Tuesday, 29 July 2014

How To Buy a Diamond Ring (Part 1)

Buying a diamond ring is an interesting process.  I'm going to make a few generalisations here but as men who are about to propose we are in an interesting situation:

  1. We know that we have to propose with a diamond ring 
  2. We know very little about jewellery of any sort 
  3. We care very little about jewellery so the process is quite tedious
  4. If we are about to spend thousands of dollars we want to the best ring for the price that we can get
I am going through the same process that you're all going through and I know how painful it is so I have put together a guide.  It turned out to be far longer than I originally planned so I have split it over two posts.  The second post will come later this week.

Step 1: Know your girlfriend

Before you even think about looking at diamonds you need to know the girl you are about to propose to.  Here are some things that you will need to know at a minimum before you even think about starting to look for a ring.

A. Does she actually want a diamond ring?

For most guys this will be a resounding 'yes' (it certainly is for me), but there are some girls who think that the whole concept is a bit silly and actually prefer something simpler, cheaper and more meaningful.  If you have one of these girls your life just got a whole lot easier (and cheaper).

So how do you find out.  The easiest way is to just start a conversation about engagements and proposals generally.  This is much easier if you are in the age group where everyone is getting engaged.  Ask what she thinks about her friends rings, and when she meets people who have just gotten engaged does she want to see the ring?

B. What is important to her?

Different girls will care about different things in a ring.  Given that you can't buy 'the perfect ring' and don't want to spend hundreds of thousands of dollars you need to work out what is important to her in a ring.  For example
  • Does she care about the brand?  Some women care about brands far more than others.  If she doesn't really care then avoid something like Tiffany - you're paying for the name...not for the actual ring itself
  • Does size matter? Size and

Thursday, 24 July 2014

Self Managed Super Funds are closing!

This is a guest contribution from Mr Ikonz, of Project Ikonz.

Whilst we all know that self managed super funds (SMSFs) are the fast growing sector in the superannuation market, it’s important to remember that they aren't for everyone.

All the stats that you see and all the media reports focus on the continued growth of SMSF accounts, but not a lot of people focus on how many SMSFs are wound up on an annual basis.  Did you know that according to the ATO, in the 12 months to 30 June 2013, 2,230 SMSFs were closed? In the last 5 years, over 38,000 SMSFs were wound up!!

What are some of the reasons why an SMSF might be wound up?

There are a huge, number of reasons as to why an SMSF might be wound up, but below are my top 3 reasons why:

1 - They aren't as easy to run as you would think.

The name says it all! SMSFs are self-managed, meaning that you will need to take on the workload of a trustee, which previously was designated to a fund manager. This work includes managing the asset allocation, administration, account and audit of the fund. Whilst you can certainly outsource a lot of this work to experts such as accountants and financial advisers/brokers, as the trustee, you are still responsible for the running and compliance of your fund. Not an easy job!

2 – Being a fund manager ain't that easy

Selecting and managing the assets in the fund isn't as easy as

Monday, 21 July 2014

Review: One Up on Wall Street by Peter Lynch

One Up on Wall Street is an investing classic and a book that every small investor should read.  I first read this book when I was starting out on my investment journey and I re-read it again before writing this review.   If anything I liked this book more the second time around as I more information, more context and I was more used to investing in stocks.

Who is Peter Lynch?

When it comes to books on investing I think the author is incredibly important.  I like authors to have  track record in the real world of investments.  I would rather take advice from someone who has been there and done than in a very public and scrutinised way rather than those who say that they have earned significant returns using some strategy or another.

Peter Lynch has everything that I look for in an author even before I start reading his book.  His investments were incredibly public (he headed up the Magellan fund at Fidelity Investments) and his returns were spectacular over a long period of time (he averaged a return in excess of 25% between 1977 and 1990).

This book is all about teaching you how to beat Wall Street

I know that there are a hundred books which all claim to do this same thing but Peter Lynch's approach is both practical and insightful while at the same time not being overly simplistic.  Basically his formula for success for small investors is as follows:

  1. Know the weaknesses of Wall Street (or of large institutions generally)
  2. Don't try and beat them at their own game
  3. Use the information you personally have to give you an edge 
  4. Don't forget the fundamentals of the stock you are investing in
  5. Know the type of company you are investing in (fast growing, turnaround etc.) and tailor your investment in that company to suit (i.e. know when you should both buy and sell these companies
Obviously the book is much more detailed than what I've outlined above but it is incredibly insightful.  Although all the points above are important I really think that points 1 - 3 three are what set this book apart.  Most investment books will

Thursday, 17 July 2014

5 ways to make your suits last longer

If you work in a corporate environment you will know how important your image is.  We are not only assessed on our abilities and our work output but are also assessed on our image - how we look and conduct ourselves.  

If you are male (and often if you are female as well) and work in a corporate environment, the chances are that you will need to wear a suit to work.  The problem is that:

  1. Suits are expensive
  2. There is a difference between cheap suits and fully tailored suits
  3. Suits wear out and you need to replace them.
I have addressed the second problem on this blog before.  I outlined a way to get fully tailored, high quality suits made in Asia which looks better than anything that you can get in western countries for a similar price.

However, even if you do get your suits from Asia you are still paying hundreds of dollars per suit...and suits wear out.  This post will cover some ways you can make your suits last longer.  By following the steps below you will need to replace your suits less often, look better for longer and ultimate save a lot of money.

Suits do wear out...

Suits do wear out and there is nothing worse than seeing someone wear a suit that is well past its use by date.  Although this approach may be 'snobbish', if you are working in any sort of corporate environment you are going to be judged on your looks (in addition to your ability) so you need to know when your suits are looking a little worse for wear.

Some common signs your suit is reaching the end of it's life:
  1. It's starting to become shiny
    • The biggest sign that your suit is starting to reach the end of it's life is that it is starting to get a shine to it.  The shine is caused by the fabric flattening out and starting to reflect light.
    • Unless you bought your shiny suit in the first place (which I do not recommend), any sign of shine should be a sign that you should be investing in a new suit
  2. It doesn't really fit you any more
    • Although your suit may not technically 'look' old, if it isn't really fitting you any more then it is time to get a replacement
    • I'm not talking about gaining or losing a few pounds, but if you have lost a lot of weight and your suit like it was made for someone 4 sizes bigger (which it was) then it's time to get a new one
  3. It has some tears, holes and stains that can't be hidden
    • Stuff happens to suits that we can't avoid.  You catch it on something, you spill something or it's just been over-loved.  Some damage can be hidden (for example some damage to the inside lining of your jacket...but if it is really obvious...it is time to change the suit

...But there are ways you can make your suit last longer

If you are spending a

Monday, 14 July 2014

How to save for your home deposit

Have you thought about buying your own home?  Have you done all your maths and worked out that actually...yes you can afford a home and it is the right time for to buy your first house?  Many people get to this situation and then realise that they are missing one big hurdle...they don't have the deposit they need for a house.

This post will give you some practical tips about how to save your deposit and my views on how much you should save for your deposit.

Saving a deposit for your first home is hard...

I actually think saving a deposit for your first home is one of the hardest savings and investing things that you will ever have to do.  There are so many behavioural and practical factors working against you including:
  • It is incredibly hard to be disciplined and not the spend the money on other expenses that come up.  Unexpected expenses almost always arise and when you have a pot of cash sitting there it is incredibly easy to dip into this pot of cash
  • The goal seems so far away.  Saving for a deposit is rarely something that you can do in a few months.  It takes serious effort over a few years and it is easy to get disenchanted
  • You actually need more than you think...I will cover this below but unfortunately due to transaction costs (such as stamp duty and other costs associated with buying a property) you need more money than just the x% of the property value that you were aiming for

I am currently saving for my first place of residence.  If you follow this blog you will know that I already have an investment property however I have 'ring fenced' my investments (not legally but rather as a personal rule) so I am effectively saving for my first investment property all over again.  

Here is a plan to make saving a deposit for your first home easier...

The 5 step plan below is

Thursday, 10 July 2014

Paying off debt? Remember that not all debt is created equal

Psychologically debt is a funny thing.  Most of us need it from time to time and debt is not always a bad thing.  In fact even consumer debt can sometimes be acceptable.  Your home loan is a form of consumer debt that most of us need to take out at some point in our life and this is fine.

Debt also needs to be paid back over time however many people do not pay back their debt in a logical manner.  There is an order that you should pay off your loans however many people do not pay off their loans in this way but rather spread their repayments equally over all their debt.

What is the logical order to repay debt?

Debt should always be paid back in the following order:
  1. Repay the highest interest non tax deductible debt first
  2. Repay other non tax deductible debt in order of interest rate from highest to lowest
  3. Repay tax deductible debt (assuming the after tax cost of this debt is lower than the lowest cost non tax deductible debt)
You should not pay the principal on any of the cheaper debt until the most expensive debt is completely paid off.  Of course you should continue to make the interest repayments and allocate the principal component of this debt to the higher cost debt.

Want an example?  Ok assume you have the following debts...what order should you pay them off?
  • A $300,000 home loan at 5% p.a.
  • B $10,000 credit card loan at 22% p.a.
  • C student loan of $20,000 which increases at CPI (inflation)
  • D $200,000 tax deductible investment property loan at 6% p.a.
You should pay the principal amounts off in the following order
  1. First pay the credit card loan off.  It is the highest cost by a mile.  You should pay only the minimum balance on everything else or convert them to interest only loans until this loan is paid off
  2. Then pay off your home loan - it has the next highest after tax cost.  Yes it has the biggest balance but it is also increasing at the fastest rate so you want to get on top of this as fast as you can
  3. Then pay off your investment property loan.  Assuming you are on a tax rate of 40%, the after tax cost of this loan is 3.6% 
  4. Then pay off your student loans.  Obviously it depends on the rate of inflation in your country but in Australia inflation typically runs at 2-3% so it is easily your cheapest cost of debt
Paying the loans in this order decreases the amount of time that it will take you to pay down your loan balances and reduce the total amount of interest you pay over time.  By targeting the highest cost of debt first you are being the smartest and most efficient with your repayments.

What are some of the reasons that people don't pay their debts in a logical order?

People rarely pay off their loans in the optimal order.  In fact I know very few people that would pay off their loans in the order I suggested above.  Why?  Here are some of the reasons I think people pay off their loans in a sub-optimal way:

People like to see whole debt balances gone so pay off their smallest loans first

Most of us feel better when we have less debts to deal with.  What this leads to is people striving to pay off their smallest debts first even those these debts may not be costing us a great deal.  I know a number of people who have paid off their extremely cheap student debt before they pay off their home loans which are costing them far more.

If you can ignore the 'feel good' feelings that comes with paying off whole balances and concentrate on paying off your debt in a logical manner you will be much better off financially.

People like to see their loan balances decreasing

The painful thing about making minimum repayments (which may actually increase the loan on some types of debt) or by paying interest only, is that your debt balance goes nowhere.  You are paying money towards these loans but your balances aren't going down at all.

People generally prefer to see their loan balances going down from paycheck to paycheck and it can be rather disconcerting to see most of the balances staying the same even though you are making payments. 

In this case what you need to concentrate on is the fact that you are actually paying down your highest cost of debt loan faster as a result of concentrating your payments.  You are paying less total interest tomorrow because you are getting rid of your highest cost of debt today.

People can't be bothered changing their payment plans

Most forms of debt come with a pre-arranged payment plan and it takes effort to change it and most people can't be bothered going to their bank and changing this.  

For example most people would have their home loans and investment loans set up so that their are paying both principal and interest.  If you wanted to pay down your credit card debt faster you would convert these loans to interest only loans and pay the extra amount off your credit card debt.  After your credit card debt was paid off you would convert your home loan debt back to principal and interest.

Doing this takes effort and there is one big trap - you end up with a whole lot more free cash which you can blow.  If you are sensible and committed you should use all of this extra cash to pay down your debts and after the highest cost debt is paid off use all that cash to pay off your next highest cost of debt.

Paying down your debt does have a logical order.  If you follow it you can really improve your financial situation and get your debts under control faster.

How do you pay down your debts?  Do you have a pre-defined order?  Have you ever done anything illogical to 'feel better'?

You May Also Be Interested In:

Monday, 7 July 2014

Where have all the Investment Banking posts gone?

It is with great sadness (and some excitement) that I am announcing the removal of my Investment Banking posts from this blog.  Over the last 3 years I have written 50 posts on Investment Banking and these have been some of the most read posts on the blog and have driven a significant amount of traffic to the blog.

Why did I remove the Investment Banking posts?

As I mentioned in my post reflecting on the 3rd anniversary of this blog, this blog had gotten incredibly large and unfocused.  It was part personal finance, part career advice, part politics and a bit of economics thrown in there for good measure.

In an attempt to streamline and refocus the blog I have removed the Investment Banking posts (although the other non core posts will remain on this site).

Where can I find the posts on Investment Banking?

I recently mentioned that I

Friday, 4 July 2014

June 2014 Annual Net Worth Review

As promised for several months I have compiled an annual net worth review which will attempt to not only give you an insight into how I have performed over the last twelve months but also a better look at how I structure my portfolio and my reasons for doing so.  I have never provided this level of detail before in a post so I hope you find it interesting.

A brief look at my 12 month net worth performance

Over the last 12 months my net worth increased from $368,000 in June 2013 to $503,000 in June 2014 however as you can see from the chart below this was almost all an increase in my assets with my liabilities staying flat reasonably flat.  If you look at my portfolio construction below you will see why my liabilities barely move month to month.

My liabilities stayed flat over this period but my asset performance was what drove my net worth result.  A summary of my net worth performance is as follows:
  • My assets increased from $724,000 to $860,000 an increase of 19%
  • My liabilities increased from $356,000 to $357,00 an increase of 0.3%
  • My net worth as a result increased from $368,000 to $503,000 an increase of 36.5%
My asset mix shifted

Wednesday, 2 July 2014

June 2014 Net Worth: $503,000 (+2.1%) and Expenditure Tracker

A few months ago I combined my net worth and expenditure tracker posts as the posts were interlinked and it seemed to make sense to display them together.  This post represents the 'regular' net worth update however in coming days I will also post up an annual review of my net worth performance which will give far greater insight into the construction of my portfolio as well as my liabilities.

June 2014 Net Worth: $503,000 (+2.1%)

Value% Change
Net worth$503,000+2.1%

What drove my net worth performance this month?

I was incredibly happy to reach my net worth goal for this month as it was also my revised goal for the year. I can't believe I've crossed the half million mark - although it has been a slow and steady process it still feels strange to sit here at this level.

The month on month improvement was one of my best for the year and represented incremental improvement in all of my accounts instead of one big hit which improved everything.  Outlined below are some of the biggest factors that affected this result:
  • Positive factors
    • I finally submitted my tax returns for the year and this had several positive implications for my net worth
      • I received a modest tax refund which was mainly driven by my investment property which was negatively geared over the year
      • This eliminated many of the tax liabilities that I was carrying in the liabilities section of my net worth tracker (especially CGT liabilities from share sales)
    • My share portfolio was up for the month - it wasn't a significant improvement (less than 1%) however this has been a drag over the last few months so it is good to see it back in positive territory