Friday, 29 June 2012

90Million Blog's 1 Year Anniversary!

As this month draws to a close I am amazed and proud to announce that 90Million Blog has been online for 1 year now.  It has gone from being a blog with less than 5 posts a month in the first few months to one which I am pretty dedicated to updating every workday.

The readership of this blog has also increased beyond all my expectations.  A big thank you to those that read this blog and add comments as well - I really appreciate it and hope that this provides a service that you find useful and occasionally entertaining.

My plan is to expand the scope of this blog over the next year however I will still keep posting those things which seem to keep the readers coming back.  New things I hope to introduce include
  1. Uploading templates and spreadsheets that readers can use for themselves.  I am toying with the idea of having simple / less complex ones for free and more complex ones for a nominal fee
  2. A scam watch section which is dedicated to financial scams.  The biggest problem are those financial products which are not technically illegal but which are borderline unethical.  Given the work in identifying these I don't think this would be a weekly post but I hope to build up a vault of information for people out there
Regular series I hope to continue over the coming year include
  • Net worth and expenditure tracker posts: This was the original purpose of this blog and I'm going to continue it (hopefully with some improvements)
  • Investing in real estate posts:  I will continue to post real estate related posts on a weekly basis. 
  • Getting into Investment Banking: I will continue my Investment Banking series which I hope to be a practical look at the industry and a useful resource for people considering working in it.
If you have any other suggestions I would love to hear them as I always trying to improve what I post.

Thursday, 28 June 2012

Book review: The Adventure Capitalist by Connor Woodman

The Adventure Capitalist: Camels, Carpets and Coffee: How Face-to-face Trade is the New Economics
The Adventure Capitalist is a fun and entertaining read that takes us back to the basics of trade.  You will not find any mention in this book of housing markets, stock markets and Wall Street.  Instead Connor Woodman attempts to answer the question:  can an individual get out there and start trading in goods in the international marketplace and make a decent profit?  The reader rides the highs and lows with author as he seeks to answer this central question. 
Through the author’s adventures the reader discovers the answers to many more questions including: Is it possible to buy camels in Sudan and then take them to Egypt and sell for a profit?  Can you really buy wine in South Africa and then ship it to China or is the market too young (and snobbish)?  And will tourists in Mexico buy inflatable surfboards made in China?
This book will not provide you with the knowledge to get out there and start making money, nor does it have any ‘special formula’ for success and we found that to be the books greatest strength.  We, the reader, discover that there is no great secret to the business of international trade – you need to do your research and more importantly just get out there and make your mark on the world.

ü  Interesting and

Wednesday, 27 June 2012

Insurance: How does the medicare levy surcharge work?

A quick pre-tax time tip re health insurance.  Every single year before June 30 health insurers go on an advertising binge telling prospective customers to 'get in before June 30'.  This is aimed at those who, because they earn above a certain limit and do not have private health insurance, are charged the medicare levy surcharge. 

However please note that the surcharge you pay is based on the number of days covered by health insurance during the year.  Getting health insurance right before June 30 does not eliminate your obligation to pay the surcharge for the rest of the year.

For example if you were to get health insurance on the 26th of June and earned above the threshold (e.g. assume you earned $100,000 and were a single person) then your Medicare levy surcharge would for 2011 / 2012 would then be:
  • Number of days uncovered / Days in a year = 361 / 365 = 98.9%
  • MLS surcharge on income = 1% * 100,000 = $1,000
  • MLS obligation for the tax year = $1,000 * 98.9% = $989
So there is no real incentive to take up health insurance before the end of the financial year but there is definetely incentive to take it up quickly. Further the intoduction of a tiered surcharge system means that all middle and high income earners should look very seriously at what health insurance would best suit them.

Background - how does the Medicare Levy Surcharge work?

The medicare levy surcharge is a tax based incentive to get insurance.  It works as a big stick - if you earn above a certain limit and do not have health insurance then you pay an extra tax (which can be quite steep).  I have outlined below the incomes at which you become liable for the surcharge for the 2011 / 2012 financial year (note that income includes gross wage, reportable fringe benefits and employer superannuation contributions)

Category Income Threshold Surcharge
Single, No dependents $80,000 1%
Single, Depdendent children $160,000 1%
Couple $160,000 1%

In the 2012 / 2013 year there has been a change to the way in which the MLS is calculated including a significant increase in the MLS if you do not have private health insurance. There was also the introduction of a tiered system - Below I have outlined the new MLS thresholds and surcharges.

Unchanged Tier 1 Tier 2 Tier 3
Singles <$84,000 $84,001 - $97,000 $97,001 - $130,000 >$130,000
Families <$168,000 $168,001 - $194,000 $194,001 - $260,000 >$260,000
Surcharge 0.0% 1.0% 1.25% 1.5%

Monday, 25 June 2012

Tax time: Depreciation Reports for Investment Properties

This post is part of both my Investing in Real Estate series and my series on tax measures in the run up to the end of the financial year.  All investors in real estate in Australia should get a depreciation report done on their investment property before the end of the financial year end.

Depreciation reports are a schedule of the value of the fixed assets in your property.  This includes all your fixtures and fittings such as lights, cabinets, bathroom tiles etc.  It provides the depreciable value of your property every year which is counted as a an expense for tax purposes.  The beauty in depreciation is that, as a non cash expense, it is effectively 'free money' you get back from the government in the form of
  • A lower tax bill; or
  • A tax return
You do not need to spend money for a depreciation report and you can estimate the value of the depreciable items yourself however if you are audited and the ATO sees that you have done this they are more likely to investigate the values you are claiming.  The best way to get an accurate estimate of the values (and not to miss anything!) is to use a good Quantity Surveyor. 

Quantity Surveyors are not abhorrently expensive (should be in the region of ~$700) and generally pay for themselves in the first year Note that this amount is tax deductible so you're actual out of pocket cost is more like ~$500). 
  • I used which was recommended to me by several other property investors.  I found them to be highly professional the report they produced was perfect (and my accountant was very happy with it. 
  • I have heard bad things from other (cheaper) providers of this service so I would recommend going with these guys. 
  • I have no affiliation with them (other than being a previous client)
  • If you mention that you heard about them from the somersoft website (a property forum for Australian investors) then they should give you some sort of discount (I got a $55 discount when I did this). 
  • If enough people mention this site in addition (i.e. don't lose your discount) I will try and negotiate a standardised discount for my readers. 

How much will I get back from a depreciation report?

The amount you get back will vary depending on the age of your property and any additions that have been made to the property.  Generally speaking
  • Newer properties will have higher depreciable values and so you will get more back
  • Renovations tend to get a lot back
  • There are some build dates where you can depreciate the construction cost of the property (including the bricks etc).  Check out this ATO document to see whether your building falls within this category 
To give you an example my property is a relatively old one (built in the mid 1970s) but has a renovated kitchen / bathroom etc.  In my first year of ownership I claimed a $4,000 deduction and got $1,600 back as a result.

Some older properties will not get this much back because they have had very little done to them since they were built.  If you call depreciator they will be able to tell you whether it is worth getting a report or not.  They are fairly honest about it too as they trade largely on their reputation.

What is the difference between the diminishing value method and the prime cost method?

You will notice on your depreciation report that you have the choice to deduct tax based on a diminishing cost method or prime cost method.  Over the long term these will yield the same amount back on tax but it affects the timing of the deductions.

The diminishing cost method provides a greater deduction up front (close to twice as much) compared with the prime cost method. 
  • High income earners should always take the up front deduction (diminishing cost method) as you will get the greatest benefit from the tax return and you get the money quicker (time value of money)
  • Low income earners who believe their income will increase substantially should use the prime cost method because you only get back value based on your tax rate.  If you foresee your tax rate increasing substantially in the future you may get more back over the life of the investment by deferring some depreciation to later on
Over the life of the investment it makes little or no difference.  I use the diminishing cost method because I do not foresee my income tax bracket changing and I would rather have the cash now than later.

Beware developers who offer depreciation reports with a new property

Developers are more than aware that there is a tax incentive to buying a new property for your investment as you get greater amounts of depreciation.  This value is almost always built into the property when they know they are selling to investors.

I generally do not buy new properties or properties off the plan for this reason.  The developers know every possible advantage from a tax perspective and build this into the price of the property so that they get the benefit.

Friday, 22 June 2012

Tax time - Should I repay my HELP debt early?

In Australia, we are lucky enough to have a system where everyone can afford a higher education.  The government will fund undergraduate education for every Australian resident under the Higher Education Loan Programme.

The programme is very simple and is outlined below
  • While you are at university the government funds your tuition fees
  • You incur a debt to the government
  • The debt is indexed to inflation (i.e. it is the cheapest debt you will ever get)
  • When you earn over a threshold amount ($47,195 for the 2011 / 2012 tax year) you then have to start paying it back (gets taken out of your income like income tax)
  • The rate of repayment varies depending on your income - see table below for the 2011 / 2012 repayment thresholds

Repayment rate (% of repayment income)
Below $47,196Nil
$87,650 and above8.0%

This repayment rate is compulsory.  The question arises of when should you repay your HELP debt early?

At first glance there seems little incentive to repay your HELP debt early.  The implied interest rate (inflation) is the cheapest debt you will ever get so you should really use your cash for other things (which you would normally borrow money for) such as investing or buying a house etc.

However the programme incentivises you to repay your debt early by providing discounts for early repayment.  After 31 December 2011 this incentive dropped to 5% for all amounts paid above $500. 
  • The benefit is therefore 5% + inflation (i.e. the amount your debt would have increased by)
  • Assuming inflation of ~2.5% this means that by paying early you get a total return of 7.5% guaranteed on your cash which is nothing to sneeze at but not spectacular either (at the moment you can get that as a dividend return on high yielding Australian bank shares)
There is one situation however where you should always repay your debt early.  If you are due to finish repaying your HELP debt in the current year through compuslory repayments (i.e. in the table listed above) you should pay your debt off before the tax office calculates it.  I realise this sounds a little confusing so let me outline what I mean
  • The tax office calculates your HELP obligation when you submit your tax returns (about July / August)
  • It does not know how much your employer has been taking out of your paycheck until this point
  • Assume you have $5,000 of HECS left on your debt and your employer has taken this out of your pay packet and already sent it to the tax office - they do not know this yet
  • In June (before the end of the financial year) you can pay (5000 / 1.05) = $4,762 to the tax office to satisfy your HELP debt
  • In July / August when you submit your tax return the tax office will realise that you have paid off your debt but your company has sent them an extra $5,000 through the year and so will return this to you
  • You get the extra benefit of the $238
    • This is actually a pretty decent return on cash outlayed
    • $238 / $4762 = 5% over 2 months
    • 30% annualised return
Note that the above example only works in the year where you are due to finish repaying your HELP debt.  In other years your contribution will just further reduce your HELP balance and you will only get a 7.5% annualised return.

Thursday, 21 June 2012

Book Review: Rich Dad Poor Dad by Robert Kiyosaki

Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money - That the Poor and Middle Class Do Not! Rich Dad Poor Dad is a book by Robert Kiyosaki that attempts to teach the reader the strategies learned from his ‘rich dad’ on his journey to riches.  On the front cover of the book he makes a big promise – he promises to teach the reader “What the rich teach their kids about money – that the poor and middle class do not”.   For a book that had reached the number 1 position on the NY Times Bestseller list, I found that this book did not achieve what it set out to do and there were very few (if any) strategies or lessons that the reader could take away from reading the book.  I would rate this book 0.5 / 5.0.

Normally when I summarise a book at the start of my review I try and identify the overarching theme of the author and then bullet the supporting topics they use to discuss this.  I found this exceptionally hard to do with Rich Dad Poor Dad.  The general idea throughout the book seems to be that it’s not the readers’ fault that they are not rich – the government, employers and bad education system are all biased against them.

I started writing specific examples of what I thought this book did wrong but then I kept finding more so instead I have summarised the thing that I found most distasteful about this book.  Instead of dealing with facts, figures, strategies, studies and investment techniques (as any book on investing should), Kiyosaki preys on the readers inherent biases and misconceptions (that the government, employers and a lack of education is the reason they can’t get ahead).   While this rhetoric is certainly appealing it is not what a book about investing and personal finance should contain.
ü  The book seems to motivate some people to go out and get further education in order to improve their financial well being.   This seems rather strange given that most people would have bought this book for the very same reason
ü  Has basic tips like ‘spend less than you earn’ and ‘pay yourself first’ which are great ideas but certainly not ones that you would buy a book on
û  Does not do what it sets out to – this book does not teach an average person a single lesson that the rich would teach their children
û  Not a single investment strategy in the whole book.  While the book is full of anecdotes of how Kiyosaki purportedly has made

Tuesday, 19 June 2012

Tax time: Salary sacrificing into superannuation

In the lead up to the end of the financial year I am doing a series of posts on last minute things you can do to reduce your tax.  This post will also tie in with the superannuation series I have been writing over the past few weeks. 

In previous posts I have mentioned that under Australian law your employer has to contribute 9% of your total wage (including bonuses etc) into superannuation for your retirement.  The government also incentives you through tax breaks to contribute more.  If you earn more than $37,000 before tax you can reduce the tax you pay through contributions to superannuation.  However you should remember that if you contribute this amount then you will not be able to touch it until you retire.  It is important to remember the above because tax should not drive your investment decisions but should be part of the decision making process.

You may have heard the term 'concessional contribution' quite often though asked the question 'what is a concessional contribution?' or 'how do concessional contributions work?'.  The concessional contribution is the amount of money that you can put into super in a given year that is taxed at the 'concessional' rate of 15%.  In 2011 / 2012 this is $25,000 if you're under 50 and $50,000 if you're over 50.  Note that this includes the amount that your employer is contributing to your superannuation as well as any benefits they pay for you through super (e.g. life insurance).

If you earn $100,000 (pre-tax) you're employer has to contribute $9,000 towards your super.  This means than you can contribute an extra $16,000 (pre-tax). 
  • At this wage you would be in the 37% tax bracket
  • The tax on the $16,000 would be $5,920 ($16,000 * 37%)
  • If you salary sacrificed this into super you would only pay $2,400 in tax
  • You would therefore be $3,520 better off
If you earn more than this (or are over 50) the potential benefits are even better!  Always keep in mind though that this money is not available to you until you retire. 

Beware the pitfalls

One thing you need to be aware of is that technically your employer can use the amount you salary sacrifice to complete their obligations (i.e. they are screwing you) so you need to amend your employment contract to ensure that any amount you salary sacrifice is after the amount they contribute on your behalf

Monday, 18 June 2012

Tax time: Pre-pay your health insurance before 30 June for huge savings

This is once again a post for Australian taxpayers.  If you are an Australian taxpayer you would have received a letter in the mail which outlines the changes to the health insurance regime.  It is possible to still receive the 30% health insurance rebate for the 2012 / 2013 tax year if you pay the premium by 30 June 2012.

Previously everyone was entitled to a 30% rebate on their health insurance.  After the most recently federal budget however (you can see my gripe here) this has changed with the rebate being abolished for 'high' income earners and reduced for middle income earners.  The changes can be seen in the attached table:

UnchangedTier 1Tier 2Tier 3
$84,000 or less
$130,001 or more
$168,000 or less
$260,001 or more
Aged under 65
Aged 65-69
Aged 70 or over
Medicare levy surcharge

If you call into one of the categories where your rebate has been reduced it is possible to still get the rebate for the 2012 - 2013 tax year by pre-paying your health insurance premiums before June 30.  Note that the payment has to be received by your health insurer by then.  The Australian Tax Office has confirmed that you can do this so it is perfectly legal and will save most people a significant amount of money (~$300 - $400 on a regular single persons insurance premiums)

I would normally have to do a time value of money calculation to work out whether this would put me ahead however given that I am standing to lose the full rebate there is no way known I could make a 30% return in a year.  If you were only standing to lose 10% of the rebate (Tier 1) then this would be a borderline decision.  Tier 2 and above should almost always prepay and get the rebate.

Friday, 15 June 2012

How much do I tell others about my personal finances

The question of 'how much do I tell others about my personal finances?' may seem like a simple question with a simple answer - i.e. nothing.  However the issue most often does not arise from a conversation about ones wage or ones net worth but in far more oblique ways.  It tends to arise when:
  • You tell someone that you work in a profession that is typically well paid (e.g. doctors, lawyers, financial professionals)
  • You buy a nice car and go to fancy restaurants or go on expensive holidays
  • You buy your second / third / fourth investment property (people always get excited when they buy investment properties and tell their family and friends)
The problem with people suspecting / knowing that you earn a lot of money is one of simple jealousy and envy from both family and friends.  There are plenty of problems that can and do arise.  The biggest ones that I have seen (both personally and through other message boards where people ask the same questions include
  • The perception that money is 'all important' and that you do not spend enough time with your kids, family and friends
  • That you are greedy and are cheating others to make money
  • That the 'rich' do not pay enough taxes and do not do their bit to support society
These problems tend to typically arise where a person has worked hard and pulled themselves up and done better than their peers or their family in a monetary sense.  In Australia we typically call the problem the 'tall poppy syndrome' where people like to pull those who are doing well down to their own level. 

The fact is that this is not an easy problem to overcome and people deal with it in different ways.  A common thing I see posted on message boards is that you 'should not associate with people who are bringing you down'.   I think this is a simplistic solution.  I do not know many people who associate with their family and friends just to push themselves up.  We associate with them because we like / love them for who they are and how they have treated us.

I think that every person needs to find their own way of dealing with this problem.  I deal with my family and friends in the following way
  • I have never told anyone what I earn.  For those who comment / try and get it out of me I make very vague comments and will even downplay it.  I am comfortable in how much I make so I have no problems if they think it is substantially less  
  • I do not give them details of my investments.  Most people know I have an investment property but they do not know its value, how much equity I have in it nor do they know about any of my other investments
  • I try not be be ostentatious.  I realise that this is a cultural thing.  I have been to Asia several times and once got told that people are flashy there because what is the point of having money if people do not know you have money.  I do not find this works for me but each unto their own I guess
  • I am aware of how each person is likely to react and treat them accordingly.  There are friends of mine that are doing as well and even much better than I am and there are those that come from very wealthy families.  I am a lot less guarded around them and we are the ones who discuss investment techniques and strategies as we are comfortable with each other and know that we are not going to get jealous. 
Again this is such a personal topic but I know it creates so much havoc among friends and family.  I find that keeping finances personal is an old tradition that works well for keeping friendships and families whole. 

I should preempt a natural question and although this may seem a strange topic for me to cover given the nature of this blog and the amount of detail I post (including my expenditure reviews from which you can gain a rough estimate of how much I earn and my net worth posts) I have never told anyone I know that I write this blog and I am fairly careful to ensure that my personal details are not on this blog. 

Thursday, 14 June 2012

Woolworths Everyday Rewards card: A free card with big benefits

This is just a quick post from me for Australian readers about the Woolworths Everyday Rewards card and the surprising savings that are available by using it. 

For those who are not familiar with it the Woolworths Everyday Rewards Card is a free card which allows you to link your Qantas Frequent Flyer programme to your grocery shopping as well as well as store your 'fuel credits' on a card (i.e. you do not need to keep several dockets and work out which ones to use every time you want to get discounted petrol).

What I didn't realise was that you could also get significant savings in store by using the card.  Until the 26th of June there are a range of products which are up to 20% cheaper if you have and use the card.  There is no restriction on the quantum of the relevant product that the discount applies to either.  Woolworths have said that they may continue this sort of promotion into the future with a different range of products so even if you apply for the card but do not get it until after the 26th of June, 2012 it is still worth holding onto.

It is also worth keeping track of the different promotions that get done on the card.  I had originally signed up for the card because it came with a free Qantas Freqeuent Flyer membership (normally ~$80).  The promotions they offer are very good.  Given the card is free with none of the hidden catches that we have become so wary of (I have had the card for ~3 years and have never been charged a fee) and that you can get significant savings on your grocery expenditure I think it's definitely worth signing up for.

Book Review: Pitch Anything by Oren Klaff

Pitch Anything: Position, Present, and Promote Your Ideas for Business Success ‘Pitch Anything’ by Olen Klaff is a book which has a big claim on the front cover: “An Innovative Method for Presenting, Persuading and Winning the Deal”.   I’m a big fan of books that clearly set out what they intend to cover in the book and then spend the whole book covering it and this book is one of those - I would rate this book 4.5 / 5.0. 

On the first page Klaff sets out his aim in the book:

“There is a fundamental disconnect between the way we pitch anything and the way it is received by our audience.  As a result, at the crucial moment, when it is most important to be convincing, nine out of ten times we are not.  Our most important messages have a surprising low chance of getting through.  You need to understand why this disconnect occurs in order to overcome it, succeed and profit.  This book tells you how”
The basic premise behind the book (as I read it) is that in order to be successful a pitch needs to be ‘simple, clear, nonthreatening and above all intriguing and novel’.    The formula that Klaff is summed up by the acronym STRONG:
  • Setting the frame
  • Telling the story
  • Revealing the intrigue
  • Offering the prize
  • Nailing the hookpoint
  • Getting a decision
The book covers several topics including:
  • The theoretical and psychological basis for the method
  • Frame control
  • Status
  • Pitching the big idea
  • Frame stacking and hot cognitions
  • Eradicating neediness
The greatest strength of this book is that it gets right the balance of providing background, instructions, examples and evidence of how the different techniques work.    It is worth a read for the reader who is looking for a different technique to pitch or simply for those looking to be more effective in their commercial dealings.


ü  Sets the book’s premise in a

Wednesday, 13 June 2012

Consolidating your superannuation accounts

This is my third post in my superannuation series and will cover the benefits of consolidating your superannuation accounts.  For those who want an overview of the superannuation system in Australia I have posted on this before as well as the main types of superannuation funds.

Superannuation is typically a 'set and forget' type of investment program.  From a psychology point of view it is probably the best type of investment system because it gets taken out of your wage every month before you have seen it, invested in the same range of asset classes regardless of the prices (i.e. dollar cost averaging) and very few workers actually bother to check the superannuation portfolio until they get closer to retirement which means that the psychological aspects of investing do not impact decision making. 

For all these 'positives' the major negative is apathy.  Because it is compulsory by law, most employees barely even think about which superannuation account their money is being paid into.  For those that change jobs (like myself) you may end up with multiple superannuation accounts because employers use different funds.  I have been working for less than 10 years and already have 4 superannuation accounts with 3 different funds. 

There are two big problems with this
  1. You are paying fees on every superannuation account.  Some of these fees can be low (e.g. with industry funds) but some can be very high.  As there is no real benefit to having multiple superannuation accounts as you can split your investments across multiple asset classes with the one fund manager you pay excess fees for nothing
  2. You often end up paying large amounts for things like life insurance on each account.  As a matter of course a lot of employers provide life and income protection insurance through employees super funds.  This is a great perk offered by many employers and all employees should take this up.  The problem is that when you move to a new employer the insurance protection from your old super fund stays in place but you have to keep paying for it unless you cancel it.  Over 3 to 4 super funds this can add up to close to a thousand dollars a year
The easiest way to avoid these costs are to combine your super accounts into one account.  Unfortunately there is no easy way to do this (although some retail funds such as BT and Westpac have realised this and are trying to make it easier to win customers).  What you need to do is the following:
  1. Collect all the details of your old superannuation funds
  2. Go to the website of the new superannuation fund or the fund that your current employer is paying your super into
  3. Download a consolidation form and fill in all the super funds old details
  4. You need to send along certified copies of your passport / drivers licence etc.  This is the biggest pain to get but if you go along to a police station they will do this for you (trust me it is much easier than going to a bank)
  5. Mail it to your new super fund and they should do the rest of the work (note that you cant scan / fax and email this)
Once you have all your money in one account you can split it among the different investment classes as you see fit.  Further you will not be paying excess fees and will not be over insured and paying premiums on multiple insurance policies that cover the same risk.

Monday, 11 June 2012

Investing in Real Estate: Before leasing your property

This is my twelfth post in my Investing in Real Estate series which will cover the basic things you should do before leasing your property.  No property is ever going to be in perfect condition when you buy it and the pressing question for a lot of first time landlords is how much should I do (and more importantly what can wait)?

Broadly speaking, repairs and maintenance falls into three categories - the essentials, the things you really should do before you try and lease your property and the things that can wait and I'll cover each of these below.

The essentials

Most of the essential repairs and maintenance are pretty obvious but should never be forgotten or put off.  At best you will have some very irate tenants or will find it hard to lose the property, and at worse you could be sued for negligence for any injury sustained by the tenant.  Essential things to cover before leasing your property include
  • Any repairs / maintenance that are necessary to the structural integrity of the house and making it livable 
  • Complying with all relevant legislation.  For example, in Australia all rental properties need to be fitted with working smoke alarms. 
  • Getting rid of any pest problems such as rats or termites

Things that DON'T HAVE to be done but you SHOULD before you lease your property

The things which fall into these categories are not strictly necessary but if you want your property to be leased then you should do all or most of these things.  When prospective tenants are looking at a house they are trying to imagine themselves living in it.  The more you improve the property the easier it will rent and the more rent you are likely to get (note that you need to be careful not to overspend on these items)
  • Make sure the house is spotless:  This means cleaning, dusting, polishing where necessary.  It will take a couple of hours of your time or you can hire professionals to do this but nothing will put prospective tenants off more than a dirty house
  • Paint the doors:  You don't need to paint everything in the house (as a full repaint can be rather expensive) but the things that people notice first about every room is the door when they go to walk in.  Doors also suffer from scuff marks, dents etc so are most likely to need a bit of love.  Buying one tub of white paint with a gloss finish should be sufficient to do most of the doors in the house and for that relatively low cost and effort it lifts the house more than you can believe
  • Clean / mow the garden and get rid of weeds:  Your front yard is the first thing your prospective tenants will see and the back yard is where they will imagine spending time with their family and friends.  It doesn't need to be landscaped - just neat!  My property's yard was overgrown and there were weeds growing through the brickwork at the back and it looked pretty bad.  I paid a gardener $100 and he fixed it in a day!
  • For rooms that do not have walk in robes - buy some decent cheap cupboards:  This one was a piece of advice given to me by another property investor which I used!  Everyone needs robes in their house and not all tenants have their own.  A lot of houses have built in wardrobes in every room but not all (one of the rooms in my house didn't).  The easiest way is to go down to the local second hand store and pick one up - they are relatively cheap and are a tax deductible expense.
All of the above items are relatively cheap (or free if you are willing to do it yourself) and make your property that much easier to rent.  There is a danger in doing too much before you lease because for a given area there is only so much that people are willing to pay before they think they can go to a better area so your rental rate is always going to be capped.

Also in some jurisdictions (e.g. Australia) there are tax consequences of doing 'improvements' before the property is leased.  Repairs and maintenance are considered expenses but improvements are added to the capital value of the house which is a negative from a tax point of view.  Things that are done before the property is leased are generally considered improvements.

Things that can wait

These repairs are those things that are not essential to the structural integrity of the problem, are not likely to be an issue for a few years and are expensive to fix (or are nice to have but do not add significantly to the rent you are likely to receive).  Examples of this include
  • Brand new carpets:  Everyone likes brand new carpets but the cost is often prohibitive when compared with the increased rent you are likely to receive
  • Non core structural issues:  This includes things like cracks in the wall.  Every property gets cracks in its walls and it is not often a big problem.  If you wait for a few years it can be classified 'maintenance' and you can get a tax deduction for it.
  • Heating / cooling:  This really depends on the climate in which you live.  Where I live it is a pretty temperate climate so a basic heating and cooling system is sufficient.  A lot of first time landlords try to imagine what they like in their house and install that for their rental property but rarely make the return of this.  You need a basic system to keep the house comfortable but that is about it
  • Painting the whole house:  This does not need to be done to get tenants.  See my comments in the previous section
There are lots of other things that fall within this category.  The important thing is not to spend too much money and overcapitalise your property.  This is still an investment and you need to make your return.  At the same time you never want to be a 'slum lord' and rent out a property that is terrible and unlivable.  Always weigh your tenants needs and desires and your property will always be in demand.

Friday, 8 June 2012

Opportunity costs in everyday life: Decision making made simple

This blog has forced me to think about the amount of money that I have spent in a way that I have rarely done before.  I am now concentrating on getting the same products for much cheaper prices.  What this necessarily means is buying some things in bulk.  An example of this (as mentioned in my May 2012 expenditure review) was the ammunition I bought in bulk for my hobby of target shooting.  Discount buying is a common way of saving money and everyone does it - the number of bulk buying discount stores is testament to this fact. 

What I never really thought about though was the fact that in bulk buying we are making a conscious trade off between spending an extra amount now to lower the unit cost of the product that we want however this naturally means that we are outlaying more currently.  Again this would be no great revelation to everyone but the thing I came to realise is that we deal with this opportunity costs in almost every area of our lives and never really think about the fact that this is what we are doing.

In economics terms an 'opportunity cost' is the value of the next best alternative that we are giving up.  This does not need to purely relate to price.  For example the opportunity cost of me going on a date with a girl is a night out with the boys or a night watching some movies at home.  Obviously there is some financial cost to all of these outcomes but there is also a 'hidden cost' and that is utility or 'happiness'

There are some decisions which we can always come down with one particular answer.  There are others though were we may hum and haw for a while.  This blog has actually started to influence how I make some decisions. 
  • In the ammunition example above I knew that the more rounds I bought the cheaper I would get them not only because the price was getting cheaper but because it was a 1 hour round trip to the place where I buy my ammunition and there is an opportunity cost to my time
  • This blog complicated that decision somewhat because again as mentioned in my May 2012 expenditure review my expenditure for May was impacted by the fact that I had this cost in there.  Had I bought less ammunition my 'target' expenditure would have been closer to my goal however the unit cost would have been higher
Realising that you are dealing with opportunity costs can actually make conflicting outcomes (such as the one above) a little easier.  You can prioritise what the most important factor is to you (for me the more I thought about it the more I realised the point of this blog is about financial freedom so a lower cost is preferred) so I ended up buying a larger amount to save the money instead of the smaller amount which would have made the blog post look better.

You may point out that this is actually over thinking what is quite a simple decision but when I came to the realisation that I could apply this decision making process to almost any aspect of my life it was quite liberating.  Asking the question what is the next best option always helps makes decisions easier and I'm not sure that this is done enough.

I apologise if this post ended up somewhat 'preachy' and this was not my intention.  It just added another limb to my decision making process (and was one of the few limbs that made a decision easier) so I was keen to share it.  Anyway let me know what you think.  If you think I'm completely off the mark I would be keen to hear about that too!

Thursday, 7 June 2012

Book Review: The Essential Buffett by Robert G Hagstrom

The Essential Buffett: Timeless Principles for the New Economy
The Essential Buffett is a book which attempts to simplify and explain the life, teachings, investment philosophy of Warren Buffett – the world’s richest investor.  The book is a cross between a Warren Buffett biography and a ‘how to’ book on focus investing.  I would rate this book 3 / 5.

Topics covered include:
  • A background to Warren Buffet including a biography of the man and his most visible investments; 
  • The theories and individuals that influenced his development as an investor;
  • The criteria and method that Buffett uses to choose his investments; 
  • The theoretical basis for focus investing; 
  • Evidence of others who use focus investing; 
  • The emotional side to investment ; and 
  • Applying the principals of focus investing beyond the scope of what Warren Buffet invests in
Writing a book (especially one less than 300 pages) that covers all these topics adequately was always going to be a challenge for any author and while Hagstrom does a reasonable job in ‘The Essential Buffett’ the reader is left feeling that there is a lot more reading that they need to do before they are able to apply any of what Buffett does.

This book is suited to those who are beginning their investment journey and are seeking an investment framework that works for them.  It covers a lot of in depth concepts at a very high level – those who have already embraced the concept of Focus investing are best placed to look elsewhere for more detailed books on methodology. 

The core lesson from this book is that investing should be able core value – are you getting a good deal (and not paying too much) for what the underlying business really is?  The author provides very strong (albeit unintended from his point of view) evidence for this.  The book was written prior to the tech bubble bursting in the early 2000s and it attempts to provide a value investing analogy to invest in technology stocks.  In hindsight we see that the principals of value investing hold true in all sorts of markets while attempting to extend the philosophy to new concepts and ‘fads’ without proven earnings rarely yields the same returns.
ü  A good high level book for beginners in the value investing philosophy
ü  Does not attempt to make the

Wednesday, 6 June 2012

What is the difference between Industry super funds and other types of superannuation funds?

This is my second post on superannuation funds and will attempt to briefly describe the different categories of superannuation funds.  For an overview of how the superannuation system works in Australia see my previous post on this topic.

Broadly there are 4 types of super funds - Retail Funds, Industry Funds, Employer Funds and Self Managed Super Funds.  Below I will outline the main differences between the funds.  It should be noted that for all the externally managed funds (i.e. all except the SMSF's) there are external fund managers used so differences mainly come down to fees as performances tend to be very similar.  Also previous performance for super funds especially is no indication of future returns so looking at performance history is a silly thing to do.

Retail Funds

  • Open to anyone in the public
  • Most like a managed investment fund - you put your money in and pay a fee for the service they provide
  • The fee is typically towards the higher end of the range but there are many funds that offer low fee options
  • Wide variety of investment options - you can basically tailor it to your needs and wants
  • Your financial adviser will often recommend these because they pay financial planners a commission (keep your eyes open for this!)
  • Typically don't invest the money themselves but rather outsource to specialist fund managers

Industry Super Funds

  •  The larger funds are open for anyone to join.  Other funds may only be open to those members within certain unions / industry groups
  • They are not for profit funds and fees are used for the members benefit
  • Typically lower fees than retail funds but some charge high fees so make sure you watch out for this
  • Narrower variety of investment options - 10 - 15 seems to be the max.  However they are pretty standard types of portfolio allocations which I don't think is a bad thing
  • Your financial advisor probably wont recommend them because they do not pay commissions to investment advisers
  • Typically don't invest the money themselves but rather outsource to specialist fund managers

Employer Funds

  • Only for employees of a particular employer or group of employers
  • The most common of these are the public sector superannuation funds
  • Note that these can often be defined benefit funds (instead of the accumulation funds that industry and retail funds normally are)
  • Generally the fees are extremely low

Self Managed Super Funds

  • A 'do it yourself' super fund
  • Each fund must have between one and four members with each member being a trustee
  • Quite a complex regulatory regime but gives you complete control over your investments and investment decisions
  • You cannot pay fees to yourself or any other trustee but you can pay fees to outsiders (e.g. advisers, fund managers etc)
  • There is a significant compliance cost associated with self managed super funds so to make it worthwhile you really need ~$250,000 in retirement savings
  • This money cannot be used for anything other than your retirement so you cannot combine your whole investment portfolio

Tuesday, 5 June 2012

Investing in shares: European Meltdown - Finding opportunities

In a previous post I outlined those areas which investors should probably avoid due to the uncertainty in the European investing environment.  In this post I will outline some areas where investors may find opportunities to get great value investments.

In my opinion the safest way to make good investment returns in Europe in the current prevailing environment is not to try and predict the way the markets will go or what business sectors will recover etc but rather to invest in those areas which are already fundamentally sound but which are being hit due to the general malaise in Europe.  It is the perfect buying environment for people who do not get emotionally involved in their investments because you can take advantage of terrible market sentiment to make great profits.  Not living in Europe is also a big advantage as you are removed from constant negative news flow etc and can focus purely on your companies and investments.

Below I have outlined areas where great investments can be found
  1. Companies listed in Europe which have no operations in Europe:  There are several Asian companies that listed in Europe over the last few years (presumably to get international exposure) which have no operations in Europe.  These companies are exposed to the highest growth economies in the world, have absolutely no exposure to Europe in a business sense but their share prices have been smashed along with the rest of the European share market.
  2. Small Cap stocks in Europe that are performing fundamentally well: In a 'risk off' environment like the one that currently prevails in Europe people only want to own the biggest 'blue chip' stocks and will not touch small caps with a ten foot pole because of their perceived riskiness regardless of how the business is doing.  As long as these businesses do not need to tap the funding markets they are a great place to find bargain investments.
  3. Companies listed and operating in 'strong' European countries like Germany:   The big uncertainty with Europe is whether the EU will stay together or whether countries like Greece, Spain, Portugal etc will leave the Euro.  The uncertainty is causing the Euro to remain depressed and is affecting companies and stocks in almost every market in Europe.  Countries like Germany are actually performing extremely well.  As soon as certainty returns to the market (regardless of the outcome) these stocks should perform well.  Even if the Euro collapses and Germany goes back to the Deutschmark this will be a much stronger currency than the Euro currently is (as the Euro is dragged down by the poorly performing countries) so as an investor you win either way.
One thing that should be noted with investments like this is that they will not come off straight away or even within one or two years.  As an investor you are waiting for the market to settle down and for investors to 'realise' that these companies that they have been shunning are actually really good investments which drive the price up.  You are waiting for market sentiment to return to normal (the business does not need to improve for you to get your return although this may provide an extra kicker).

Occasionally you can find stocks which conform to all the above criteria.  An example is Kinghero AG which is a stock I'm invested in - it is a small cap, German listed clothing manufacturer and retailer which only operates in China.  There are plenty of others out there - all you have to do is look for them.

Disclaimer: I'm long Kinghero AG.  Also make sure you do your own research and get advice relatign to your pesonal situation.  This is not meant to be investment advice and investors should do their own evaluations of opportunities and stocks.

Monday, 4 June 2012

Expenditure Tracker - May 2012

May 2012 saw a large reallocation of funds from my Home Loan offset account (effectively investments in fixed interest securities) to the share market to take advantage of the very low valuations that the market was showing.  It was also marked by a significant decrease on my personal expenditure compared to previous months however I still could not keep this within my target range.

A summary of my expenditure for the month is shown below:
  • Share investments: $15,111 ($11,811 over)
  • Home Loan Offset account: -$12,411 ($14,011 under)
  • Personal expenditure: $3,045 ($1,546 over)
On a cumulative basis (January - May 2012) the accounts are as follows:
  • Share investments: $23,684 ($7,184 over)
  • Home Loan Offset account: -$8,699 ($16,699 under)
  • Personal expenditure: $19,331 ($11,831 over)
Over the last few months I have had large swings in and out of my share investment accounts (including my large proposed investment in the share purchase plan which was scaled back ~99%).  However the amounts I have invested this month are relatively long term value investments which I do not expect to exit in the near term.  They were to take account of the significant weakness in the share market seen in May.

As mentioned above personal expenditure was more in line with my target compared to previous months however it is still double what it should be.  This was because I had several lumpy expenditure items during the month as well as weekend trips away (including a bucks weekend which we managed to do relatively cheaply)

On a cumulative basis only my share investments are in positive territory while I have actually taken money out of my home loan offset account compared with the start of the year.  This is a position that I am comfortable being in as I am very overweight property at the moment.  My aim is to have a relatively balanced portfolio. 
  • My goal is to have property / fixed interest / share market investments approximately even (i.e. 33% / 33% / 33%) 
  • At the moment the weighting of my net investments (after borrowings) is currently 40% / 25% / 35%
  • It is much more skewed on a gross (exposure basis) at 79% / 9% / 12%
    • The difference above is because all my borrowings are against my property investments
My focus over the next few months will be on evening my net exposures first (i.e. increasing the amounts held in my home loan offset accounts) and will then look at my gross exposures.

Friday, 1 June 2012

May 2012 net worth - $240,000 (+1%)

Assets: $594,000 (+0.6%)
Liabilities: $354,000 (+0.1%)
Net worth: $240,000 (+1%)

The relatively small increase this month was rather frustrating as I had kept my personal expenditure in check (the last week of the month proved to be very expensive though) and the credit card repayments for the month were also small.  The small increase was driven by a few major factors this month including
  • A significant fall in the share market over the month which caused my investment portfolio to decrease in value
  • The above was offset by the fact that I was able to take advantage of the share price weakness in the middle of the month to reallocate a large portion of my funds from my home loan offset account into the share market and make some good short term gains (I also made some losses off these investments)
  • A continued investment in my employee share investment plan and automatic allocation to my superannuation plan by my employer (I have started to post on superannuation if you would like to see how the system works in Australia)
  • My credit card bill at the end of the month was slightly higher than I would have liked it to be and this came about due to several expensive dinners and outings I had in the month
Looking back at my predictions from my April 2012 net worth post most of the things I had predicted came to fruition.  It was just disappointing that despite the level of discipline I was able to show this month the increase in net worth was relatively minor. 

One of the big things I need to work out how to do is to accelerate the growth in my net worth.  There is only so much you can do saving (for me saving ~3,000 to $4,500 per month from my wage is about was good as I can do) so I need to work out a way to generate other income.  I have mentioned before that I would like to start a small business to generate some side income however thus far no ideas worth pursuing have come to mind.

My prediction for June are much the same as May.  Increases to my net worth will be driven by the share market and my ability to control expenditure.  As June represents the end of the financial year and tax year in Australia for individuals I may also have some changes in my net worth related to tax planning.  June will also represent 12 months since I first posted my net worth so I will do an annual summary of my performance.