Copyright September 2004 Australian Securities and ...€¦ · Make payments fortnightly and pay a bit more than required each time. If it won’t cost more in interest, a redraw

Your Money

From the Australian Securities and Investments Commission

Can you get morefrom your money?

Make smarterdecisions?

Avoid expensive mistakes?

For consumers and investors

www.fido.asic.gov.au or phone ASIC’s Infoline on 1300 300 630

FIDO

Copyright September 2004 Australian Securities and Investments Commissionand graphics used under licence. All rights reserved.

Your Money (lowresv5) 10/6/04 10:14 AM Page 1

● Decide what you reallywant, and focus on yourmost important goals.

● Start saving now: you canstart small and increase yoursavings gradually (they’llgrow with interest, too).

● Always check the facts: ask questions and getprofessional advice. If youaren’t comfortable or don’tunderstand, don’t go ahead.

Throughout this booklet wehave used tables to work outbudgets and so on. Copy themand add your own details to seehow our suggestions mightwork for you.

3Your Money

In this bookletHow are you going now? 4

Planning your finances 8

Budgeting and dealing with unexpected events 15

Managing your loans and your mortgage 21

Protecting yourself, yourfamily and your property 25

Getting the most from your super 29

Retiring: how much money will you need? 36

Starting your personalinvesting 42

To find out more 49

This booklet can help you:

● Use your money more wisely.

● Save for what you reallywant.

● Manage your loans,insurance, superannuationand retirement saving.

ASIC wants you to be wellinformed and confident aboutfinancial decisions.

This booklet can start you offon the right foot with generaltips and explanations.

2 Your Money

How can this booklet help you?

About ASICThe Australian Securities and Investments Commission enforces andregulates company and financial services laws to protect the public.

Our ideas may not apply to yourparticular circumstances. If youwant personal financial advice,you may need to see a licensedfinancial adviser.

Key tips for managing your money


5Your Money4 Your Money

Are you better off todaythan a year ago?Write down what you own andwhat you owe today and a year

ago in a table, like theone in our example

opposite for Natand Sam. It’s fairlyeasy to make a fewestimates, andthen use your

mortgage, creditcards, bank accounts

and superannuationstatements to fill in theblanks.

Taking stock of your financialsituation is the first step inmanaging your money. Askyourself two importantquestions:

1. Are you better offtoday than a yearago? Look atwhat you ownand what youowe.

2. Are you saving anymoney? Look atyour income and yourexpenses.

What they own Value today Value a year ago Change

Home 321,000 300,000 Up

Car 10,000 15,000 Down

Superannuation 55,000 45,000 Up

Total owned 386,000 360,000+26,000

up 7%

What they owe Debt today Debt a year ago Change

Mortgage 236,330 240,000 Down

Car loan 10,345 15,000 Down

Credit cards 3,000 1,800 Up

Total owed 249,675 256,800-7,125

down 3%

Nat and Sam’snet worth

136,325 103,200+33,152up 32%

How are you going now?

A year ago, Nat and Sambought a home and a new car.Now, their home is worth more,their super has grown and theircar loan is coming down.

Unfortunately their credit carddebt has gone up, and theydon’t have much saved forunexpected bills or timewithout work.



If Nat and Sam were 25 years old,they’d be pretty comfortable,because they have plenty oftime to pay off their mortgageand build up their super. If theywere 55 years old, they’d befacing some serious problemswith so much debt and so littlesuper, even if they kept workingtill 65.

When you draw up a similartable for yourself, first look atwhat changes have occurred.Then think about your age andhow much longer you expect towork to see if you are likely tobe comfortable or if you facesome serious issues.

Are you saving anymoney?Record all your income andexpenses for a month, as wehave for Nat and Sam in thetable opposite.

Nat and Sam, who both workand have two children, aredoing well to save some money.However, their debts take up alot of their money, and $161 amonth won’t stretch far. There’salso not much room for them toput extra money towards payingoff loans or building up moneyfor their children’s education.

Looking at your own incomeand expenses is a first step inbudgeting, and shows if you’remaking progress, standing still,or going backwards.

Income IncomeConverted to

monthly amounts

Sam’s take home pay $1,327 fortnightly $2,875

Nat’s take home pay,works part time

$873 fortnightly $1,891

Total income $4,766

Expenses ExpensesConverted to

monthly amounts

Home mortgagerepayments

$1,700 monthly $1,700

Car loan repayments $463 monthly $463

Credit card interestpayments

$495 yearly $41

Car running costs $3,000 yearly $250

Food and groceries $250 weekly $1,083

Holidays, entertainment $100 weekly $433

All other costs (school,clothing, medical, insurance,repairs, rates, water, electricity)

$635 monthly $635

Total expenses $4,605

What Nat and Sam save each month +$161

TIP: List each loanrepayment as aseparate expense, thenconvert everythinginto monthly figures.


How long will it take toreach your goals?Some goals may be urgent, forexample getting credit carddebts under control and paidoff. Remember how Nat andSam’s credit card debt had goneup? Paying almost $500 eachyear for just $3,000 (16.5%interest) is very expensive, sothey would probably need to fix this soon.

Longer term goals, for examplebuying a home or saving forretirement, can be just asimportant.

Because they cost a lot ofmoney, the sooner you startworking towards them, thesooner you can achieve them,even if you can only spare asmall amount of money. It cancost a lot more to do thesethings later.


In the table on the next page,based on Nat and Sam’ssituation, we have:

● drawn up some financialgoals

● estimated how long theymay take, and

● noted some things to do toget started.

Planning your finances

What do you want toachieve? Would you like to:

● Pay off your credit cards?

● Buy a new car and pay it offquickly?

● Buy a home and pay it offquickly?

● Save for your children’seducation?

● Put some money aside foryour retirement?

These are some typical financialgoals. Others include paying off personal loans or saving upfor a holiday. Write down yourown goals as the first step inyour plan.

Your own plan will help youcontrol your money. If you setsome goals, make a plan andstick to it, you can makeprogress even with ups anddowns along the way.

TIP: Using your owngoals, you could drawup a similar table foryourself. If you’re notsure about some ofthe things you need todo, come back to themafter reading the ideasin this booklet.


11Your Money

Buy a home and pay it off (long term)

How to start: Work out how much they can afford each month, and look around in their price range.

Shop around for a low interest rate.

Make payments fortnightly and pay a bit more than required each time.

If it won’t cost more in interest, a redraw or offset savings account can let you put any extra money you may have, includingyour pay cheque, on your mortgage.

Save for children’s education (medium to long term)

How to start: Set up a long term investment account that theywon’t touch.

Check personal finance magazines about suitable long terminvestments.

Put some money aside for retirement (long term)

How to start: Put more money into superannuation (more on super later).

If their funds offer investment choice, consider which option bestmeets their needs.

Pay off credit card (2 years)

How to start: Stop using the cards. Instead, use a card that debitstheir savings account, so they spend their own money, not pay touse someone else’s.

Check how much they need to pay monthly to get rid of the debtwithin 2 years, and stick to that amount each month.

Pay off new car (3 years)

How to start: Work out how much they canafford to pay per month, including the cost of

insurance.

Choose a model within their price range andshop around for the best price.

Make the biggest deposit they can.

Shop around for the best loan, as well as the car. Maybe extend

their mortgage, so long as they pay off quickly the extra they borrowed.

10 Your Money

Nat and Sam’s financial goals, time needed and how to start


13Your Money

How much will each goalcost?The next step in planning yourfinances is to estimate howmuch your goals may cost, andcompare that cost with whatyou are saving. Then you cansee if there’s a gap to close.

Estimating costs is fairlystraightforward for the goalsyou have already started, suchas loans you are paying off.

Useful internet loan calculatorscan show how much a loan willcost, and how your repaymentsare affected by shorter orlonger term loans.

To estimate long term savingsand investments, we will showyou some calculations for Natand Sam, which you could useor adjust. Later we’ll offer someextra figures on super andsaving for retirement.

12 Your Money

Nat and Sam’s goalsOn track?

Monthly cost

How they worked this out

Repay a $15,000 car loan in 3 years

Yes $463Borrowed more against their home loan at7% interest, and increased their paymentsby $463 to pay the car off in 3 years.

Pay off $3,000 credit card debt in 2 years

Notstarted

$148Interest is 16.5%. Stopped using the cardsimmediately.

Buy a $300,000 home, and pay it off in 25 years

Yes $1,770Borrowed $240,000 at 7% interest. (Theirfamilies helped with their deposit of$60,000 plus $15,000 for costs.)

Save $21,000 towards children’s tertiary education in 10 years time

Notstarted

$120Invest an initial $2,000, and contribute for10 years, earning 5% after tax each year.

Make extra super contributionsNotstarted

$363‘Salary sacrifice’ an extra 10% of salary.(More about super later.)

Total cost per month $2,864

What Nat and Sam’s financial goals will cost


15Your Money

So in two years, there’s extramoney to pay off their homeloan faster and put somemoney aside for the children’seducation.

They can achieve their goals ifthey make a start, even if ittakes two years longer thanthey would have liked.

Closing the gap means findingways to free up cash that youcan devote to your financialgoals.

Usually the top priority ispaying off high-interest loans.When you achieve that goal,you can channel the extramoney you save into your nextgoal, and so on.

What if you’re not saving anymoney, not saving enough or unexpected events throwyour finances into disarray?Budgeting and being preparedfor unexpected events canchange things for the better,often without too much pain.

Budgeting and dealing with unexpected events

A gap between your goalsand your savings?Is there a gap between whatyou can save each month andthe cost of your goals?

The gap between Nat and Sam’ssavings and their goals areshown in the table opposite.

Nat and Sam’s goals cost morethan they can spare from the$161 they save each month.They can’t afford to starteverything today, but they canafford to do some things thatwill close the gap within a fairlyshort time.

Suppose they grit their teeth,stop using their credit cards anduse what they save to pay offtheir cards in two years. Aroundthe same time, they will alsohave paid off the car. Their coststhen drop and so their savingsincrease to $665 per month.

14 Your Money

1. What’s the total cost of Nat and Sam’s goals each month? $2,864

2. Subtract the total amount they are already paying for what’s on track -$2,233

3. Here’s the cost of what they still have to pay for $631

4. Subtract what they are saving now -$161

5. Here’s the gap between their savings and the cost of all their goals $470


17Your Money

Budgeting: what youneed, and what you wantThe best tool for finding extramoney is a budget, much likeNat and Sam’s record of incomeand expenses.

Look at the things you need –the essentials, such as housingand food – and those yousimply like to have, or want.When you need to trim thebudget, cut back on the ‘wants’first – things that aren’tessential for everyday life. Don’t cut out all the wants,because if your budget’s tootight, it’s not going to work.

How can you save more? The best way to save is to putmoney away as soon as you arepaid and before you spend.

16 Your Money

What you can do Potential savings How it could work

Have an easy access cash account for everyday needs, with a debit card attached

Reduces need to use credit card;earns interest

Get your pay deposited into thisaccount

Save or invest a fixed amount of money every pay in a separate account

More for your future goals, andan emergency source of money

Get your employer to pay directto your account or have a fundmanager direct debit your bankaccount

Save your pay rises, bonuses, special payments or tax refund

Savings build up significantly over time as you continue to livewithin your existing budget

Increase your automatic savingsamount. Immediately invest your extra money

Pay your mortgage fortnightly, and pay an extra 5–10% extra on your mortgage every month

Saves interest costs and pays offyour mortgage sooner

Get your lender to deduct yourmortgage and extra paymentsfortnightly

Budget a specific amount for fun, leisure and personal expenses

Controls impulse buyingMakes it easier to stick to yourbudget

Put your change into a savings jar at the end of each day

Creates a little pot of ready cash

Use this money for small personal expenses

Make extra superannuationcontributions from your pre-tax salary (‘salary sacrifice’)

More money for retirement andless personal income tax paid

Discuss with your pay office, butmake sure that you can afford to make extra contributions


19Your Money

What if you can’t payyour bills? Stay calm and work out whatyou can reasonably pay eachperson to whom you owemoney (your creditors),considering both your livingcosts, rent or mortgage, and allyour debts. Not-for-profitfinancial counsellors can helpyou, see page 51.

Contact your creditors promptly

Save for your next car and choose a lower-priced model

Potential savings: A big deposit reduces the total purchase price,and you may also get savings on borrowing and insurance costs

Use pre-paid cards for your children’s mobile phones

Potential savings: Make your kids top up the card themselves if they spend too fast

Use self-catering holiday accommodation

Potential savings: Saves on eating out at cafes, hotels andrestaurants

and tell them you are havingfinancial difficulties and want todiscuss repayment arrangements.This is especially important ifcreditors hold security over yourhome, car or other assets.

Offer only what you canreasonably afford to pay, andoffer something to eachcreditor. Try to cover interest orcharges applying to the debt.

Ask if the creditor will agree to

18 Your Money

Pay by cash or EFTPOS instead of using credit

Potential savings: Encourages saving because you use your ownmoney (which is limited) instead of borrowing it. Saves interest oncredit cards

Pay credit cards off in full each month

Potential savings: Saves 16% per year on your outstanding balance

Use lay-by for Christmas shopping or save small amounts over the year

Potential savings: $25 per week would mean $1,300 in Christmascash, avoiding high credit card bills in the New Year and interestpayments

Combine multiple accounts, such as cheque and savings accounts at the bank, and separate superannuation funds

Potential savings: Saves fees and charges

Use internet or phone banking

Potential savings: May save bank fees

Take your own lunch to work

Potential savings: If you save $4 per day, that’s $1,000 a year

Tips for cutting costs


how much tax you’ll pay andwhat makes the best sense foryou financially. If you belong toa union, they may be able togive you free advice.

What if you get a windfall? Above all, go back to yourpersonal goals. Consider payingoff all personal debts first andthen your home mortgage.

If there’s still money left over,consider making a personalcontribution to superannuation,a contribution to your spouse’ssuperannuation or starting toinvest. Windfalls can easilydisappear through unplannedspending or hasty investments.For large sums of money, you may need the help of afinancial adviser.

More information? DownloadFIDO’s budget planner fromwww.fido.asic.gov.au.


reduce the interest on the debtuntil you can get back on yourfeet. Confirm any agreement inwriting.

What if you getretrenched? Before making any decisions,taking any money or signingany documents, find out yourentitlements and the best wayfor you to deal with any moneyyou may receive. You may notbe able to undo a decision youare unhappy about.

Centrelink’s FinancialInformation Service conductsseminars on retrenchment andfinancial issues and can offerface-to-face interviews so youcan find out about all of youroptions, see page 51.

Ask someone who understandsyour terms of employment andyour superannuation benefits,

Getting into debt is far easierthan getting out of it. If youshop around and manage yourloans, they won’t make a messof your finances.

Managing your loans and your mortgage

When should youborrow? Look at the total cost includingall the interest before youborrow. Only borrow if you are sure you can afford therepayments.

For things you just want, suchas a holiday, it’s cheaper to saveup for them. For example, Natand Sam’s $3,000 two-weekholiday, paid on their creditcards, took them two years’hard saving to pay off, and costthem an extra $534 in interest.Even for things you may need,such as a car, it’s cheaper tosave if you can.


22 Your Money 23Your Money

If you do borrow, pick theshortest repayment period you can afford, especially foranything that you use upquickly, like a holiday, or thatloses value, like a car.

For a home, almost everyonehas to borrow because it’shardly realistic to save up forone. In this case, it can makegood sense to borrow, becausea home could increase in value,perhaps even faster than theinterest rate you will pay.

How much should youborrow?It pays to be cautious. Lendersmay offer you a bigger loan than you would feelcomfortable with.

They may increase your creditcard limit without asking andwithout checking if you reallycan repay higher debt.

Interest rates could go up, andif you borrow too much even asmall rise could get you intotrouble.

Could you afford to do that forthe full term of the loan, maybefor 20 or 25 years?

You may be overstretchingyourself if:

● your total loan repaymentscost more than half yourtake home pay

● your home loan repaymentscost more than a third ofyour take home pay.

What’s the best loan?Usually it’s the loan with thelowest interest rate. This isoften the single most importantthing to get right, so shoparound. Even small differencesin interest rates can make a bigdifference to the total amountyou will pay, especially withlong-term loans. Extra featuresthat cost you more in interestrates may just waste money.

Look for the ‘comparison rate’which takes fees into account.‘Honeymoon’, ‘introductory’and ‘low start’ loans may sound appealing, but once thehoneymoon ends, you couldend up in a more expensive loan.

Check that your loan allows youto make extra payments, and ifthere are any fees for doing so.

Loans with fixed rates may:

● not allow extra payments or,if they do, will commonlylimit the amount you canrepay over the life of theloan

● charge very high extra feesfor paying out the loanearly.

Where to find loansThe CANNEX website atwww.cannex.com.au is anexcellent place to start.

TIP: Do a trial runbefore you borrow.

Try saving an amountequal to your loanrepayments eachmonth, or saving thedifference betweenyour rent and homeloan repayments(include the one-offcosts, such as stampduty and movinghouse).



Magazines and newspapercolumns also give a good ideaof current rates.

Do consider all types of lenders:credit unions, building societies,banks and non-bank lenders.Loans with the lowest rates ofinterest may not be the mostheavily advertised. Mortgagebrokers may not offer all the lowinterest home loans available.

Which loans should youpay off first?Pay at least the minimumamount due to every lender ontime. If you can afford extrapayments, start with the loancharging the highest interest.Only put extra into other loansonce the most expensive onehas been paid off. The lowest-priority loan is one that has tax-deductible interest – for aninvestment property loan, forinstance.

Why pay loans andmortgages off faster? Paying off your loan faster cansave you thousands in interestpayments.

One simple way to get ahead isto pay your loan fortnightlyinstead of monthly. In effect,you make the equivalent of 13 monthly payments a yearinstead of 12. Fortnightlypayments will cut four years off a 20-year home loan of$200,000. And if you can pay an extra $100 per fortnight, you will cut seven years off your loan.

If you have some money tospare, consider reducing yourloan balance. Paying $1,000 offa credit card charging you 16%interest obviously beats puttingthe same money into a termdeposit earning 5.5%. Also,remember the effect of tax.

Why insurance reallymattersInsurance helps cover the costsof unfortunate events, such aslosing your living because ofillness or disability, or yourhome in a fire.

It protects the financial safetyof you and your family, andyour property.

Protecting yourself, your familyand your property

Paying $1,000 off a loancharging interest of 6.5%, savesa full $65. Even if you couldinvest the money somewhereelse that earned $65, you wouldthen have to pay tax.

Be careful about claims thatrefinancing will pay off yourloan faster. You can only pay off loans faster by paying moremoney. Only refinance if youare sure the savings outweighthe costs.


27Your Money

Common risks and how to insure against them

26 Your Money

Common risks Insurance productWhat can reduce your insurancepremiums

Damage or loss to a home building and fixtures

Home building insuranceAdequate maintenance, smokedetectors, sound electrical wiring

Loss of home contents Home contents insuranceWindow and door locks, burglaralarms, smoke detectors

Damage to someone else’s vehicle or property

Third party property insurance An accident-free driving record

Loss or damage to your motor vehicle

Comprehensive insurance Security devices

Death and total and permanentdisability

Increased life and total andpermanent disability insurancethrough your superannuationfund or a personal policy

Using your super fund if the policy suits you

Sickness and temporary disability

Income protection insurance(this is tax deductible); Privatehospital medical insurance;Trauma insurance

Check if your super fund offerssuitable insurance

UnemploymentGenerally you can’t insureagainst unemployment

Not applicable

How much cover do youneed? If you make a claim, themaximum an insurer will payyou is the amount of money, or ‘sum insured’, in yourcontract. That sum has to cover everything.

Most people underestimate thevalue of what they own and‘under-insure’. If you under-insure, you won’t get enoughmoney to cover the total cost of your loss. For example, the‘sum insured’ for your homemust be enough to cover allyour costs if your home weredestroyed, including rubbishremoval, alternative housingand rebuilding costs. Ask abuilder or valuer to give you a realistic estimate.

Under-insurance can hurt inanother way. Suppose you


29Your Money

insure your home contents for$10,000, but they’re reallyworth $20,000. Your insurermay be allowed under yourcontract to pay only part of anyloss or damage because youhave insured your property foronly part of what it’s worth.(This does not apply to homebuildings and home contentspolicies so long as you haveinsured for no less than 80%,for example $16,000 insuranceon $20,000 worth of contents.)

How do you get the bestcover? Shop around and get a fewquotes. To give you a quote, the insurer will ask you variousquestions.

Answer all questions fully andhonestly. You must tell them allthe facts that could be relevant,otherwise the insurer may be

28 Your Money

entitled to refuse or reducepayment on a claim.

You may save on insurancepremiums by agreeing to payan ‘excess’.

Compare the actual coveroffered in each quote. Gothrough what the policy coversand what it excludes with afine-tooth comb. Many people

find out only too late thatsomething was not covered.Insurance covers only what’sdefined in the policy andnothing else. A cheap policythat doesn’t cover what you

Your superannuation can be asafe, low-cost and tax-effectiveway of saving for retirement ifyou make the most of it.

Super’s for retirement,not beforeTo get your superannuation,anyone born after June 1964must be over age 60 (reducingto age 55 if born before

July 1960). At present you mustbe fully retired, although thiswill change.

Only in cases of severe financialhardship or compassionategrounds can you get any moneyearlier. Otherwise, early accessto your super is illegal.

Getting the most from your super

EXAMPLE: If youcan afford to pay for the first $500 ofdamage to your homeor contents, you mayget a reduced premium.Packaging severalinsurance policies withone insurer may alsosave money.

need could be worse than amore expensive policy withunnecessary features. If youhave special needs, seek expertadvice before you take outinsurance cover.


31Your Money

Will your employer’scontributions be enough? Possibly only if you join a fundin your early twenties, take nomore than a year or two out ofthe workforce and work untilyou retire at 65.

30 Your Money

Should you contributemore? Contributing a bit more to yoursuperannuation will make a realdifference to your retirementsavings.

If you contribute extra from yourafter-tax income, you don’t haveto pay contributions tax (or anysurcharge) on those extracontributions, and they getmore favourable tax treatmentwhen you retire. Also, you mayreceive a co-contribution fromthe government.

For example (see tableopposite), Nat has $20,000 insuper at age 35 and a grosssalary of around $23,000, so iseligible for the co-contribution.

Nat’s thinking aboutcontributing an extra $1,000after-tax, and here’s thedifference this could make.

* Using the ‘FIDO superannuation calculator’ on ASIC’s consumer website, and assumingNat is in a typical ‘industry fund’. See Your guide to the FIDO super calculator for ourassumptions and reasons.

Superannuationcontribution

After 10 years

After 20 years

After 30 years, at age 65

Employer’s 9%contributions only

$51,000 $96,000 $164,000

Employer 9% plus anextra $1,000 after-taxcontributions, with$1,000 co-contribution

$79,000 $161,000 $281,000

Nat’s superannuation account balance in today’s dollars*

For higher income earners, if your employer allows you to contributeextra from your pre-tax income, you can alsobenefit. (If you areeligible to receivea government co-contribution, you

may better off making after-tax contributions.Presently this applies

if you earn less than $40,000 each

year, but may soonincrease to $58,000each year.)

HINT: In reality,many people may have longer breaksfrom the workforce,and so employercontributions bythemselves may notgive you a comfortableretirement.


In our example above, Sam’scolleague Alex, aged 40, earns a gross salary of $70,000 andhas $50,000 in super now.

Alex’s thinking aboutcontributing an extra 5% inpre-tax salary, and here’s thedifference this could make.

Extra money you contribute muststay in your superannuationuntil you retire, so only

33Your Money

contribute extra money that you can set aside untilthen. Otherwise, considerinvesting some money outsidesuperannuation.

Why do fees matter? Every dollar paid in fees,especially in ‘ongoing’ fees,reduces the final payment you get.

32 Your Money

* Using ‘FIDO super calculator’. See Your guide to the FIDO super calculator for ourassumptions and reasons.

Superannuationcontribution

After 10 years

After 20 years

After 25 years, at age 65

Employer’s 9%contributions only

$139,000 $272,000 $361,000

Employer 9% plus anextra 5% pre-tax salarycontributions

$176,000 $363,000 $488,000

Alex’s superannuation account balance in today’s dollars*

* Using ‘FIDO superannuation calculator’, and assuming Alex is in a typical ‘industryfund’. See Your guide to the FIDO super calculator for our assumptions and reasons.

If you can, choose the lowestcost fund that meets yourneeds. In a fund with higherfees, you need a higher returnjust to come out even.

Suppose Sam’s about to changejobs and deciding whether tostay in the current fund orswitch to another one.

Sam’s choice of fundsAfter

10 yearsAfter

20 years After 30 years,

at age 65

Sam’s current fund(0.55% of balance plus$52 fee each yearadjusted for inflation)

$94,000 $181,000 $310,000

Sam’s alternative fund(2% of balance, no $52charged)

$86,000 $152,000 $239,000

Effect of fees $8,000 $29,000 $71,000

Sam’s superannuation account balance in today’s dollars*

In our example above, Sam’scurrent fund charges around0.55% each year in ongoingfees plus another $52 each year. Another fund charges 2% each year and offers about80 different investment optionsand Sam can switch betweenoptions daily.


35Your Money

Sam’s got $35,000 in super now.Let’s assume both funds earnthe same return before fees andtaxes, so you can just comparethe effect of the different fees.

Especially over a long time, just1.3% extra in fees can make abig difference. So Sam has toconsider carefully if the extrafeatures are worth the cost.

34 Your Money

Most industry and corporatesuperannuation funds will cost you less than retail funds,although retail funds may offer services, choices or otherfeatures you may want. Higherfees do not guarantee higherreturns.

Which investmentstrategy? You may be able to choose how your superannuation isinvested.

Rate of return for 20 years,reinvesting all returns

Start with Finish up with

4% per year $10,000 $22,000

6% per year $10,000 $32,000

Consider your personalcircumstances. If you are closeto retiring age, and plan todraw on your superannuationmoney as soon as you retire,you might choose a low-risk,low-return fund. If you havemuch of your working lifeahead of you, or you mightretire without drawing on allyour superannuation, you mayaccept a greater risk to increasethe chances of growth.

Historically it has provedextremely difficult to beat risesin the cost of living withoutinvesting in assets like sharesand property.

That means accepting the risk of losses in bad years.Professional advisers wouldexpect most people, even thosewho have retired, to invest insome riskier assets, as well as in cash and fixed interest.

Even small differences in returnsover a long time add up to a lotof money, see our example inthe table above.

In this case, compounding anextra 2% over 20 years earnedanother $10,000.

More information? Get a freecopy of ASIC’s brochure Superdecisions.

TIP: Before youmake a choice, readabout the risks andreturns for eachinvestment strategyyou are offered.


37Your Money

How much will you needeach year? Look at your current expensesand work out how they wouldchange if you were retired.

For example, if your mortgagewill be paid off by the time youretire, you can cancel out thisamount. If your children will beindependent, you may need lessfor living expenses.

The table opposite shows ourexample of expenses for afamily with two children and a mortgage, who want a retirement income of $34,000 a year.

36 Your Money

Retiring: how much money will you need? Expense

Current yearlyexpenses

Retirement yearlyexpenses

Mortgage $16,000 0

General living $33,000 $30,000

Insurance $7,000 $4,000

Education expenses $10,000 0

Total $66,000 $34,000

Expenses for a family with two children and a mortgage,who want a retirement income of $34,000 a year

Allow for any continuing ornew expenses in retirement.You may need to save more if you:

● plan to retire before 65

● pay rent for your home

● still have debts to pay off

● cannot do any part-timepaid work once you retire(for instance, because of ill-health)

● have extra expenses, such asspecial health care needs

● want to travel

● will have to pay for a car,computer or mobile phonethat your employer pays for now.



* Assuming current market rates for buying a retirement income (an allocated pension),with your retirement savings earning 6% after costs.

If you want an annualincome of $34,000 and you are retiring now at

Multiply income by*

Estimated savingsneeded

Age 55 19 $646,000

Age 60 17 $578,000

Age 65 14 $476,000

What about the agepension? Many people get some agepension once they reach 65, if they can satisfy means andassets tests.

The maximum age pensiontoday is about $11,500 a year

age 55 by 19; at age 60, by 17;and at age 65, by 14.

The table above shows ourexample of the savings neededto get a retirement of $34,000per year, until age 85.

How much will you needto save? The earlier you retire, thelonger you will have to live onyour savings – you might haveto support yourself for morethan 30 years.

As a rough guide, multiply theannual income you want at

Savings needed to get a retirement of $34,000 per year, until age 85

TIP: Do your ownretirement checklist.

Superannuation, taxand social securitybenefit rules arecomplex, and willaffect you.

Do your homeworkand get professionaladvice.

for singles and $19,000 a yearfor a couple.

That’s not a lot to live on, sothe more you can rely on yourown retirement savings, thebetter off you’ll be.



Your retirement checklist How to find the answers

How much will it cost tomaintain your current lifestylein retirement?

● Prepare a retirement budget

● Include regular living expenses as well as one-off costs, such as a new car, home alterations,and travel

● Plan to clear all debt before or as soon you retire

What retirement benefits and choices does yoursuperannuation fund offer?

Ask your fund administrator

Will you be eligible forgovernment benefits?

Discuss with a Centrelink FinancialInformation Service officer, even if you do not expect to claim apension

Your retirement checklist How to find the answers

Tax concessions? Get Australian Taxation Officepublications and talk to your tax adviser

What financial products andservices would suit you inretirement?

● Your superannuationadministrator may haveinformation

● Your tax adviser might be able to help

● Centrelink’s FinancialInformation Service can also tell you about products andservices in the market, thoughthey can’t recommend products

● Consider seeing a licensedfinancial adviser if you havemore than $100,000 insuperannuation and personalinvestments

More information? GetInvesting money: your choicesfrom Centrelink. For steps to

Our retirement checklist belowwill give you some suggestionsfor working out what you will

need in retirement and how toorganise it.

choosing the right financialadviser, get ASIC’s brochureDon’t kiss your money goodbye.


42 Your Money 43Your Money

* Based on earning 6% each year after fees and taxes, and reinvesting their investmentearnings.

Investors What they planWhat they hope to

achieve in 10 years*

Nat and Sam$500 at the start and $150 each month. (Totalinvestment $18,350.)

About $25,500

Greg$10,000 at the start andnothing more

About $17,000

You can invest your personalsavings in many ways, and youmay not want to put all yourspare cash into superannuation.Here are some tips about alarge and complex subject.

It can also be worth gettinginitial advice even if you intendto start small. Centrelink’sFinancial Information Servicecan give you information aboutinvestments face-to-face,though they can’t recommendparticular financial products.

Starting your personal investing

When do you start? Start now, no matter how small the amount you have. The longer your investment has to grow, the better theresults. Even if you can’t affordto invest a large amount, youmay be able to start a small butregular investing program.

Above are two examplesshowing how Nat and Sam

hope to invest, compared with their friend Greg who can afford to invest a lump sum now.

What do you invest in? That depends on:

● how long you can invest themoney for, and

● how comfortable you feelabout different investments.

TIP: Before youinvest, read more onASIC’s consumerwebsite FIDO, inpersonal financecolumns and investmentmagazines, and inbooks by licensedAustralian advisers.



How can you invest? You can make your owninvestments directly, whichgives you control of all thedecisions.

That means working out yourown investment strategy, andkeeping up to date with yourinvestments and what’shappening in the marketthrough company annualreports and the financial media.

You can also invest indirectlythrough managed funds. Yourmoney is pooled with moneyfrom other investors, and aprofessional manager makesthe decisions for all theinvestors.

You don’t have to worry aboutday-to-day investment decisions,but you do pay fees for themanager’s services. Do still readyour fund’s annual report.

Either way, you might still seekadvice from a licensed advisorybusiness.

How can you managerisk? All investment involves somerisk, but you can reduce it by:

● investing in small amountsregularly to reduce the riskof investing everything justbefore the market drops

● spreading your money across different kinds ofinvestment choices (such as

How long can you spare the money?

Common investment choices

6 months to 2 yearsAim to earn interest with little risk,for example in term deposits and cash management accounts

2 to 5 yearsAim to earn mainly interest, possibly adding some growth assets, such as property and shares

5 years or more Aim for capital growth as well asincome by including more shares and property

Investment time frames and appropriate investment choices

Investments are usually dividedinto two main types: incomeand growth.

Income investments like cashmanagement trusts andgovernment bonds give you an income from earninginterest, but usually little or no capital growth – your

original investment doesn’tincrease in value.

Growth investments like shares or property may give you capital growth over the long term, so that, as well as earning income, youroriginal investment mayincrease in value.

TIP: You can reducerisk by investing smallamounts regularly and spreading yourinvestments.


growth assets such as propertyand shares. Income investmentsmay keep pace or do veryslightly better than inflation,say about 4–6% a year,depending on the risk involved.

If you are offered returns even1–2% above current marketrates, you are likely to be takinga much higher risk in investing.Anything above 15% would bevery high risk indeed, possiblyeven a scam.

47Your Money

What if the market falls? The market value of investmentsrises and falls. Falls occurregularly and may present good opportunities for bargainbuying.

Markets generally recover, but they can take time. It’simportant to set your goals and your time frames and stickwith them, rather than worryabout every change in themarket.

46 Your Money

shares, property and cash) toreduce the risk of being inthe wrong market at thewrong time

● spreading your moneyamong shares in differentcompanies, differentproperties and differentindustries to reduce the risk of losing heavily on asingle investment. (Somemanaged funds can do thismore easily than trying todo it yourself.)

● dividing your moneybetween two or three fundmanagers to reduce the riskof picking just one that’sabout to perform poorly.

How can you cut costs? Fees, especially ongoing feescharged as a percentage of yourinvestment, can make a bigdifference to what you earn.

Always make sure you knowwhat fees are charged beforeyou make an investment. (Someinvestment arrangements, suchas ‘master trusts’ and ‘wrapaccounts’, may offer extrafeatures and services, but makesure you will actually use them,otherwise you could pay extrafees for nothing.)

See our comments on fees inthe superannuation section.

What returns are realistic? For a general idea, compare any investment with what’shappening in the overallmarket.

Returns vary considerably from year to year, so look at performance over as long a period as possible. Over 5–7 years, it may be realistic to expect returns that averageabout 7% to 9% a year from

REMEMBER: If itsounds too good to be true, it’s probably a lie.


49Your Money

See how the organisations onthe next page can help yougather information and makethe right decision.

We have listed websites becausethey are a quick and easy wayto get information.

If you don’t have an internet connection at home, you can usually get access at your local library.

Otherwise, you can phone forinformation.

48 Your Money

To find out more

Should you borrow toinvest? Once you get your budget,insurance and superannuationsavings in place, you mightconsider borrowing to invest.

Borrowing to invest increasesthe amount of money you haveto invest. That means eitherincreasing your gains or yourlosses.

It is a more risky strategy, so weigh up if you’ll feelcomfortable and consider your own financial strengthsand weaknesses:

● Will you be able to managethe debt even if yourinvestments perform poorly?

● Do you have a reliableincome with a safety net ofcash and insurance?

● Is your savings history andfinancial position strong?

● Could you handle increasedinterest rates or marketdownturns?

● Have you invested in thissort of asset before andunderstand its risks?

How do you avoid bigmistakes? Do what’s right for you, anddon’t let others pressure youinto something that makes youfeel uneasy.

Steer clear of ‘all or nothing’gambles, ‘get rich quick’schemes and high-pricedfinancial gurus with the ‘secretsof unbelievable wealth’.

Most are a waste of money oroutright frauds.

More information? Use FIDO’smanaged fund fee calculator,get a free copy of ASIC’s Don’tkiss your money goodbye.

Read about different productson various fund managers’websites.



Australian Securities andInvestments Commission(ASIC)

Website: fido.asic.gov.auPhone: 1300 300 630

● A consumer website, FIDO,with financial tips andsafety checks on allfinancial products andservices.

● Free searches on ASIClicence holders andbannings.

● Free brochures onsuperannuation (Superdecisions), on financial planning (Don’t kiss your money goodbye) and You can complain.

● Enforces laws against fraudand misconduct.

Australian Taxation Office(ATO)

Website: ato.gov.auPhone: 13 10 20

● Tax information

● Information aboutSuperannuation Guaranteecontributions, lostsuperannuation accounts and self-managedsuperannuation funds.

National Information Centreon Retirement Investments(NICRI)

Website: nicri.org.auPhone: 1800 020 110 (toll free)

● Independent, freeinformation about all kinds of investments used by many retired people.

Centrelink

Phone: 13 63 57

● Financial seminars, for people of any ageabout personal finance,retirement planning, and for people facingredundancy.

● Free face-to-face financialinterviews if you’re facingredundancy.

Website: centrelink.gov.auPhone: 13 10 21

● Commonwealth benefitsand what rules apply.

Australian ConsumersAssociation (ACA)

Website: choice.com.auPhone: (02) 9579 3399

● Free and some pay-to-viewwebsite information onmoney issues affectingconsumers.

● Choice magazine bysubscription, and books for sale.

Financial counsellingservices

● Free help to manage a short-term crisis and plan to prevent a future one.

● See ASIC’s FIDO website for an up to date list, or call ASIC’s Infoline on 1300 300 630.


Your Money

From the Australian Securities and Investments Commission

Can you get morefrom your money?

Make smarterdecisions?

Avoid expensive mistakes?

For consumers and investors

www.fido.asic.gov.au or phone ASIC’s Infoline on 1300 300 630

FIDO

Copyright September 2004 Australian Securities and Investments Commissionand graphics used under licence. All rights reserved.


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