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We welcome you to our January e-Bulletin
In this issue ...
Cast your financial safety net - Wayne's tips for your financial wellbeing in 2016
New Years Revolution - Colin looks at why a Revolution is better than a Resolution
3 Insurance myths exposed - Insurance traps - Jenny busts common myths
Shaking things up - Glenn explores how to guard against business disruption
From the Editor
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New Year is traditionally the season of fresh starts and personal resolutions. Along with diet and exercise, getting ahead financially makes it onto many wish lists year in and year out. But a brighter financial future is likely to remain a pipedream without a back-up if things don’t go to plan.
While setting goals is an important element in your overall financial plan, so is having a financial safety net. Whether you are aiming to save more, spend less or reduce debt this year, your best-laid plans could fall in a heap if you are not prepared for financial setbacks or unanticipated costs.
Putting a financial safety net in place does not come down to any single measure. Rather, it’s a comprehensive approach to risk that’s designed to protect you and your family’s financial wellbeing, come what may.
Build an emergency fund
The first line of financial defence for households is to have some money tucked away in a ‘rainy day’ fund for emergencies and unexpected costs. If you are living from one pay day to the next and your hot water heater bursts or your car needs urgent repairs, the temptation is to whip out the credit card.
If you are only able to make the minimum monthly repayment you could be paying off that hot water heater for years to come. Whereas paying cash will save you money and make your financial goals that much easier to achieve.
It’s a good idea to keep your emergency cash in a separate account where it is readily accessible but won’t get mixed up with your everyday money.
Most experts suggest you aim to put aside three to six months’ living expenses. This can take a while to build up so one time-honoured strategy is to ‘pay yourself first’. Set up a direct debit from your primary bank account to divert part of your salary each month to your emergency fund.
Reduce debt
Even with the best willpower in the world it can be difficult to save if you are weighed down with debt. When cash is needed for an emergency, households with high levels of debt are more likely to feel financial stress.
The good news is that with interest rates at or near their historic lows, there is no better time than the present to tackle debt. Aim to pay down loans with the highest interest rate first – typically this will be your credit cards.
If you have a mortgage, aim to pay more than the minimum monthly payment. By keeping at least three months ahead of schedule you can build a buffer to provide some wriggle room with your lender if you experience financial difficulties.
With home loan interest rates typically much lower than rates for personal loans and credit cards, you might consider consolidating your debts into your mortgage. Be aware though that this will effectively turn a short-term debt into one that will accrue interest for up to 30 years, so aim to step up your home loan repayments at the same time.
Review insurance
No financial safety net is complete without adequate personal insurance. We tend to insure our car and our house before we think about our most precious possession, our health and our ability to earn an income.
Ask yourself how your household would cope financially if you had an accident or suffered a critical illness. Worse still, what would happen if you were to die prematurely?
While health insurance will cover some of your medical costs, it won’t pay the mortgage and food bills or take care of your family while you are unable to work. That’s where personal insurance comes in, to cover your life, total and permanent disability, trauma and income protection. It’s possible you already have cover for some of these through your superannuation fund, but it may not be sufficient.
If you would like to discuss any aspect of your financial safety net, please give us a call.
Wayne van der Heide, Principal and Chartered Accountant
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It happens every 31st of December. Millions of people all over the western world promise themselves to improve at least one important aspect of their lives and make it their New Year’s Resolution to do so.
According to Wikipedia, the most popular resolutions remain unchanged year after year, drawn from a list that includes getting out of debt, saving money, getting a better job, getting fit, reducing stress, drinking less alcohol, and quitting smoking. Sound familiar?
Broken resolutions
These are all important and worthwhile goals, but here’s the sad thing. Research indicates that by January 7th of the new year, 29 per cent of these resolutions will already be broken. And this attrition rate will continue, so that up to 54 per cent are likely to have been abandoned after 6 monthsi.
So how can you make sure that you will be one of the minority who do not break their new year’s promise to themselves? We think the answer is a New Year Revolution instead of a New Year Resolution – a whole new way to approach this important commitment.
Plan to succeed
The first thing you should do is decide whether or not you have the time and energy available to achieve the change you want, because if your life is already overcommitted you are more likely to fail than to succeed. If your day is already overcrowded, for example, it is unlikely that you will find the extra 30-60 minutes each day to jog, swim, ride a bike or go to the gym unless you drastically reorganise things.
It is also important to prepare yourself long before New Year’s Day. Don’t promise yourself to start eating healthier food from January 1st and then do nothing about it until after feasting at Christmas. Start investigating a healthier eating plan now, source suppliers of healthier foods like an organic home delivery service, see a nutritionist if you need to, and be ready to start your healthy eating plan on January 1st.
Similarly, if you are resolved to achieve a healthier work-life balance in 2016 by giving more time to your partner, family, social life or personal fitness, you are going to have to work out how to implement your new priorities well before the new year starts. Isn’t the December break a great opportunity to experiment with some new routines and make some key decisions about how you can spend fewer hours at the office without sacrificing the quality of your work?
Be patient after you have made your resolution. It takes 21 days to make a new habit so forgive any lapses, stay focussed on you goal and you will get there.
As you can see, the difference between wishful thinking and real behavioural change is commitment and a plan, and this is never more important than when planning a brighter financial future.
In a famous Yale University survey graduates were asked if they had ever written down a financial plan. Only 3 per cent said Yes. Twenty years later, they quizzed the same graduates about their financial worth. The 3 per cent who had taken the trouble to write down a plan were richer than the other 97 per cent put together. (It also helps if you can automate the plan – a bank transfer to place part of your salary to an investment account every month, for example, eliminates the need for willpower.)
And finally, tell all your friends about your resolution so you can earn their praise if you succeed and feel their scorn if you fail – peer pressure is a powerful incentive!
Three simple steps to staging a New Year’s Revolution in 2016!
- Commit yourself
- Prepare a plan
- Make your commitment known to others
Let us know if we can assist in helping you achieve your financial revolution.
i Norcross, John C., Ratzin, Albert C., & Payne, Dorothy. (1989). Ringing in the new year: The change processes and reported outcomes of resolutions. Addictive Behaviors, 14(2), 205-212.
Colin Wright, Principal and Rural Advisory Division Team Leader
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In the unlikely event that you break a leg or, heaven forbid, die prematurely you and your family have got it covered, right? You’ve got life insurance care of your super fund, not to mention that pricey health insurance policy. And if worst comes to worst, there’s always a government pension to fall back on, isn’t there?
Actually, most Australians don’t have nearly enough insurance. The nation’s underinsurance gap has been estimated at a whopping 1.8 trillion dollars.i Part of the reason for that is the trio of misconceptions outlined above.
Let’s go through them one by one.
Myth one: My super will cover me
The reality is that the overwhelming majority of people that have insurance attached to their super are underinsured. One in two super fund members has less than half the life insurance cover they need. Nearly three quarters are underinsured for total and permanent disability cover.ii
Here’s another sobering statistic: Rice Warner found a couple in their mid-thirties with young children would need at least $680,000 worth of life insurance cover. The default super fund cover was just $200,000 – less than a third of what’s required.
Super policies typically don’t automatically include income protection or total and permanent disability (TPD) cover. While it’s true that many super funds will allow you to purchase these types of insurance, often at an attractive price, you’ll almost always have to contact your fund to put special arrangements in place. What’s more, trauma insurance is not available inside super.
If you haven’t already, you should read over your super policy carefully or contact us to determine exactly what kind of insurance is being provided. You’ll likely find the money your super fund would pay out in the event of a calamity is far less than you imagine.
Myth two: My private health insurance will cover me
Private health insurance is a wise investment, but even at the highest level of cover it won’t even cover the full amount of your medical bills. And it certainly won’t pay the mortgage or other everyday living costs such as utilities, groceries or school fees.
Granted, there are moves afoot to allow private health funds to provide more comprehensive cover, possibly eliminating costs such as gap fees. But, by definition, health funds will only ever cover health costs and only until a set monetary or time limit is reached.
Myth three: The government will look after me
The Australian government does provide a range of payments to support people if illness or disability leaves them unable to work. But unless you lead an extremely modest lifestyle, trying to survive on a pension is an enormous challenge. The Disability Support Pension currently provides $867 a fortnight if you’re single and over 21, or $653.50 a fortnight for each member of a couple.
That translates to $433.50 a week for a single person, or about 65 per cent of the minimum wage. Interestingly, the government also estimates the average person under 35 spends $869 a week on living expenses – which provides some idea just how tough it is trying to make ends meet on a disability pension.
The truth will set you financially free
In a worst case scenario you or your family would be unlucky to be left entirely on your own to cope. Your super and health funds, the government and possibly even friends, family and charitable organisations might provide some assistance.
But wouldn’t you prefer to know that in the event of a serious health challenge you have the right level of insurance cover? That you and your family wouldn’t need to worry about financial issues on top of everything else?
If so, call us to discuss whether your current level of insurance is appropriate to your situation.
i ‘Underinsurance in Australia’, Rice Warner, July 2015
ii www.lifewise.org.au
Jenny Martens, Risk Specialist
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When car-sharing pioneer Uber was born five years ago in San Francisco, few would have predicted the speed and size of the impact it would have on the taxi business. Or that in five short years it would become a business valued at US$50 billion, with operations in almost 60 countries.
Fewer still contemplated the trickle-down effect this success story would have on taxi equipment makers, car fleet manufacturers and even listed company Cabcharge, which has seen its share price halve in 12 months.
From the advent of motorised vehicles killing off horse-drawn carriages, to media streamers speeding up the demise of DVD rental stores, business disruptors have been around for centuries. And while the economic and investment fallout is considerable, so are the potential benefits.
Uber is judged for having taken away fares from the traditional taxi industry, despite the high-profile company having legions of happy passengers all over the world.
Stay informed
The challenge for investors in a time of rapid change is to be aware of what is happening and the potential impact on your investment portfolio, without being swept away by the glamour of the new or burying your head in the sand.
At the outset of a new business or technological trend, it can be difficult to predict which companies will be the Apple or Facebook of the future. Often it is easier to predict which companies are likely to be adversely impacted.
When cars first started rolling off the Ford production line, it was clearly not the time to invest in a blacksmith store.
Similarly, if a company today is struggling to compete with nimble newcomers, its profits are in terminal decline and management has no plan to deal with the challenges facing its industry, then it is worth considering if that business deserves a place in your portfolio.
Winning ways
The three hallmarks of game-changing disruptors in the digital age are a product or service that is cheap, flexible and easy for the customer to navigate on a smart phone around-the-clock.
Unlike the taxi industry, some traditional companies such as airlines and telcos have moved quickly to respond to the threat of efficient, no-frills operators by diversifying into low-budget products themselves.
Faced with cut-price competition from more nimble mobile phone plan players, Telstra partnered with Boost Mobile. Boost matches its cheaper rivals’ offering of unlimited calls and texts, data use and cheap monthly payments.
Through the alliance, the giant telco has cast a safety net under its core business by competing with the disruptors in a new space, where existing customers may not necessarily be lost to rivals.
However, other companies will struggle to stay competitive as the disruptors spread quickly from one industry to another, unburdened by large payrolls and expensive technology that weighs down incumbents with high overheads.
Crowd pleasers
Among the new players shaking up old-world thinking here in Australia and elsewhere are online accommodation hub Airbnb, household job outsourcer Airtasker, fast loan provider Nimble, cloud-based human resources specialist Zenefits and car insurer Metromile, whose premiums are calculated according to a driver’s mileage.
Each of these disruptors has a customer-focused, high-tech model that challenges the revenue making strategies of some of the nation’s largest, household-name companies. But only time will tell which of these trailblazers lasts the distance. You need only cast your mind back 10 years or so to the promising new telco, One.Tel which collapsed spectacularly despite the hundreds of millions invested in it by backers.
And not even the major banks are immune. Research by Macquarie shows that electronic payment platforms, smart phone-based lending products and automated financial advice have the potential to hurt future bank profits.i
But before you dump your blue-chip investments in favour of running with the tech bulls, it is worth considering that not all disruptors are capable of sustaining valuations beyond the honeymoon of a spectacular listing.
If you would like to discuss your investment portfolio in light of the opportunities and risks in the new era of disruption, give us a call.
i ‘Digital disruption could cost Australian banks $27bn a year’ by Stephen Letts, ABC News, 4 July 2014, http://www.abc.net.au/news/2014-07-04/digital-disruption-could-cost-australian-banks-27-billion-dolla/5571948
Glenn Ingram, Principal and Chartered Accountant
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