here’s why.
You have a home loan of $300,000 and you are paying it back over 30 years at 6 per cent a year with monthly repayments of $1800. If you maintained your repayments at that level you would end up paying nearly $350,000 in interest. Moving from $1800 a month to $900 a fortnight would slash the term of the loan by six years and save you $60,000 in interest.
Because there are 26 fortnights but only 12 calendar months, moving to fortnightly payments enables you to make the equivalent of an extra monthly payment without feeling it.
If you are over 55 you should be pouring as much money as you can into superannuation. Yes, you need cash for emergencies, but there is no point leaving money in the bank where the interest is fully taxable when you can move it to superannuation where it is taxed at just 15 per cent.
If you are nearing 60, contributing spare funds to super is a no-brainer, because you have few worries about lack of access. Remember, a major benefit of placing money in super is that Centrelink does not count it until you reach pension age. For example, if the male partner is 65 and the female 60, moving a large amount of super from his name to her’s could maximise his age pension benefits.
Don’t switch your super to an allocated pension too early if you are looking for Newstart benefits; if you do the money will cease to be exempt. A better strategy is to make lump-sum withdrawals from your super as needed.
Most of my articles have a common theme: help yourself so you can have a more secure financial future. The steps you take today will make the difference in the long term. Noel Whittaker is the author of Making Money Made Simple and other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions.