Checking your insurance (and other useful tips from my experiences this week)

NOTE: While much of the information below is still relevant, there’s a more recent version of this post which you can find here.

After losing our home to the Victorian bush fires, I have spent a huge amount of time this week sitting at my desk sorting through my own financial situation.

And with a calculator already in hand, I decided it was a good time to turn my attention to fighting the financial fires that often pop-up in my Barefoot mailbag:

Were you insured?

Dear Scott,

For years my wife and I read your column religiously each week.

We were heartbroken for you when we learned that you lost not only your home, but also all your possessions.

I trust given that you’re the Barefoot Investor, that you had adequate insurance?

Sincerely, Margo and Gary.

Hi guys,

Yes, we were insured.

Being the sort of Barefoot bloke that I am, a few weeks before the fire I upgraded our insurance to include big stuff like my wife’s wedding ring.

Still, it’s generally only when your home goes up in flames that you stop and realise how much stuff you accumulate over the years – and how expensive all that stuff is.

If we had to replace everything we had, I’m quite confident that we’d come up short. That’s okay, because we don’t plan on replacing a lot of it – and we have a very well-stocked Mojo account exactly for these situations.

People have asked me what they can do for us, and here is it: over the weekend, grab yourself your favourite beverage. Then, slowly walk around your home, from room to room, and in your head – quickly, and roughly – add up everything you see (open your cupboards too): books, toothbrushes, televisions – the entire enchilada.

Then call your insurance company and make sure you’re covered for roughly that amount. While you’re on the phone check what the sum value your home is insured for as well. Until last weekend, I never thought it would happen to us either.

The Two-Fingered Salute

Hi Scott,

I’m about two months away from paying out a part 9 debt agreement, and having it removed from my credit file.

I am 33, I have no debts, I have no defaults on my credit file and I earn around $40,000 a year in a permanent part-time job that I have been in for 15 months.

I want to apply for a $5000 personal loan. I do not own any assets of value. Will my application be declined and what do I need to do to improved chances or am I destined to always pay for having an act of bankruptcy on my file?

Cheers, Brenda.

Hi Brenda,

Well done for fighting your way out of debt. The only problem is that you still sound like a debt-drunk: you may have successfully completed the 12-steps – but you’re still craving.

Here’s the truth: you don’t need personal credit from a bank (or anyone else).

Up until relatively recently, people survived just fine without credit cards, car loans or a David Jones card. Personal credit is a relatively modern invention, and one that makes the bank and retailers billions (which is why you’ll have no problem getting a $5000 loan).

Brenda, it’s time to give these bastards the two-finger salute. After all, you’ve played their game and lost. Now it’s time to win. Make a vow to never, ever, touch a credit card or personal loan again.

Go forward confidently with cash in your back pocket, and you’ll never feel vulnerable again.

Own your own ATM?

Hi Scott,

I recently read about an investment where you own your own ATM. Basically you pay for an ATM and they pay the running fees and guarantee you a minimum 20% return each year for the ten year contract length.

There’s always a catch. So far the main issue I see is that you have to sell the ATM back to them for 10% of the original cost at the end of the contract.

I believe if you look at what you end up with and what you began with it equates to an annual return of approximately 7.5% not 20%, however that’s still a decent return. What do you think?

Cheers, Tommy

Hey Tommy,

Thank you for sending this through, I’m in need of a good laugh, and your question did the trick!

First off, anyone who takes out an ad that promises punters 20% returns have about as much integrity as a Craig Thomson work expenses form.

Really it’s a dead giveaway that slimy salespeople are involved – and, as you correctly discovered, ‘what the headline giveth, the fine print taketh away’.

Second, the (bogus) 20% return is guaranteed – but by who? A guarantee is only as good as the group behind it – just ask the Port Adelaide AFL footy club.

A few years ago their major sponsor was a mob called My ATM. Their business involved taking out ads that promised punters 20% returns if they stumped up $14,000 to buy their ATMs (sound familiar?).

They went bust, reportedly owing the club $350,000 in unpaid sponsorship.

My husband will soon be laid off, what should we do?

Hi Scott,

My hubby works at Alcoa’s Port Henry plant and will lose his job as part of the operation’s closure by the end of the year.

We’re a one-income family with two kids and were wondering how do we deal with the payout? We have no mortgage and would appreciate any advice you have.

Thanks, Lisa.

Hi Lisa,

There are three things I want you to do.

First, make sure you have six months of family living expenses in a high interest online account. Because you’re husband is receiving a payout, he won’t automatically be able to register for Newstart.

Second, grab him a copy of the book, Who moved my cheese?. It’s a cheesy title, but a quick read. Losing your job can really hit you between the eyes – especially when you’re the main breadwinner.

His golden handshake will get a slight shakedown from Canberra. Part of his payout he gets at the end of the year will be tax free ($9246 as a base, and then $4624 for each year he’s worked at the company), and the rest will be taxed at his marginal rate, like any other earned income.

Depending on how long he’s worked at the company, it could result in a big tax bill. So the third and final thing I want you to do, is look at chipping some money into super (just watch your $25,000 limit).

And finally on a personal note, I’d like to thank all the lovely, loyal readers who have taken the time to send me hundreds of supportive emails, bottles of wine, and a mountain of clothes for my baby son – who I’m pretty sure has a bigger wardrobe today than he had last week.

Tread you own path, thanks for your support and have a great and safe weekend.

Help! I’m paying too much tax!

Hi Scott,

My husband and I both work as senior marketing executives and we are lucky to be earning a combined $350,000 income. I know it sounds good, but we live in Sydney, and have a $780,000 mortgage. Our biggest expense is the tax we pay!

I have been reading a rival financial advisor, who always seems to suggest that people borrow to invest in shares, though I’ve noticed that’s not something you recommend. Can you help us pay less tax?

Best,

Heather.

Hi Heather,

The world’s smallest violin is playing for you right now. You’re biggest expense isn’t tax – you’re a citizen of this country – and therefore unless you want to live in Zimbabwe, you’re legally obliged to pay tax based on your assessable income.

The truth is there’s a limit to what you can do to save on tax – especially when you’re an employee. The most obvious strategy is for you to both max out your superannuation contributions.

If I were you I’d focus on knocking out your mortgage as quickly as possible, and then look to invest your cash flow – in good quality businesses.

Finally, smart, wealthy people have make dumb costly decisions all in the name of saving money on tax.

So watch out for anyone touting tax ‘solutions’ that will see you spend a dollar just to get less than half of it back.

Property versus Shares

Despite Australians being among the biggest share investors in the world, I know that the thought of putting your money into the market scares the pants off many of you.

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“I’m going to sell my apartment”, announced my girlfriend.

She may as well have been asking me to pass the butter, she was so cool, calm and collected – like a female Donald Trump (but with much, much more hair).

Her rationale?

She’d bought the apartment as a young single woman a few years ago. Thanks to the property boom she’ll trouser close to a hundred grand, and she hated the hassle of being a landlord.

Besides, she now lives in sin with me and my golden retriever – and by all accounts we’re pretty decent landlords.

Simple right?

Enter the parental peanut gallery: “Why would you want to sell – there’s nothing safer than bricks and mortar!” And: “You do know that Alan Kohler was on the ABC news last night saying that property had done better than shares!”

I knew where this was going: I was the ‘big bad shares guy’ who had convinced this smart, independent woman to sell her hard-won asset, and in a slowing market no less. Though it wasn’t true, I was chuffed that both sets of parents believed I held such sway over my girlfriend.

Shares vs Property

The shares vs property debate is one of those mortal battles – Ford vs Holden, Melbourne vs Sydney, Kochie vs Karl. Each has its diehards with their own set of statistics that prove that one is a better bet than the other.

Both arguments are pushed by vested interests: money managers rake in billions a year by taking a tiny slither of your investment and making it theirs (via asset-based fees), and there’s an entire industry of agents, banks, politicians and retailers that feed off a strong property market.

Share spruikers maintain that owning a business is more profitable than owning the shop (which explains why most banks don’t own the physical branches). Property pushers promote everyday millionaire landlords who’ve gotten rich by simply buying and holding homes.

But before we roll up your sleeves for some financial fisticuffs, let’s take a look at a report from ANZ Bank this week that pours cold water on both sides of the battle.

Property Wins

The ANZ report, Asset Returns: Past, Present and Future found that the highest returns over the past 24 years came from owning your own home.

The report suggested that on average owning a home generated an annual return of 12 per cent, even with costs and taxes factored in. Homes trumped both investment properties at 9.6 per cent and shares at 8.9 per cent.

No surprises there – I’ve always argued that owning your own home is the ultimate investment – but I wasn’t so sure about their calculations, especially when it comes to the tax breaks investments receive. So I called up one of the authors of the report, the head of property research for ANZ, Paul Braddick, for a chat.

He was refreshingly frank.

Barefoot: “Your report found that owning your own home comes out in front financially. Is this because you can sell it without being hit with capital gains tax?”

Braddick: “Well, that and the deregulation of the finance industry, which has facilitated a growth in prices.”

Barefoot: “Err … is that banker-speak for ‘over the last 20 years we’ve allowed homeowners to borrow a lot more dough?’”

Braddick: “Well, yes.”

What has fuelled housing priced over the last 20-plus years is a halving of interest rates – from around 14 per cent to 7 per cent. So while the cost of debt was falling, the bankers’ enthusiasm to lend increased.

The big winners were the Baby Boomers, who elbowed young first homebuyers out of the way at auctions, using the equity in their homes like an ATM machine. But there’s only one problem – for many Boomers the machine’s starting to run out of cash.

Shares Win

So while the ANZ report sung the praises of property over the last two decades, it’s not so hopeful for the coming decade. In fact it forecasts that shares are going to be the asset class to invest in over the next 10 years.

Despite Australians being among the biggest share investors in the world, I know that the thought of putting your money into the market scares the pants off many of you.

Each night when you get off work (and often in your lunch break) you can see exactly how much your share portfolio is worth. Sometimes that’s a pleasant experience – though not lately.

But it’s really no different than if you auctioned your home every single day – you’d be amazed at the differing daily prices, but wouldn’t be too fussed if you weren’t planning on selling that day.

Having easy access to your money is a good thing: you can’t sell off your second bedroom if you want to go to Bali at Christmas, but with shares you can – plus it’ll cost you the price of a pizza (in brokerage fees) and the dough will be in your bank account within a few days.

But what about the tax benefits of property?

While negative gearing is a socially acceptable way of saying ‘I’m losing money’, the tax breaks for both property and shares are, when all is said and done, equally generous, and for that matter equally ridiculous. (How we could have two government tax reviews yet still favour borrowing and speculating over getting out of bed and working is a testament to the power of politics.)

You Win

The ANZ report reinforces that owning your own home is a bloody good idea (so long as your can comfortably afford it and you aggressively work on paying down your mortgage).

But it also shows that it pays not to have all your eggs in the one basket. Besides sprucing up your super, it’s a smart strategy to start a small share portfolio – if for no other reason than to get your head around being a part owner of a successful business.

Or at least that’s what I’m telling my newly cashed up girlfriend.

Tread Your Own Path!

Protect Your Most Important Assets: Your Family

Your income is your most powerful financial asset. That’s why you should consider income protection to cover you if you can’t work for a while…

NOTE: While much of the information below is still relevant, there’s a more recent version of this post which you can find here.

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“How dare you!”

An angry caller on my radio show was chewing me out for some bad advice I’d given to the previous caller – a housewife in her mid-fifties who didn’t know how much her husband earned, how much debt they were in, or how much money they had in savings.

So what was my ‘bad advice’?

Well, I suggested she sit down with her husband and have him paint their complete financial picture. I explained that it was important because (a) odds are she’ll outlive him, (b) marriage is a team effort, and (c) they’re both jointly and severally liable for their obligations.

Caller: “The only thing you’re liable to do is give that poor chap a heart attack! Who are you to be filling his wife’s head with those questions – you’re putting their marriage in danger!”

Barefoot: “Nope. That’s what the husband is doing by treating his wife like a monetary mushroom (kept in the dark and fed fertilizer). And if you’re sticking up for him, you’re no better than Fred Flintstone expecting Wilma to come running when he rings a bell.”

Man Up

Generally speaking, men and women are wired differently when it comes to money. Men are more prone to risk-taking, whereas women value security. So it may sound horribly old fashioned, but I believe it’s a bloke’s job to man up and provide that sense of security for his partner.

Don’t misunderstand me. I didn’t say he has to be the breadwinner (I’ve got as much respect as the next bloke for happy-handbag-holder Tim Mathieson).

That’s not the issue. The real danger this poor woman faces is the same as for 95 per cent of Aussie families: she would be financially stuffed if her partner didn’t make it home from work tonight.

This is an uncomfortable subject. That’s why it’s been on my ‘backburner’ of column ideas for at least 12 months. But over the past couple of weeks I’ve been studying crisis financial counseling – and one of the most shocking things I’ve learned is that widows aren’t always little old ladies with blue hair. They come in all shapes, sizes and ages.

So it’s time that I man up and give you a simple, step-by-step guide to protecting your most important assets.

Have the Chat

Grab a piece of paper and draw a line down the middle. On one side write down what you own, and on the other what you owe.

Together, discuss the following questions:

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The Three Questions

Question 1

If one of you weren’t able to work for a couple of months, how would you continue to pay your debts and other living expenses?

Question 2

What would happen if one of you didn’t make it home from work tonight?

Question 3

How would you look after the kids?

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Don’t bury your head in the sand. The bean counters tell us that, before you before you turn 65, there’s a one in three chance you’ll need to be off work for three months because of an illness or injury. And, tragically, every single day 18 Aussie families lose a parent, according to the Lifewise/NATSEM Underinsurance Report. That’s why you need insurance.

Make the Call

Now don’t mistake me for a sleazy insurance salesman, but there’s a simple (financial) solution to these tough questions, and I’m going to show you how you can pay for it without opening your wallet. And all with one telephone call.

I’m guessing you’ve already got your basic insurances covered. If you’ve got a house, you need home insurance. If you’ve got a car, you need car insurance. If you’re Jennifer Lopez, you need butt insurance. And if you’ve got a body, you need health insurance.

Now for the advanced level.

Your income is your most powerful financial asset. That’s why you can get income protection to cover you if you can’t work for a while (although it generally won’t cover you if you become unemployed – that’s what the dole’s for).

Next you should look at the aptly named total permanent disability (TPD) insurance. This will give you a lump sum payout to pay off the mortgage or hospital expenses if you incur a disability that prevents you from ever working again.

And finally you should look at life cover, which really should be called death cover, because you only get it if you croak (well, your family gets it actually – that’s the idea).

Now go back to your piece of paper. You generally need enough life cover to pay off all your debts, and provide another income at least until the kids are off your hands. That’s why both parents need to be adequately insured (rule of thumb: get coverage for 10 times your current annual salary), because the surviving partner will need to take time off work to raise the kids.

The good news is that in most cases you can buy these three insurance policies by making a simple phone call your superannuation provider. (On doing so you may find that you’re already covered for at least life cover and TPD, but in most cases not enough.)

The advantage of buying your insurance through your super fund is that you’re paying with pre-tax dollars, and your fund can get a better rate than you can. You may want to want to add a few extra shekels to your super to cover the extra insurance, but I reckon it’s worth it.

(Oh, and another trick to reducing your insurance costs is to have a strong savings strategy in place. That way you can increase your waiting period, e.g. 90 days rather than 30, for when you can claim, and this can significantly lower your premium.)

However — and this is important — you should always seek independent financial advice before acting, especially when it comes to insurance. This is one area where it’s worth paying for it to be done right. 

It’ll never happen to me!

One of the most annoying things in my life is that I look no different to that strapping young lad who won the Bendigo Fun Run in 1992. I haven’t aged a day – well, in my eyes anyway.

My receding hairline and protruding potbelly would say otherwise. Fact is, we’re all getting older and the one thing that I will be honest about is the need to look after my most important assets.

Whether you’re Wilma, Fred, Barney or Betty, carving out an hour of your own time to do the same will show that you’re an emotionally intelligent person who’s willing to look after the ones you love.

Tread Your Own Path!

Pay Off the House or Invest in Shares?

One of the most commonly asked questions I get is whether to pay off the house or invest in shares. Here is my advice.

Dear Barefoot,I’m 38, married, with two kids. We bought our home six years ago and owe about $330,000 on it, and it’s worth around $475,000. I’ve just got a promotion at work, so I was thinking I’d like to invest in either some shares or maybe even an investment property to save on tax. Although my wife isn’t too keen, we thought we’d ask you. What’s your advice?

Tim, Sydney

Hi Tim,

I get this questions a lot – and mostly from men.

Making money motivates most blokes, whereas most women are driven by security (which explains why a former scammer once told me his golden rule for manipulating people was ‘don’t pitch the bitch’).

Women therefore tend to be much more levelheaded, and prefer to have a good handle on their most important asset – the family home – before chasing other investments.

How do you get around this?

Well, you could bust out a whiteboard and explain to your wife that shares historically outperform all other asset classes, and that a conservatively geared share portfolio (which I have built throughout my working life), or perhaps even an investment property would be an asset base worth diversifying into over the long term.

But life doesn’t happen on charts.

If you’re paying 7.5 per cent on your home loan, you’ll need to generate a better return than that to make it worth your while. Yes, there are tax benefits from negatively gearing, but you should never invest solely for tax benefits. And you need to keep your eye on the after-tax return – 7.5 per cent (guaranteed) is hard to come by – especially in residential property. (That’s why I’m a big fan of fully franked, dividend paying, shares).

Here’s what I’d do:

First, I’d talk to your wife and get her opinion (happy wife, happy life).

Second, I’d make sure I had at least three months of living expenses stashed away in a high-interest online savings account or a mortgage offset account. Why so much? Well, we are truly lucky to live in the best country on earth and we pay a hefty price for it. Research out this week from The Economist shows Australia is one of the most expensive places to live. Having some Mojo money is a smart strategy for sound sleep – and isn’t that money’s greatest gift?

Third, I would absolutely invest some of your bonus (after you’ve whacked a bit off your mortgage), by salary sacrificing a set amount into a low-cost superannuation fund that has a portfolio of quality Australian and international shares. Your super contributions are taxed at just 15 per cent, as are your earnings, and capital gains are taxed at 10 per cent (just watch your contribution caps).

Paying down your debts, building up your super, and having a buffer for tough times makes such good sense that it’s exactly how I manage my own money – and I’m not even married (yet).

Tread Your Own Path!

Scott

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How One Man Lost $500,000 Trading CFDs

Why on earth would anyone want to trade financial products that could potentially wipe you out? This is why.

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I went out to the flicks the other night to see The King’s Speech. Great movie – horrible pre-show entertainment.

No sooner had I popped down my popcorn and settled into my seat than an ad touting the latest investment fad, Contracts for Difference (CFDs), came on.

The slick ad looked liked a movie: fast-moving shots of city skylines, goldmines, and wealthy dudes doing wealthy dude stuff. It even had its very own Hollywood-style voiceover man.

He seemed to be suggesting that, because everyday news events tend to impact financial markets, the choctop-chomping suburbanites sitting with me in the cinema could profit from these events by trading highly speculative derivative contracts.

Talk about a horror movie.

What are CFDs?

If you’re trying to piece together what the hell a CFD is, you’re perhaps one of the lucky ones. CFDs essentially allow you to make highly leveraged bets on which way a share price (or the price of gold, currencies, or two flies crawling up a wall) will move in the short term.

You only have to come up with an initial margin (think of it like a deposit) of 5 per cent of the value of the share, but the CFD gives you exposure to 100 per cent of the price movement. If the share price moves the wrong way, you can be potentially exposed to unlimited losses.

Huh?

One of the best descriptions of CFDs I’ve heard comes from none other than ASIC Commissioner Greg Medcraft, who said ‘they’re basically a way to borrow to gamble’.

Nice.

CFDs aren’t allowed in some countries because they’re too risky, and earlier this month the Financial Ombudsman Service called for investors to be banned from trading CFDs unless they can prove they understand these highly complex derivatives.

However, writing about CFD providers is fraught with peril. They’re the financial services’ equivalent of Scientologists: rich, powerful, and not afraid to throw around their influence.

‘How I Lost $500k’

One of the best descriptions of CFDs I’ve heard comes from none other than ASIC Commissioner Greg Medcraft, who said ‘they’re basically a way to borrow to gamble’.

So with that let me introduce you to John*, a 31-year-old bloke from Melbourne who thought he’d give trading a go. I spoke to him this week.

Why on earth would anyone want to trade financial products that could potentially wipe you out? Here was John’s thinking:

If he invested $10,000 of his savings into the share market and it went up 10 per cent he’d make $1,000. Big deal.

If he invested $10,000 of his savings into CFDs and it went up 10 per cent he’d make $10,000. Big deal!

John was completely out of his depth. He didn’t realise that trading is like a game of tennis – you need to know who your opponent is.

The people he was playing against were in many instances the big financial institutions, like Citibank, Goldman Sachs, Barclays, HSBC and CBA. These institutions’ employees aren’t so much traders as risk managers – people with advanced degrees in mathematics, years of training, sophisticated financial models, and collaborative trading offices all around the world.

“I was trading the price of gold, oil, the ASX 200 and currencies”, said John. “All the action happens overnight in America, while you’re asleep – or trying to sleep.”

“I did okay at the start, but I didn’t really know what I was doing. For me, all too often I’d get this kind of overriding, heart-racing moment where I thought things are going to turn around.”

“So I’d go deeper, and deeper … while the market kept going the wrong way. Too many times I woke up to find out I’d received an automated margin call email (to top up his trading account because of losses) from my CFD provider.”

Barefoot: “Wait, wait, wait … how many times did that happen?”

John: “Oh gosh, I reckon about 25 times … I think I lost about $250,000.”

It gets worse.

“My trading strategy didn’t involve stop-losses (a risk-strategy that automatically exits your position at a predetermined price, so you ‘stop the loss’). I didn’t see the point, because in many cases with a stop loss you’d get sold out at a loss, and then the market would move back and you would have ended up making money.”

But that didn’t happen one Friday night a few months ago.

“When I went to bed I didn’t realise that the market was having one of its ‘corrections’. I woke up in the morning and checked my account. I’d received multiple margin calls overnight that had gone unanswered, so my CFD provider sold my positions out.”

“I stared at my computer screen. I had just lost a further $250,000. In one day.”

“It wasn’t like I’d bought $250,000 worth of shares and they’d gone down to zero. I never had that money in the first place. And now I had a few days to come up with $250,000 to cover my side of the trade.”

Luckily John could afford to lose $500,000. He’s a successful financial advisor.

Tread Your Own Path!

*name changed

How to Start Investing in Shares

Mr Smith, my high school maths teacher, insisted that trigonometry was something every young man needed to know. Yet I was more interested in buying and selling shares.

But the only place I could do this – we’re talking the early 90s, before broadband, when mobile phones were the size of Bert Newton’s noggin – was the guidance counsellor’s office. I would sneak in and use his (free) phone to call my broker.

When I tell people this story, they instantly understand why I never went on a date in high school. They also begin asking me lots of questions about how they can start out in the share market.

So let’s answer some of them.

The Top Five Questions:

1. Why bother investing?

2. How much does it cost to get started?

3. Isn’t investing something I should get a professional to do for me?

4. How do I know which stocks to buy?

5. What if the stock market crashes?

Why bother investing?

Let me give you two reasons. Let’s start with the carrot – compounding.

Albert Einstein said “it’s the easiest way to get rich without having to don a necktie, sit in a cubicle, and make small talk all day with Sue from accounts”.

Or maybe he said compounding was one of the greatest wonders of the world. Either way he was a fan. Here’s why.

Let’s say you stash away $50 a week and invest it into the share market each time you get to $1,000. Assuming your shares earn 9 per cent a year, in 30 years you’ll have $442,000, but have invested only $78,000 of your own dough. That’s compounding.

So that’s the carrot, now let me hit you with the stick – inflation.

Practically everywhere I look these days I see prices rising – at the petrol pump, at the supermarket, and (over the last few years at least) at auctions. This means that the dollars in your pocket are losing value – they buy less stuff.

If today you have $100 to spend on groceries, in 30 years that amount will be only worth about $40. So if you have your dough stashed under your mattress (or for that matter, in a transaction account), you’ll soon be eating lots of mouldy bread.

The only way you can outrun inflation is by earning a higher rate on your money than is being eaten away. Historically, the best way to do that is by investing in the share market, which has been averaging around 10 per cent per year for the past 20 years.

How much does it cost to get started?

Provided you don’t have any credit card debt or any other consumer credit (pay those suckers off and nab a guaranteed 18 per cent return!), you can get started in the share market with as little as a thousand bucks.

Isn’t investing something I should get a professional to do for me?

 That’s exactly what the mass financial marketing machine wants you to think.

Most retail managed funds are about as good as the financial planners who flog them – they overcharge and under-deliver. Figures this week from Morningstar show the average fund manager underperformed the market in 2010. Worse, most still slugged investors with high fees for their failure.

How do I know which stocks to buy?

It’s easier than you think

Here’s you: “But I don’t know anything about the share market!”

Here’s me: “Relax, you don’t need a crystal ball. The best investors focus on becoming part-owners of good businesses.”

How do you do that?

You buy what’s called a low-cost index fund.

These are simple, boring funds that just track the market. Which means that you can pick up a slice of the top 200 or 300 businesses in Australia … with a single purchase!

Even better, this way you don’t need to decide what to buy: the index fund is ‘self-cleansing’, because it automatically buys big companies as they grow, and sells those that fall out of favour (like Kodak).

And remember, if you’re invested in shares in your super, you’re already an investor in hundreds of businesses — how easy’s that?

What if the stock market crashes?

It will. That’s one thing you can count on.

Share markets – like life – have their ups and downs. The world’s an uncertain place: there’s the risk of war, recessions, oil price hikes, Bieber-fever. But if history is a guide, the stock market will still be the best place to invest to for the long term.

Repeat after me: “I will not invest money that I’ll need in the next five years.” To soothe their nerves, smart Barefooters have a couple of grand stashed away in their Mojo account so they don’t have to sell when everyone else is.

So if you’ve been putting off dipping your barefoot into the stock market, the time to begin is now. Like any skill, you get more comfortable the more you do it, and it’s one hobby that can definitely pay big dividends.

While I can’t remember much from high school maths, the lessons I learned from buying businesses have stayed with me till this day.

Tread Your Own Path!

REVEALED: How I Personally Manage My Money

I’ve met people who track their spending on a spreadsheet. They tend to have names like Ian and Cheryl, and they bring homemade hummus and day-old bread to your barbie. Or worse, their home brew (‘It works out to be only eight cents a glass! Yes, and it tastes like it too, Ian.)

This is no way to live your life. Your daily latte won’t send you broke. To this day I’ve never, ever been able to stick to a budget – but I’ve compensated by letting technology do the heavy lifting for me.

It’s called the 60-20-20 plan – 60 per cent safety, 20 per cent savings, and 20 per cent splurging – and it’s the easiest way I know to manage your money.

Safety – 60 per cent

Safety means allocating 60 per cent of your take home on food, shelter and dog biscuits. All the things you need to live safely in the suburbs.

If you’re like most people it will divide up something like this:

• Mortgage: 30 per cent (but not if you’ve bought in Point Cook)

• Food: 15 per cent (or a bit more if you watch The Biggest Loser)

• Mobile and broadband: 5 per cent (unless you’re Malcolm Turnbull)

• Car: 10 per cent (unless you’re Bob Brown, who rides a bike)

Let’s talk dollars. An average couple pulling in a combined $120,000 a year (without any crying tax deductions – yet) takes home about $1,850 a week. So they would have to sock away:

• Mortgage: $555

• Food: $277

• Mobile and broadband: $90

• Car: $185

Knowing how much it costs to run You Inc is scary, but powerful – so work out your percentages. In times of trouble, this is the minimum amount you need to bring in to keep the lights on and the cat warm.

Savings: 20 per cent

Allocate 20 per cent of your hard-earned to savings.

Hang on a minute. If you’ve got any credit card debt or personal loans you’ll need to do the following:

First, save $2,000 into a Mojo account – a high-interest online savings account. For our average couple this would take them a little over six weeks to save (20 per cent of $1,850 = 370 x 6 = $2,220).

Second, start paying off your minor debts by attacking the smallest one first (say a parking fine), knocking it over, and then moving on to the next biggest one – and keep going. I call this method ‘domino your debts’, because you knock them down one by one. (By the way, your major debts, like HECS-HELP and the mortgage will obviously take longer.)

Now you’re (mostly) debt free, you can begin paying yourself – every dollar you put into your savings account is like getting a payrise at work without doing anything – it’s like being a politician.

The best legal tax dodge going around is superannuation – especially if you earn under $62,000. Call your fund and ask about chipping more into your fund via the Government’s co-contributions scheme.

Then you have a choice: you can aggressively pay down your mortgage (or if you’re renting, you can aggressively save for your deposit via a First Home Saver Account), or you can begin building an investment portfolio of direct shares. I do a mixture of both.

Splurge: 20 per cent

You are hereby directed to go out and blow 10 per cent of your money on crap that makes you feel good (shoes, booze, and anything else you want).

The other 10 per cent of your splurge money should go to longer-term splurges: overseas holidays, weddings, divorces, anything that is going to cost more than a few weeks’ wages.

For our couple, this means dinners to the value of $185 a week, and sticking another $185 into the Greek Island Getaway fund.

The best place for keeping your splurge funds is uBank, which is currently paying the highest rate of interest on the market (as at Feb 18th 2011), and lets you create sub-accounts for your different goals.

The key is to make sure your splurges don’t drain your bank. Think about the big goals you have over the next 12 months, and chunk them down to weekly amounts.

OK COMPUTER

Here’s you: “This sounds like a lot of, like, work.”

Here’s me: “Nope – the 60-20-20 plan puts your money on autopilot.”

That’s the beauty of this plan: once you’ve crunched some numbers and set up your accounts, the system runs itself. Best of all it’ll take you only ten minutes a month to monitor.

Here’s how to get started quick:

1. Over the first week keep tallying up your expenses (either with an old school pen and paper, or an iPhone app that tracks your spending), so you know where the dough is going. Relax, this isn’t a tut-tut judgmental stuff, just keeping a track on where you spend your money.

2. When you calculate your percentages for safety, savings and splurging, make a few calls to see if you can screw down your suppliers.

3. Keep a float of $500 in your savings account so you don’t accidentally overdraw and get hit with (unfair, perhaps illegal) fees.

4. For your 10 per cent ‘blow money’, physically take out cash each week. Get it in $10s and $20s. Then put it in an envelope and store it in your sock draw. It’s a psychological thing.

   Casinos use chips so you don’t freak out when you gamble away your (mother’s) rent, credit cards work the same way.

   (Case in point: the other week I bought something at Harvey Norman, and the pimply teenager at the checkout was like “Woah, dude, you’ve got, like, real money”.) Cold, hard cash is a lot harder to spend.

5. Once you have this plan in place you won’t have to worry about money again. That frees you up to focus on using the miracle of compound interest to turbocharge your wealth plans – which we’ll tackle next week.

Tread Your Own Path!

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Shopping List:

1 X fee-free transaction account
1 X high-interest online savings account
1 X low-cost industry superannuation fund
1 X discount online sharebroker
1 X sock draw

Automate Your Money:

The 60-20-20 plan

• 60% Safety (all living expenses)

• 20% Savings (thinking ahead)

• 20% Splurge (things that make you smile)

20 Tips to Set Yourself Up in Your 20s

You don’t have to be running the world by the end of your 20s, but you can certainly set yourself up for success. A funny thing happens when you have a birthday with a zero at the end. You freak out.

After all, it’s God’s way of reminding you that you’re getting closer to pushing through the pearly gates – that and the fact that you look a bit like Sam Newman (or Naomi Robson) when you look in the bathroom mirror in the morning.

Over the festive break I had dinner with three mates who were adjusting to having a life with not just a zero at the end, but a three in front. After more than a few reds, we came up with a list of the top 20 things we wished we’d known in our 20s.

1. The Joneses were broke

The Joneses you were trying to keep up with probably had a cool car and nice clothes, and took fashionable holidays to countries that Jetstar doesn’t (yet) fly to. But chances are they were broke – or will be by the time they hit 40 – because they were wasting money on worthless junk trying to keep up with the Jameses.

2. Buy the right stuff

We all regret not taking the opportunity in 2000 to buy a house (or two) and then riding the debt boom. The key to long-term wealth creation is buying the right stuff: assets that compound in value over time.

3. Watching 100 re-runs of Sex and the City will give you a zero per cent return

Instead of sitting around playing make-believe, get out and become your own Carrie Bradshaw (or Mr Big).

4. Bad credit will come back to bite you

I know of a guy whose credit file is dirtier than Pamela Anderson. He now finds it hard to be taken seriously by banks and other lenders. Get your money in order with my 10-minute plan.

5. Chains of habit are too light to be felt until they are too heavy to be broken

Warren Buffett said this, probably in relation to investing, but it applies equally to all the silly habits young people experiment with – smoking, drinking, debt-bingeing, and the Young Liberals.

6. Listen to old people

I’ve learned a lot from listening to older people who’ve endured similar struggles. It’s easier to learn from someone’s mistakes than to make them yourself.

7. Don’t listen to (some) old people

We’ve all known a number of old geezers at work who set out the rules of “how things are done round here” – which usually equated to not showing them up or offending their fragile egos. All workplaces have losers. The older they get, the sadder they become.

8. Move out of home

It’s not natural to live with your parents in your 20s. Any money you save is offset by a lack of independence, missing the chance to grow as a person, and your father making small talk with your random pick-up from the night before.

9. In your 20s you learn, in your 30s you earn

If I had a dollar for every young whippersnapper who busted out of university and expected to run the company within a few years I’d be, well – come to think of it – I’d be me. Really though, learning in your 20s sets you up to make serious dough when you’ve curbed your enthusiasm for 5am finishes.

10. The letters after your name don’t really matter (unless you’re a surgeon or a stripper)

EQ beats IQ hands down. Passion and enthusiasm beat them both.

11. No, you can’t have it all

The management gurus are wrong: there’s no such thing as a four-hour work week. It’s a daily trade-off between spending time with your family and friends, your career, and watching Sex and the City re-runs.

12. Networking is slimy

I’ve met wonderful people who’ve opened doors for me. But not because I offered them a cheesy smile, a sweaty palm and a magnetic business card. It was because I gave before I got. Actively looking to help people is the most powerful career advice I know.

13. Turn your passion into profit

Here’s how it works. You finish university wanting to be a writer – but it’s a tough job market, so you take a job in accounts until something better comes up. Ten years later, you’re still there. Comfort is the enemy of progress. Work hard at turning your part-time pleasure into profits – then go full time.

14. Tattoos are trouble

Your mother is right, and your future children will agree with their grandmother.

15. Buy the cheapest car your ego can afford

Two of my mates bought cars to impress girls. Now 10 years on, both adamantly attest there are easier ways to impress ladies than dropping $42,000 ($30,000 plus $12,000 on repayments) on a car – like a deposit on a pad. Girls like cars. Women like homes.

16. It’s easier to save money when you’re broke

Most people fool themselves into thinking they’ll save more if they earn more. It almost never happens. Saving is a character trait – not a function of how much money you earn.

17. That mate who borrows money from you isn’t going to give it back

I once lent a mate a grand to cover his rent. At the time he swore he’d pay me back. But he couldn’t – for the same reason he had to borrow it in the first place. As time went on he avoided me more and more, to the point that now we never speak – all for a lousy thousand bucks.

18. Relationships are more important than a career or car

Sadly, one of my mates didn’t make it through his 20s. His final memories were filled with moments he spent with family and friends. He never mentioned his possessions or his profession. Not once.

19. Most things don’t matter

I spent a good part of my 20s worrying about things that never happened.

20. 30 is the new 20

You know you’re in cougar territory when you start spouting lines like this. But there’s a point to it: even if (like me and my mates) you didn’t nail all the things on this list in your 20s, the rules are the same whether you’re hitting the nightclub or the bowling club this weekend.

Tread your own path!

All You Need To Know When Buying Your Next Car

When I was growing up I’d pray that it was my mother, not my father, who would pick me up from social and sporting events. She had the nice car.

Dad, on the other hand, drove a Toyota Hilux, but not one of those gleaming monsters you see CUBs (cashed-up bogans) driving around today. Rather it was a clapped out one-tonner he’d had for as long as I could remember. It was so old it had a factory-fitted wooden tray on the back.

I’d die a slow death when I’d see the clunker coming up the road. The only thing worse was when we’d offer someone a lift home – which, in the stinking summer sun, meant we’d all rub legs as we sat along its bench seat.

Thankfully my mother was not a fan either. Towards the end of the Hilux’s life she would put pot plants in the back and use it as a sort of moveable garden ornament.

Yet my father’s taste (or lack of) in cars has had untold influence on me.

To this day I’ve never bought a new car, and for most of the cars I’ve owned the thought of theft is more of a running gag than a reality.

Yet maybe it’s the kilometres I’ve been racking up, or perhaps it’s that my labrador retriever, Buffett, has slobbered over every inch of my sedan, but I’ve finally decided that it’s time to trade up.

Trading up

Yet I’m no car person, so I enlisted the help of my good mate Sam, who makes his living selling used cars (which is much nicer than calling him a used car salesman).

Barefoot: “Tell me about all the scams you blokes use to sucker people in.”

Sam: “Mate, that’s all a beat-up. The real trouble happens when you buy privately.” (Spoken like a true seller of used cars.)

And so the hunt began.

Supply and demand

In talking to Sam I started to understand that the car market is much the same as the share market – it’s built on the back of supply and demand and influenced by external factors like the Global Financial Crisis and government policy.

When GE Money and other lenders effectively pulled out of financing new vehicles last year, some dealers were forced to flog new stock at a loss. This in turn sent the second-hand car market spiralling down – and canny buyers picked up bargains.

It’s a similar situation with luxury cars. The GFC has seen many a banker lose his bonus and therefore his Beamer, which is usually sold off at auction. (Sam also advises that buying a car at auction is a risky strategy, given that in most instances you can’t test-drive the car and that you’re competing against used car dealers. Enough said.)

Government trickery

The Government has artificially boosted demand for new vehicles by giving small business owners a 50 per cent bonus tax deduction for cars.

Most dealers are run off their feet, yet when this arrangement ends in December you may find they’re more motivated to do a deal.

Still, if you’re like me and you know more about stocks than shocks, the internet has you covered.

Surf the Web

Like most things these days, it pays to kick the tyres in cyberspace before you find yourself slugging it out with Sam and his mates.

So your first port of call should be to the government-backed howsafeisyourcar.com.au, which rates most of the cars on the market in terms of safety, and offers a great overview of the features that have been known to save crash-test dummies.

While you’re on the Net, the next thing to do is go to sites like carsales.com.au and carsguide.com.au (owned by News Ltd, publisher of the Herald Sun), where not only do you get expert reviews but you can get a feel for where the market is.

Car Inspection

When you’ve found your dream machine (or money pit), it’s a wise investment to pay $150 to get a vehicle inspection, just to make sure you’re not buying a Timbercorp.

If you’re a business owner there are tax advantages to leasing (so long as you can keep, or fudge, a logbook). If you’re employed you could ask your boss to include your vehicle in a salary packaging arrangement the next time you review your pay.

Avoid car dealer financing

If neither of these options is available, it’s best to use as much cold hard cash as you can afford. Stay away from dealer financing, especially from outfits like Motor Finance Wizard, who flog horribly overpriced cars under the guise of them being interest-free.

Borrowing money for something that falls rapidly in value only serves to compound your losses.

Yet most of this is common sense.

Steal yourself for the car showroom

What’s not so well known is that most car accidents happen on the showroom floor.

We all know that cars are a dud financial deal, but unless you want to get around on a bus they’re a necessary part of life.

The trick is making sure you don’t end up hitting a financial pothole.

My old man says to buy the cheapest car your ego can afford.

Until the other day I was still no closer to working out which car I should choose. Then by chance it happened.

I pulled up at the lights and Buffett and I had our eyes drawn to the left – through his slobbered, slimy window.

It was love at first sight.

A gleaming, white Mitsubishi Triton ute.

It was perfect – just the vehicle for a city dweller and his horse. Er, dog.

Even better, I’m sure that in the fullness of time it will almost certainly embarrass the hell out of my future son.

Tread Your Own Path!

How to be Prepared and Ready for Anything

Sam from St Kilda is an elderly resident in his 60s. One fateful summer’s evening he was out watering his pot plants, when suddenly a car careered through his gate, running him over and breaking his leg.

Unlike many pensioners his age, Sam is still employed as a television personality and thus was fortunate to be able to meet the medical costs.

Yet most of us aren’t highly paid media identities able to shell out thousands in the event of a disaster – then again few of us have partners half our age that are in the habit of running us over using our own European sports car as a weapon.

NOTE: While much of the information below is still relevant, there’s a more recent version of this post which you can find here.

Prepare for the unfortunate

Still, as any good insurance salesman will convince you, there’s a high probability that at some stage an unfortunate – and costly – event will set you back.

Perhaps you will crash your car, or be conned into buying tickets to a Nickelback concert, or maybe your home will be burgled.

When the unthinkable does happen if you don’t have insurance you are risking financial ruin.

Consider the possibilities

Sadly, despite what the contents of your bathroom cabinet might indicate, three Panadols and a box of Band-Aids are not an effective insurance policy.

Although many people spend a lot of time thinking about making and spending money, few spare any time for insurance. The reason is that insurance is about as compelling as going to a Nickelback concert. It makes us think about all the unpleasant things that could happen.

Some insurance agents prey on this fear and in the process convince people to take out unnecessary (and expensive) cover we don’t need.

The fundamentals of insurance

The basics of insurance are this. Throughout time people have been getting themselves into all sorts of bother. Most people don’t have money set aside to pay for the ramifications, and therefore like to pass on the financial risk to someone else – usually an insurance company.

For shouldering this risk you pay the insurer a premium, which covers you against a particular event occurring that is in your policy.

choose to pay an initial amount towards your costs (known as an excess). In doing so, the insurance company will usually lower your premium, since it won’t have to bother doing all the paperwork for a little claim.

According to the Sun newspaper in London, songbird Jennifer Lopez has insured her physical assets for a cool $1 billion, although it’s not known whether her insurance excess increases at the same rate as her backside.

Insurance companies offer all sorts of policies for everything imaginable happening. Shane Warne has apparently insured his winning, spinning fingers.

Stick to the basics

Insurance is the only thing we buy that we hope we’ll never have to use. That being the case, it’s wise to get insurance only for those events that can financially maim you.

For most of us that means car insurance (if you’ve got a car), health insurance (if you’ve got a body), and home and/or contents insurance (if you’ve got a home and possessions).

Most people have basic life insurance cover included in their superannuation.

Unless you have dependants there’s not an urgent need to shell out your hard-earned to ensure your dog is cared for when you’re dead.

Car insurance

Most people’s first experience with insurance is their car.

There are three main types: compulsory third party, third party property (which can include fire and theft provisions), and comprehensive.

The cars I’ve owned in the past have been worth less than what some people spend on a round of drinks at a nightclub, so I’ve always stuck with compulsory third party.

Everyone who owns a car should have this as a minimum, as it covers you against damage your car inflicts on other people and their property.

A recent survey by SGIC showed that more than one in five motorists don’t believe that speeding increases their chances of being involved in a collision. With that in mind, people with expensive wheels should consider going up the insurance food chain and getting more comprehensive (and expensive) cover for their vehicles.

Health insurance

The second form of insurance you should look into is health.

Australia has one of the best hospital systems in the world in Medicare, which is paid for by our taxes. There are advantages, however, to being a private health patient.

In most cases, there’s no waiting list for hospital procedures, and you have a choice of where you want to be treated and by whom.

I think the cost is well worth it for the peace of mind it delivers.

House and contents insurance

The final form of insurance that you should ensure you have is house and contents.

According to AMP, 70 per cent of Australian homes are underinsured and one in four houses has none.

Perhaps your place isn’t exactly the Taj Mahal. Yet imagine coming home from work and seeing your house on fire. All you have left is the clothes on your back.

How much would it cost to replace everything you had?

The figure for even the most basic of houses can run into the tens of thousands of dollars. At about $250 for contents cover and $500 for building insurance, you’d be absolutely crazy not to get this insurance.

We’ve all seen the damage cyclone Larry inflicted on Queensland. Experts predict insurance claims will run into the hundreds of millions.

When shopping for insurance it’s often a good idea to go through an insurance broker. They can tell you what your policy covers you for, and more importantly what it doesn’t.

Pranging your pride and joy, falling ill or getting robbed are stressful experiences in themselves.

When disaster strikes the last thing you want to worry about is how you’re going to finance your misfortune.

Tread your own path!

However — and this is important — you should always seek independent financial advice before acting, especially when it comes to insurance. This is one area where it’s worth paying for it to be done right.

How Much is Your Car Costing You?

When it comes to dating I’m at a distinct disadvantage. Without my own wheels it’s tough – ever tried picking up a girl for a date in a taxi?

Economists call this opportunity cost; the money I save in not owning a car comes at a cost, namely, the unlikely event of pulling a pash on public transport.

Most people want a car for convenience, but the choice of chariot is not simply motivated by need for transport. If it was we’d all be driving second-hand Subarus.

Status symbols

To some, the car they drive is a symbol of their lot in life, and the moulded metal in their garage says as much about their personality as what comes out of their mouths.

Marketers have successfully shaped this image for decades – the horseless carriage is a freedom machine, a sexual stimulant and a status symbol rolled into one.

But at what price? Whether you care to admit it, the car you drive comes at a big cost. So let’s pop the hood and work out just how much your motor is costing you.

“One of the golden rules of wealth is to avoid, wherever possible, borrowing for things that fall in value.”

Exhausting expense

These days it’s probably cheaper to fill your car with Chanel Number 5 as petrol prices climb to record highs. Higher fuel costs are only part of the problem. According to the RACV most family cars now cost more than a quarter of the average weekly wage to run.

Most people get hot under the collar about rising petrol prices – few maintain that rage when it comes to the overall costs of running a car, which can be thousands of dollars each year.

Let’s say you buy a new Holden Astra for $23,990. According to the experts at the RACV, running costs for the Astra are $146.11 each week. After five years the car will cost you nearly $38,000 – and it would now be lucky to be worth $11,000. That’s what you call wealth destruction.

Australians love their shiny wheels. Sales of new cars have been going through the roof. Industry experts are predicting that we will buy a record one million new cars this year.

To move that many new cars off the factory floor, manufacturers have become skilled at selling the dream. The new-car smell has become a pheromone for many a consumer, and just like a serial playboy, there’s always a new model around the corner to tempt you.

New finance experts

Car manufacturers have also become experts in financing – after all, how many of us have a spare 30 grand to throw at a new car? The largest car maker in the world, General Motors, makes more money from lending people the money to buy its cars than it does from making them.

New-car salespeople will often tell you it’s better to buy new, because with a second-hand car you could be inheriting the previous owner’s problems – like the fact that it almost sent them broke.

What the manufacturers don’t say, of course, is that one of the golden rules of wealth is to avoid, wherever possible, borrowing for things that fall in value. The same goes for the mysterious world of leasing cars for a “tax break”. This form of finance has been a boon for car salesmen as it muddies the picture (and the cost) of buying a car so much that it bamboozles the average buyer.

Think about it logically. The Government isn’t in the business of enacting legislation so people can buy expensive cars. In many instances, the tax benefits can be eroded by hefty fees and charges.

Vehicle value?

As with all financing there is a cost, and it comes out of your pocket. Many times it’s the people with the best cars who are the least able to afford them.

Driving a flash car may impress people and increase your self-esteem, but it can keep you from building up assets that increase in value over time.

Sales figures show that most people are mesmerised by the hypnotic spin that success comes with all-wheel alloys and leather interior. Luckily I’ve met a girl who shares my views – and her car!

Tread your own path!