Going back thirty or forty years, many people used to do their own car repairs and maintenance.
This was because, back then, cars were not anywhere near as sophisticated as they are today.
The same could be said of financial affairs.
The only kind of personal insurance was life; there was not much choice of home loan; credit cards were virtually non-existent and superannuation was available to only those fortunate enough to work for the government or large corporations.
That is hardly the case today.
Given the complexity of both finance and automotive engineering these days, it would be foolhardy for anyone to undertake the management of either need for themselves, unless they have a reasonable working knowledge of the issues.
You might be capable of tackling some aspects, but, if you get out of your depth, that's where you need the help of an expert.
After all, you don't know what you don't know.
Generally speaking, you cannot access your superannuation until you reach "preservation age", which, for anyone born on or after 1/7/64, is age 60. (There is a phasing in from age 56 up to 60, for those born between 1/7/60 and 1/7/64, in annual increments).
Once you reach this point, you are able, subject to certain restrictions, to access your superannuation savings, in the form of an income stream, without the need to retire.
Why would you would wish to is this?
Because such a "pre-retirement pension", as it is sometimes called, is at lower or even zero income tax, this additional income can be used to supplement your present income, if you wish.
Alternatively, it can provide a means for you to "salary sacrifice" additional funds to super and boost your retirement "nest-egg" because of the tax savings this strategy can generate.
To compare the two requires assumptions about future interest rates and super fund returns, but let's assume super funds will return about the same as home loan interest rates.
Then the issue becomes primarily about tax.
Unless you're fortunate enough to be on a remuneration package of $250,00 or more, pre-tax contributions to super lose only 15c in every dollar to tax.
If your marginal tax rate is higher than this (in other words, anyone paying income tax), you are better off to "salary sacrifice" to super than to make extra home loan payments.
For example, if you are in the 32% tax bracket, including Medicare Levy (you earn between $45,000 and $200,000), contributions to a super fund means a 25% better return.
This is because 85c per dollar goes to the super fund compared with 68c with home loan payments (85/68 = 1.25)
Of course, this assumes the money will eventually come out of super tax free, which occurs at age 60.
So, if 60 is a long way off, you have to weigh up the better "return" of super versus the home loan with how long the money is tied up in your super fund.
After-tax contributions are a different scenario altogether.
Because there is no tax differential between the two options and money in super is potentially locked away for a long time, it is generally accepted that, in this case, extra home loan payments becomes the preferred option.
As always, sound advice is the key.
How much capital you need to retire comfortably depends on a number of factors; lifestyle expectations in retirement and how long you intend to live, being just two.
Investment returns fluctuate and depend on how the money is invested.
That said, a reasonably "safe" assumption is that a retirement income portfolio should return an average of 5% per annum over the long term.
Using this figure as a basis for your calculations means you need a lump sum equal to twenty times the desired annual income to safely generate the income you desire.
For example, if you want an income of $50,000 a year, you need a capital base of $1m.
Of course, this doesn't take into account inflation.
Eventually, you can start to spend your capital, assuming you don't intend to leave it behind when you're gone.
But, to avoid running out funds before you run out of birthdays, having a further 50% in invested funds is the ideal.
In other words, whatever your retirement income goal, multiply that figure by 30 and that is your target capital sum.
That target may seem out of reach, but, if you can also qualify for Centrelink benefits, you may not need quite as much.
How do you work out how much YOU will need? - That's where we come in!
While not all that long ago something of a rarity in an individual's portfolio, 100% mortgage interest offset accounts, "offset accounts", are rapidly becoming the "norm" for personal financial management and not without good reason.
Set up alongside a principal and interest home loan, offset accounts serve as a savings account for individuals who also have a home loan.
At the end of each day, the bank takes the balance of the home loan account, subtracts the balance in the offset account and calculates the interest to be charged for that day for the loan in question.
Due to the power or compounding, the accumulating balance plus the interest savings accelerate the reduction of the home loan balance in the same way as additional repayments would have on the loan. However, the distinct advantage here is that, while extra home loan payments tie the money into the loan, unless you ask the bank if you can redraw the additional "equity" (which most will do, albeit at a cost), the money in your offset account is yours to access at your discretion.
This makes them ideal for everyday transactional accounts, inasmuch as any money you didn't use TODAY is saving interest on your home loan, yet is still available for you whenever you wish to access it, be that through an online transaction or an ATM withdrawal.
What's more, and verified by a press conference statement by former Prime Minister, Paul Keating, given during his term as Federal Treasurer, interest "earned" on savings in offset accounts is not taxable as they constitute interest not charged, as distinct from interest earned.
This makes them a very effective form of saving.
Using, by way of example, a taxpayer earning between $80,000
The first question is do you want a credit card or a debit card.
The difference between the two is that both tap into the credit card system. But, where a credit card uses "borrowed" money, with a debit card, you are only accessing your own funds.
Assuming you want a credit card, there are several considerations. Here are just a few:
- Does the card provide an interest free period? Most do, but not all. Generally, those that offer a lower rate of interest charge interest from the time the transaction hits your account, whereas offer a period during which, as long as you clear the full balance on the statement due date, no interest is payable.
- What annual fees are payable? These vary from nothing to quite high, with the fee usually relating to either the interest rate payable or other features of the card.
- What other rewards does the card offer? Very much has been made of the rewards programs associated with use of credit cards. Generally speaking, the actual value of these reward points is typically around 0.7c per dollar of card expenditure. This needs to be taken into account when comparing the value of different cards, not to mention deciding whether or not to use your card for a particular transaction (see next point).
- Will there be a cost to use the card compared to EFTPOS? This is less about which card to use, and more about whether to use the card for a particular purchase. In some instances, a card use fee may apply and here there are some differences between the various types of cards. For example, American Express transaction fees are usually, but not always, higher than Visa or Mastercard. So, it always pays to ask how much it costs to pay by card before committing to doing so, because often the fee exceeds the value of the points earned.
As a general principle, using a credit card with an interest free period and clearing the full statement balance each and every month is a very sound strategy, especially if you are also using a mortgage offset account. Just this strategy alone can substantially reduce a home loan term compared to not using the card.
As with everything to do with your money, it pays to do your homework, or get someone else to do it for you, before you make your decision.
Given the protracted period of record low interest rates we have just experienced, it is little wonder that this question is being asked more frequently.
The first thing that needs to be acknowledged is that banks are businesses.
So, if they are offering to fix the rate on a home loan, they would not do so where they expected to lose out in comparison to leaving you on a variable rate loan.
If they expect to win, or at least break even, that means you are likely to lose, or at least not end up better off.
If that is true, why do people fix?
The most important reason for fixing a home loan is certainty.
If you know that the fixed rate offered means you can afford the loan, then this is a "safer" option than variable, even though you may not end up better off in the long run.
So, if you DO intend fixing, there is a few factors you need to consider.
The first is that many banks charge a "rate lock" fee in addition to interest.
So, to ensure the fix is actually a good deal, you need to compare the total cost of the fixed loan with the variable loan, not just the interest.
Another factor is that of what are referred to as "economic" or "break" costs on a fixed loan.
Should you wish to terminate a fixed loan mid-term, if interest rates have fallen and the bank cannot lend the money at the same rate as they were charging you, most will charge you the "difference" for the remainder of the loan term.
Another point to consider is that most fixed interest home loans do not allow the operation of an "offset" account against them; a strategy we would normally recommend.
Similarly, many do not allow the repayment rate to be varied, do not allow lump sum repayments or more than $5-10,000, nor permit the "redrawing" of equity.
So, while the attraction in fixing a home loan while rates are low is obvious, you need to do your homework (or get us to for you) before you commit.