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The Basics of investing

Have you ever wondered what the difference is between saving and investing? At Financial Genius we believe that all of our clients will benefit from gaining additional knowledge about their finances. By educating yourself you will be able to fully comprehend your accounts, insurance, and superannuation details.

Saving is setting money aside in cash accounts (generally bank savings or cash management accounts) for immediate expenses, emergencies and short-term plans. The money earns interest, which is added to your assessable income and taxed at your marginal rate.

Investing is putting money into assets to grow in value, deliver returns and build longterm wealth and security. There is a wide range of investments to choose from, each with different features and benefits. Your age and stage of life will affect the investments you choose. In other words, saving is for now, investing is for the future. Both are necessary for effective financial management.
Young kid with a piggy bank for investment

How to choose investments

It’s easy to choose a savings account, but far more complex to decide on your long-term investment strategy. You will need to be clear on the differences between the four major asset classescash, bonds, property and shares – and between fund managers. 

You will also need to understand the various risks and returns involved in investing and work out what level of risk you are comfortable with.

Risk and return

All investments aim to provide a certain level of return and are subject to certain risks. So when it comes to investing, as well as making money there’s a chance you could lose it. apart from losing money, you can also think of risk as the possibility that your investments don’t achieve sufficient returns for you to meet your financial objectives.One way to manage investment risk is to ensure you hold the investment for an appropriate length of time, generally five to seven years for share investments, to ride out any short-term fluctuations in value. As a general rule, the bigger the potential investment return, the higher the investment risk, and the longer the suggested investment time frame.

Setting goals

When making plans for the future you need to know what you want to achieve and by when. To get to this point, it’s a good idea to seek professional help. A qualified financial adviser can explain the various options available and provide advice on the most appropriate direction for you.At FG we can help you set goals, establish your priorities and develop an investment strategy suited to your circumstances. We’ll help you build wealth, achieve your objectives and create a more secure financial future.

The sooner the better

The sooner you put your money to work, the more time it has to grow. Regular investing is the key to stable growth. Even if you start with a modest amount, as long as you keep investing regularly you’ll move steadily to where you want to be.

Regular investing helps smooth out market ups and downs

Another advantage of regular investing is that you don’t need to worry about the question ‘When is a good time to invest?’ If you use a savings plan or regular investment plan option in a managed fund and invest the same amount every month, you’re automatically adopting the investment strategy known as ‘dollar cost averaging’. This means that whether financial markets are up or down, you invest the same amount of money every month. As a result, you automatically get more units for your money when prices are down and fewer units when prices are high.

This is what all wise investors are trying to achieve: to buy more when prices are low and avoid jumping in heavily when markets are running high. But so many people get distracted by the hype surrounding the markets they lose sight of this simple principle. They get nervous when prices are low and avoid investing. Or they get carried away when prices are rising and buy in heavily at market peaks. Using a regular savings plan can help you avoid these traps.

Over time, regular investing can smooth out the inevitable market ups and downs, and can also reduce the average cost of the units you’ve purchased, giving the potential for a higher overall return.

The basics of superannuation

When the time comes to retire, it would be nice to feel confident that your life after work will be comfortable and that you’ll have the time and money to enjoy many things you weren’t able to do while working. The Age Pension provides only a very basic retirement allowance that most people would find difficult to manage on. This is why it is so important to take control and set yourself up for your future now, by making regular personal contributions to your superannuation fund.

Huge tax advantages

The Australian Government offers powerful tax incentives to encourage us to save for retirement throughout our working lives. For example super contributions are taxed at concessional rates There is no limit to how much money you can accumulate in super over your working life, the only limit applies to the amount you can contribute in any one year. When you reach 60 you can withdraw all your super savings tax-free.

About super contributions

If you’re an employee, your employer must, by law, contribute a minimum percentage of your wages (usually 9%) into a complying super fund (including self managed super funds) on your behalf. 

Some employers contribute more, and some employees add more to their super fund by arranging with their employer to have a proportion of their pre-tax salary put into super. 

This is known as ‘salary sacrifice’. You can also make personal super contributions from after-tax money. If you’re self-employed, you can make personal deductible contributions to your super fund.

How much super is enough?

To calculate how much super you’ll need in retirement, you will need to know:
  1. Your estimated life expectancy
  2. How much annual income you want to receive in retirement
  3. How much super you’ll need to produce that level of income
A professional financial adviser can help you answer these questions, explain the various options available to you, and provide advice on the best strategy for your situation. At FG, we can provide advice on the most effective way to build your super balance and achieve your retirement goals within your time frame.

The sooner the better

Super is one of the most tax-effective investments available. Because it is by nature a long-term investment, the sooner you start to contribute to it the more time your money will have to grow. Over time you’ll earn interest on your interest, as well as on your regular contributions. The same rule that applies to investments also applies to super – regular investing is the key to steady growth.

To find out how to maximise your potential returns from super, call (02) 9858 2446 or email us.

Basic of insurance

Insurance is essential for your peace of mind. Whether you’re covering your life, ability to work, business, property or possessions, having insurance helps protect your lifestyle and the people who depend on you. Insurance is never a luxury. You may go for years without making a claim, then one day the unexpected happens. No one can eliminate the devastating emotional impact of serious illness, disablement or death, but if you have to deal with money problems as well, the situation can be much worse. Having money available when you need it most is what makes insurance so valuable.

Using super to pay for your insurance

Some types of insurance allow you to pay the premiums automatically from your superannuation fund. This can be a tax-effective option because it enables you to pay your premiums with pre-tax money. Using money that is normally inaccessible until you retire also means you don’t have to dip into your daily living budget.

What should you insure?

When protecting your family, financially look at your areas of greatest vulnerability such as your mortgage, debts, household expenses your business. You should also protect yourself against loss or damage to your property. These areas can be covered by:
  1. Life insurance – pays a lump sum on death if you die while you’re a policyholder.
  2. Income protection – provides regular payments if you can’t work due to illness or injury.
  3. Disability insurance – pays a lump sum if you are totally or permanently disabled.
  4. Trauma insurance – pays a lump sum 14 days after diagnosis of a serious or terminal condition such as stroke, cancer, heart attack or other specified conditions.
  5. Business insurance – a range of insurance products that can be incorporated into a package tailored to your type of business.
  6. Home insurance – to cover your residence, investment property, contents and personal valuables.
  7. Other cover such as motor vehicle and boat insurance, which covers you for loss and damage.

Do you have enough cover?

It’s all very well to have ‘some’ insurance, but many people are under-insured and find themselves out of pocket when they make a claim. It’s important to accurately assess how much insurance you need. This is an area where Financial Genius Pty Ltd can help you. We’ll help identify your greatest areas of risk and work out how much cover is appropriate for your needs.
Professional in a consultation session with her client

The basics of retirement

Retirement is a milestone marking the start of a new phase in your life. If you’re wellprepared, you can look forward to freedom from a set routine and the opportunity to enjoy many things you haven’t had time to do while working. Your quality of life and financial security after work will depend on you having an adequate retirement income. The decisions you make now about how you will
invest your superannuation and any other savings once you retire are of critical importance. Whether you intend to move into full retirement straight away, or scale down to part-time work first, there are many issues to consider before you make any changes.

Planning ahead

In the lead-up to your retirement, information and advice are crucial in helping you assess your situation, identify your retirement goals, and develop a practical, achievable plan. This is where Financial Genius Pty Ltd can help. Superannuation is highly favourable for retirees, who may want to consider making the most of the tax concessions and flexible rules that are now available. For
example, under the new transition to retirement legislation, between ages 55 and 65 – depending on your year of birth – you can now access some of your super money through a pre-retirement pension while you continue to work full time or scale down to part-time employment.

What you need to consider

When planning your retirement, areas to think about include:
  • When you want to, or are likely to, retire
  • Whether you want to retire completely or scale down to part-time work
  • How much super you have
  • How much income you will need
  • How long your money will last based on your life expectancy
  • What you want to do and achieve in retirement.

A regular income and big tax advantages

When you retire, it’s important to know that you have a reliable, regular income. The most popular and tax-effective way to arrange a regular income stream is through an allocated pension or annuity. This is because:
  • If you’re 60 or over, lump sum or pension income payments are completely tax-free
  • If you’re over 55 and under 60, you will receive a 15% tax offset on pension income payments received as part of a transition to retirement strategy
  • Earnings in the fund are tax-free.

Control and flexibility

With an allocated pension or annuity, you can choose how much you want to receive as your regular income, provided you draw at least a set minimum (based on the value of your account balance). You can also withdraw lump sums at any time if you need to, but you can’t make additional contributions to your pension once it is set up.

If you choose to invest your money outside super, there is a wide range of investment options to choose from. A professional financial adviser can help you create a diversified portfolio designed to deliver the returns you need to achieve your goals. The income you receive is a combination of capital growth and earnings.

Centrelink benefits

For the majority of people, the Age Pension is considerably less money than they are used to living on. The amount of Age Pension you receive will depend on whether you are single or have a partner, whether you have dependent children, and your income and assets.

You can qualify for the Age Pension if you satisfy each of these criteria:
  • Aged 63 and over for women or 65 and over for men
  • Meet certain residence requirements
  • Have income and assets below a certain amount.
The qualifying age for women is gradually being increased to match the qualifying age for men. By 2014, the qualifying age for both men and women will be 65. An FG adviser can help you calculate how much Age Pension you will be entitled to receive given your particular circumstances.

Putting your affairs in order

A comprehensive retirement plan should include a review of your will and the details of how you’d like your estate to be distributed after your death. The right advice from a solicitor can avoid many common pitfalls that occur in family or business situations. It’s also important to seek advice on the tax implications of how your estate will be distributed, to make sure your beneficiaries receive all that you would like them to. We can refer you to appropriate legal and taxation professionals.

Glossary

Understanding investment and insurance jargon isn’t easy. Here’s a list of some frequently used financial terms.
  • Age Pension: a social security benefit paid by the Federal Government to people who have reached the qualification age, being age 65 for men and between ages 63 and 65 for women, depending on when they were born. The amount of pension paid (if any) is determined by the income test and the asset test.
  • Allocated pension: also known as an ‘account-based pension’ this type of pension allows you to withdraw regular income payments until your balance is reduced to zero. Allocated pensions are usually established using your super savings to fund your retirement, but may also be commenced using a nonpreserved cash benefit, total and permanent disability payment, terminal illness benefit, or a death benefit. The value of your account moves up and down according to the investment earnings you receive and the amount of income you withdraw. If you are 60 or over, you pay no tax on the income payments you withdraw. You are required to withdraw a minimum percentage as income each year, based on your age. Your capital can be withdrawn at any time as a lump sum (provided eligibility criteria are met). There is no guarantee that your accountbalance will last your lifetime.
  • Annuity: a regular income stream paid in return for a lump sum investment, usually for the purposes of retirement income.
  • Assessable income: income earned before allowable deductions.
  • Assets: possessions or property.
  • Asset test: this test is used, in addition to the income test, by Centrelink to calculate the amount of Age Pension you are entitled to receive.
  • Beneficiary: a person entitled to receive funds or property under a trust or will.
  • Binding death benefit nomination: a legally binding nomination a member can make to the trustee of a super fund in relation to their benefit (where the trustee has elected to accept nominations). The nomination outlines to whom a death benefit will be paid in the event of the member’s death.
  • Capital: the total wealth owned or used by an individual or business.
  • Capital gain/growth: the increase in the market value of an investment.
  • Centrelink: an Australian Government statutory agency that helps people become self-sufficient and supports those in need.
  • Compound interest: interest that is calculated on the amount invested plus interest previously earned and left in the account. This is sometimes called ‘earning interest on your interest’.
  • Concessional contributions: taxable contributions made to a super fund. Concessional contributions may include employer contributions (including the 9% super guarantee contribution), salary sacrifice contributions, personal deductible contributions and ‘family and friend contributions’ (contributions paid to your fund by a person other than you, your spouse or your employer). Concessional contributions are subject to contributions tax and count towards your concessional cap.
  • Concessional tax rate: a reduced tax rate applying to a certain category of investment.
  • Conservative: moderate or cautious.
  • Contribution: a deposit into a super fund.
  • Death benefit: a benefit equal to your super account balance paid to your dependents or legal personal representative when you die.
  • Debt: the amount of money owed – including mortgages, personal loans and credit card balances.
  • Diversification: spreading your money across a range of investments rather than just one (eg various asset classes such as shares, property, fixed interest securities and cash) with the aim of reducing risk.
  • Earning rate: the percentage return (income and/or capital growth) earned on an investment.
  • Employment termination payment (ETP): a lump sum payment made from an employer to an individual upon their termination of employment, including genuine redundancy, disablement, death or early retirement. Such payments can be taken in cash or, if eligible, may be directed to a super fund.
  • Equity: the value of an asset after deducting any money owing on it.
  • Estate: property and possessions of a deceased person.
  • Fixed interest: an interest rate that stays the same through the term of the loan.
  • Fund manager: a firm that provides investment management services or an individual who directs investment management decisions.
  • Gearing: investing with borrowed money.
  • Growth assets: assets, such as shares and property that are expected to increase in value over the long term.
  • Income stream: an investment product that provides regular payments, made up of the capital you invested and earnings on that amount.
  • Income test: this test is used, in addition to the asset test, by Centrelink to assess the amount of Age Pension you are entitled to receive.
  • Inflation: an increase in the general level of prices.
  • Interest: money paid in return for the use of borrowed funds. If you have money in a savings account, your bank pays you interest while it ‘borrows’ your money. If you have a loan, you pay your bank interest while borrowing its money.
  • Investing: purchasing assets with the aim of making your money grow in value. For example, by buying property or shares.
  • Life cover: an insurance policy that pays a specified amount of money when the policyholder dies.
  • Lump sum: an amount of money, eg a superannuation benefit, taken as a single cash payment rather than being transferred into a pension or annuity.
  • Non-concessional contributions: contributions made from your after-tax income. These may include personal contributions, spouse contributions and child contributions. Contributions tax is not deducted from these contributions when they are invested into a super fund, nor are they taxed when they are withdrawn, because tax has already been paid. These contributions count towards your non-concessional cap.
  • Offset: a tax rebate that reduces the amount of tax payable.
  • Pension: a regular income stream paid to an individual, either by the government (such as the Age Pension) or by a superannuation/pension fund.
  • Policy document: a document provided by an insurer or broker as proof of an insurance contract.
  • Pre-retirement pension: a pension designed to supplement your income in the later years of your working life before you retire. Like an allocated pension, you must take a minimum pension payment each year. However, unlike an allocated pension, there is also a maximum permitted pre-retirement pension payment, which is calculated as a percentage of your account balance. If you are age 60 or over, no tax is payable on your pre-retirement pension.
  • Preservation age: the minimum age at which you can access your superannuation. Your preservation age depends on your date of birth. If you were born before 1 July 1960, your preservation age is 55. The preservation age increases on a yearly basis until 1 July 1964, with all those born on or after this date having a preservation age of 60.
  • Retired: for the purposes of receiving a retirement benefit, you are ‘retired’ when you satisfy one of the following conditions: o Have reached your preservation age, ceased employment and do not intend to ever again work more than 10 hours per week o Have ceased employment on or after age 60 (regardless of future work intentions) o Have turned 65 (regardless of current employment status and future work intentions).
  • Return: the amount of money your investment earns.
  • Risk: the possibility that your investment may fall in value or earn less than expected.
  • Rollover/rolling over: the transfer of some or all of the balance of your superannuation money from one fund or product to another. You can rollover your super irrespective of your age or work status. A rollover does not count towards any contributions cap. No tax is withheld from your rollover.
  • Salary sacrifice: an amount of pre-tax salary that an employee contributes to super instead of taking it as cash salary. This is in addition to the compulsory super contributions the employer makes on behalf of the employee.
  • Self managed super fund (SMSF): a fund that is controlled and managed by the members of the fund. The members, as trustees, make all the decisions about how the fund is run, the investments it holds, and the type of benefits it can pay.
  • Spouse contribution offset: a tax offset of up to $540 may be claimed if you make a contribution to your spouse’s super fund. To receive this offset your spouse’s assessable income plus reportable fringe benefits must be less than $13,800 pa, with the full $540 offset payable if you contribute $3,000 and your spouse earns less than $10,800 pa.
  • Superannuation: money that you and your employer put aside in a concessionally taxed trust fund during your working life for you to use when you retire.
  • Superannuation fund: a concessionally taxed trust fund created to accept the investment of superannuation savings and contributions. A super fund can be operated by an employer as a corporate fund, by a fund manager as a personal fund, as an industry fund, or it can be self-managed.
  • Super Choice: legislation that enables many, but not all, employees to choose the super fund into which their employer makes compulsory contributions.
  • Tax file number (TFN): a unique identifying number issued to each taxpayer by the Australian Taxation Office.
  • Will: a legal document that sets out how you wish your assets to be distributed when you die.
  • Work test: if you are aged between 65 and 74, you must meet the work test to be allowed to make some super contributions. This work test requires you to have worked at least 40 hours within 30 consecutive days in a financial year prior to making the contribution. Generally, a super fund cannot accept super contributions when you reach age 75.
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