Residential Aged Care – A Daunting Prospect?
By Demelza Lister
It can be a daunting prospect moving a loved one into a residential aged care facility and it’s one that we regularly share with clients as that time looms on the horizon.
There is usually a wild cycle of emotions to cope with:
- There is the feeling of guilt – Are they ready?
- Am I being selfish? Should I, could I, keep caring for him/her at home?
- Which follows to the logistics of where should they go? When?
- What will we do with the house, the furniture, the dog?
In addition to these emotional and logistical decisions, you also have to consider the financial aspects. The costs to enter an aged care facility can be very high and a number of factors must be considered including:
- The costs of firstly entering the facility
- The ongoing fees
- The effect on their social security benefits
- Taxation implications that may arise from selling assets to pay for entering a facility
- Choosing appropriate investments that are effective for tax and social security purposes
- Planning how these changes may affect their Estate Plan; and
- Simply understanding the payment options available to them and the implications of each.
The financial aspects of aged care are complex and require a solid understanding of how the rules impact on social security and the tax system. Most clients meet with us after the potential resident has had their health situation assessed by an aged care assessment team (ACAT) and we then help them understand the financial rules.
The cost components associated with new people entering and residing in an aged care facility can be summarised as follows:
1. Accommodation Payment
The accommodation payment can be a lump sum payment known as a Refundable Accommodation Deposit (RAD) or Refundable Accommodation Charge (RAC), depending on the value of your assets. Generally, the deposit is limited to a maximum of $550,000 and is fully refundable. Alternatively, if the resident can’t pay the lump sum, then they can pay a daily amount known as a Daily Accommodation Payment (DAP) or Daily Accommodation Charge (DAC). This can be an expensive option for some.
2. Basic Daily Fee
This fee is generally paid by all residents and covers the daily living costs including nursing, personal care and meals. The fee is calculated as 85% of the max. single age pension payment. The current rate to 19 September, 2018, is $50.16 per day. The fee is usually paid fortnightly or monthly in advance and is payable even if you are temporarily away from the facility.
3. Means Tested Fee
The Means Tested Fee is assessed on a combined income and assets test. The income test is assessed as 50% of your assessable income over an income free area of $26,764.40 pa (for singles) and $26,244.40 pa (per member of a couple). The assets test is calculated as the sum of 17.5% of assessable assets between $48,500 and $165,271.20; 1.0% of assessable assets between $165,271.20 and $398,813.60 and 2% of assessable assets over $398,813.60. This fee has a lifetime cap of $64,715.36 and once a resident has paid this amount over the years, they will no longer pay a means tested fee for any day, regardless of whether they change aged care facilities.
As mentioned, the financial rules are complex and most people only encounter them once or twice in a lifetime. We are performing these calculations on a regular basis and have skill and experience in completing the paperwork required by CentreLink to determine the means tested fee.
Should you require advice in this area please do not hesitate to contact Potts & Schnelle at 25 Queen Street, Corowa and 75 Main Street, Rutherglen, Ph 02 6033 2233.
Talking Money – Super choices for large tax refunds
Many of our clients are currently receiving large tax refunds when lodging their 2018 income tax returns because they are claiming personal superannuation contributions. If you earn most of your income from employment, you may want to make personal deductible superannuation contributions instead of, or in addition to, salary sacrifice.
Personal Super Contributions are now tax deductible
Since 1 July 2017, employees have been able to choose to claim personal super contributions as a tax deduction in their own tax return.
Like salary sacrifice, personal deductible contributions are generally taxed at 15% on their way into the super fund, which is usually better than paying your marginal income tax rate of up to 47%.
Some key differences are that, with personal deductible contributions:
- you don’t have to enter into an agreement with your employer
- you can contribute using available money from a range of sources, such as your after-tax pay, your savings, a windfall, or the sale of assets
- you can contribute any time in the financial year, either in regular instalments, as a lump sum or both, and
- you can easily increase or decrease the amount you contribute in line with your income and expenses.
Claiming the tax deduction
To claim a personal super contribution as a tax deduction, there are some very important steps you’ll need to follow. First, you’ll need to submit a valid ‘Notice of Intent’ form with your super fund and receive an acknowledgement back from the fund. You also need to make sure this happens before you complete your tax return, start a pension, or withdraw or rollover the money. Otherwise you may not be eligible to claim a deduction for the full amount you want. Other conditions may also apply.
Which option is best for you?
Personal deductible contributions could be worth considering if:
- your employer doesn’t offer salary sacrifice
- salary sacrifice is available but it reduces other benefits such as SG contributions, holiday pay or leave loading, or
- you want to make a concessional contribution using a bonus or another benefit or entitlement already accrued and you haven’t got the right salary sacrifice arrangement in place.
- you want more control over how much you contribute and when the contributions are made.
Alternatively, Salary sacrifice might be a better option if you’re not the most disciplined saver. Importantly, with salary sacrifice, the contributions go straight into super from your pre-tax pay before you get a chance to spend the money.
You could even consider using both these options, combining the discipline of salary sacrifice with the flexibility of personal deductible contributions.
For example, you may want to arrange to sacrifice some of your pre-tax salary each pay period and make a personal deductible contribution at the end of the financial year when your cashflow and tax position is clearer.
You could also time the personal deductible contribution in the lead up to 30 June to make the most of the $25,000 concessional contribution cap.
Could you benefit from making personal deductible contributions?
If you’re thinking about investing more in super, we can help you decide whether making personal deductible contributions is right for you. We can also look at what else you could be doing to help you achieve the retirement lifestyle you want, including options outside the superannuation environment.
To discuss your personal situation, call us on 02 6033 2233, mention this article and ask for an appointment with one of our financial advisers for a half hour free analysis.
Our Greatest Challenges in the life of a small business owner/manager
With the financial year end looming, it is an opportune time to reflect on our businesses. The life of a small business owner/manager is very challenging. It is very easy to keep doing things the same way as before. However, for long term survival it is important to sit back from time to time and reassess what we have achieved and where we are headed.
We find it worthwhile to think about what will be our greatest challenges over the next 12-24 months. Here are a few ideas/questions to consider:
Sales are often the key driver of your business. Some of the challenges for small businesses are:
- How do we grow our sales?
- What should we be aiming to sell?
- How do we improve the gross profit on each sale?
- Where are our customers going to come from?
- How can we convince customers to buy from us instead of our competitors?
- How much do we have to sell to make a profit?
- How much stock should we hold and what type?
- What is our optimum price where we make the sale but also make an adequate profit?
- What is our perceived selling difference?
- Is our market disappearing?
Whether your business is just you or whether it employs many, the people in your business raise their own set of challenges:
- Have we got the right number of staff?
- Have we got the appropriate skills to serve our customers and run the business?
- How can we attract and retain key people and move on the ones that we don’t want?
- Are our wages competitive?
- Are we paying above the market? Is our wages bill too high?
- How will we keep everyone motivated?
- Are there any Work Health & Safety risks that aren’t being managed?
- How strong is our cashflow, can we pay our bills on time now and in the future?
- Do we need to review our banking arrangements, are we getting the best deal?
- Are our loans set up the best way for our cashflow and profitability?
- How can we collect our accounts receivables quicker?
- Can we negotiate better deals with our suppliers?
- Are our insurances up-to-date and do we have appropriate cover?
- Do we make it easy for customers to pay us?
- Are we, as owners, earning an adequate profit to justify the amount of money we have invested in the business?
- Are we building wealth?
- Do we have the right equipment?
- When will we need to update equipment and what will it cost?
- Is our location still right or should we be moving to another site?
- Are our processes efficient or could we be doing things better?
- What changes are on the horizon? Are we set up to take advantage of new opportunities?
Obviously, it’s difficult to address all of these issues and still put out the daily spot fires. Nevertheless, by reflecting on these things, priorities will emerge and changes will happen gradually, helping to secure the longevity of your business.
At Potts & Schnelle we are passionate about small business. If you would like to talk to us about any of these issues, please give us a call – 02 6033 2233.
Talking Tax – Top10 Tax Saving Ideas
With 30 June just around the corner, we’ve come up with these last minute tax saving ideas for individuals.
1. Keep your receipts.
Keeping good records is the best way to make sure you claim every expense you are entitled to. Make sure you’re organised and it’s easy. Spend 5 to 10 minutes per week organising your paperwork and storing the information relevant to your tax return in a safe place.
2. Make tax-deductible donations.
Donations to tax-deductible charities are an easy way to reduce your taxable income. Keep records of the money that you donate and include that on your tax return. This will reduce your income and in turn reduce the tax you pay. Win Win!!
3. Buy some work related uniforms, protected clothing and boots.
If protective clothing is required for your work, or if you have an ATO approved or compulsory uniform, then the cost of purchasing these items can be tax deductible. Once you have the clothes, you can claim alterations, embroidery, laundry and dry cleaning too. Keep your receipts!
4. Buy work related tools
If you are a tradie, then any tools you buy for work purposes can be claimed (outright or depreciated). If you have an office job, then a laptop or IPad might be deductible if you use it for work purposes. Don’t forget ink cartridges, paper, sun protection items, manuals and stationery.
5. Pay up your union dues and professional subscriptions.
If you owe money for your union dues or for subscriptions to any work-related organisation that you are a member of, pay up the amount owing before 30 June and claim that on your tax return. Payments up to 12 months in advance are usually deductible in the year of payment.
6. Make tax-deductible contributions to your superannuation fund.
If you are under the age of 65, you are allowed to make concessional contributions to your superannuation fund of up to $25,000 pa. This amount includes any contributions that your employer may have made on your behalf, such as the 9.5% SGC. If you have available cash, you can top up your super to the $25,000 concessional cap and claim the amount in your personal tax return. This will reduce your taxable income and reduce your tax payable. Note that any contributions made, must be received by the superannuation fund’s bank account prior to 30 June to make a claim.
7. Review the work usage of your mobile phone.
If you use your mobile phone for work purposes, review the percentage of use for work purposes and claim a percentage of your total telephone costs as a tax deduction. The taxation office would expect you to fully examine a month’s telephone bill to determine the work use percentage. Keep this amongst your taxation records.
8. Home Office Expenses
Don’t forget that if you do any work related things at home you can claim for part of the cost of a home office. So, that online training course, filling in time sheets, issuing invoices or writing and proof reading a report, all add up. Work out the hours spent and talk to your tax agent about it. Your internet cost may be deductible too.
9. Travel Costs
If you have to travel for work purposes, then you can claim for unreimbursed amounts of your motor vehicle costs, accommodation, e-tags, parking, trains, trams, buses and some meal costs. Estimate your kms travelled and keep records of all the rest.
10. Realise capital losses.
If you have made a capital gains throughout the year, consider selling other assets and/or investments which will result in a capital loss. This capital loss can be offset against the capital gain to reduce the tax payable on the gain.
Of course, these are all last minute tactics and the information is general in nature. The best way to minimise your tax is to take a longer term view and structure some planning to utilise tax savings to build long term wealth. If you would like to discuss your personal circumstances with a taxation professional, call Potts & Schnelle now (02 6033 2233), mention this article, and receive a free initial appointment.
5 Facts You Need To Know When Building Your Retirement Nest Egg
Given the demands of everyday life, planning for your retirement and more specifically, building a retirement nest egg, may be a relatively low priority. You may think that you still have plenty of time, but before you put off planning for your retirement any longer, here are some key facts you should consider.
Your retirement could last 30 years or more
A male, currently aged 65, has a future life expectancy of 19 years and for females, currently aged 65, it’s 22 years. But these are just the averages, (so half of us should live longer) and they are increasing steadily. As these trends continue, your retirement could stretch to three decades, or maybe even longer.
You shouldn’t rely on the age pension
The full single rate age pension only provides around 25% of average weekly male earnings. That will only give you a very basic existence. What’s more, qualifying for the age pension may become more difficult in the future. Given that our population is ageing, statistically there are more people who are of pension age. With limited government resources, one would imagine that the rules will get tougher and they already have.
You shouldn’t rely on an inheritance
Your parents may end up spending all of their savings and may even need to downsize their home to help make ends meet. We are finding this more and more common as aged care costs continue to climb and as people live longer their wealth is eroding fast. So, if you’re relying on an inheritance to fund your retirement, you could be disappointed.
You might not have enough super either
With some of your money going into super through compulsory employer contributions, you’re off to a good start. But if you are assuming that those employer compulsory contributions will mean you will have enough super to get you through your retirement, then you could be in for a nasty surprise. Research conducted by Rice Warner Actuaries revealed that Australia has a shortfall in super of close to $1 trillion.This means that many Australians will not have enough super to fund their retirement.
Start planning now
Thankfully, with a bit of preparation, it’s possible to plan for a long and comfortable retirement. Strategies like salary sacrificing into super, making lump sum contributions, spouse contributions, or using a transition to retirement strategy are all smart strategies to consider, to help boost your super. Some of them may have some immediate tax benefits too. Once you reach preservation age (currently 57yo) it’s also possible to use your super to start a pension that pays you a regular income. Some pensions even guarantee to pay you an income for the rest of your life, negating the risk of outliving your savings.
Talk to a retirement planning expert
If you want to start building your nest egg, or if you want to see if you are on track to having enough for retirement, you should speak to a financial adviser. They can help you set realistic goals and put a plan in place to achieve them.
Call Potts & Schnelle now Ph 02 60332233 and make an appointment to discuss your personal situation with one of our financial planners.
Picking a retirement date is influenced by age, savings and holiday plans, but what many people don’t realise, is that the taxation outcome can vary greatly from case to case.
Age Pension Entitlements
For those born before 1 January,1954, the qualifying age for the Centrelink Age Pension is currently 65½ yo, and is increasing so that for those born after 1 January 1957, the qualifying age is 67 yo. For many people, this is the date that they choose to retire because a full or part age pension will help to supplement their living costs, therefore reducing and/or removing their need to work for an income.
However, at this age, taxpayers also become entitled to a “senior age person tax offset” which lifts their effective tax-free threshold to approximately $29,000 pa. This additional tax free amount can work very nicely hand-in-hand with the timing strategies mentioned in the coming paragraphs to help reduce tax payable.
When you retire from the workforce you will most likely be entitled to receive accumulated unused long service leave and/or annual leave. The taxation payable on these amounts will differ depending on what time of year you retire. Essentially, since 17 August 1993, there are no concessional tax rates applicable to these amounts, they are taxed at your marginal tax rate. Given that our marginal tax rates increase as our taxable income increases, it makes sense to receive these lump sums in a financial year when you have less, rather than more, other taxable income.
As an example, if you retire on 30 June, given that you will most likely have already received 12 months’ work income, your marginal tax rate will be considerably higher than if you receive the lump sum on 1 July and have little to no other income for the upcoming year ahead. Consequently, the financial advantages of working a few extra days, weeks, or months, to enable the accrued lump sum to be received in a new financial year can be substantial. For example, 10 weeks’ worth of termination payments at $1,500pw received prior to 30 June, could incur tax of approximately $5,000 compared to $nil if received on/or after 1 July.
Week by Week
However, another consideration with regard to termination payments, is to consider having the entitlements paid out to you week by week, rather than as a lump sum. When receiving the entitlements week by week, you are at the same time accumulating additional entitlements, resulting in a larger dollar payout. For example if you have six months annual and long service leave owing to you and you arrange to have that paid to you week by week before choosing to retire/terminate, then during that six months period you will accumulate an additional 2½ weeks annual leave/long service leave worth say $3-4,000. This strategy might be able to be combined with the taxation strategy mentioned in the previous paragraph to push your ultimate retirement date and the receipt of some of the termination payments into a new financial year.
If, on retirement, you plan to utilise superannuation to pay for your living costs, then you need to consider the taxation applicable to the future withdrawals from your superannuation fund. If you are aged 60yo+, then in most instances any withdrawals that you make from superannuation either as a lump sum or as a pension will be tax-free. However, if you are <60yo, there are a variety of taxation outcomes ranging from tax-free, through to a marginal tax rate which could be as great as 49%. Withdrawing as a lump sum when you are <60yo is generally a better tax outcome for small amounts than taking a pension. However, there are rules that limit the taxation concessions on the amounts withdrawn.
Superannuation Fund Taxation
Taxation paid by your superannuation fund on your share of the earnings differs depending on whether your superannuation is in accumulation phase or pension phase. On the assumption that you have permanently retired from the workforce, if you’re superannuation balance has been converted to a pension, then your share of the superannuation fund’s income will be tax-free. However, if you are still in accumulation phase, drawing lump sums from time to time, then your share of the superannuation fund’s income will be taxed at 15%. This can be quite a considerable amount on larger balances. For instance an accumulation fund with a balance of $600,000, earning 10% pa will pay tax of $9,000 pa, whereas the same amount in a pension fund will pay $nil. That’s a business class airfare to Europe each year!
The timing of your retirement can significantly affect the taxation payable on your personal income and on the tax paid on your superannuation savings. We highly recommend that you consult with your financial planner or taxation adviser before locking in your retirement date.
If you would like to talk to the specialists at Potts & Schnelle about this, please mention this article for a FREE initial consultation. Phone (02) 6033 2233 for an appointment.
How Much is Too Much? – Working out the Ideal Price
We are entering an era where businesses such as Amazon and other large, online retailers are providing serious price competition to existing businesses. To remain viable, small businesses need to focus on the value they, as a small business, can add to the sale, and then profit from that additional value.
Most of us, as consumers, have a fairly good idea of what we are prepared to pay for a product/service. But, as a business operator, the question is, how can we find out what that price is? And why is that price different from customer to customer?
So, how do we determine what that ideal price is and if our customers are prepared to pay more than the current price?
Factors that affect this include:
1. Determine what you are actually selling. Is it just a basic product/service, or is there more to it than that? Does your product/service come with other benefits? Are there some intangible benefits or feelings that massage the ego of the customer or improves their overall life? What are they?
An example of this is that we know people will pay more for a vehicle from Mercedes, or BMW, compared to a similarly featured vehicle from Hyundai, or Kia. Sometimes the benefits can’t be seen, but as a business, you have the ability to price in a difference based on the perception of the customer.
2. Who is your ideal customer and where does your product/service sit in their personal value chain? Are they prepared to sacrifice other products/services in order to buy yours? If so, to what extent?
An example would be, if you sell mattresses, then a customer who is buying for themselves will be more focused on the comfort of the mattress vs the price. Whereas, the same person buying a bed to furnish an investment property would be more focused on the price, rather than the quality. You should be able to extract a higher price from the first scenario.
Most small businesses initially determine their prices by making comparisons to products and services sold by other similar businesses, with scant regard to their costs or desired profit. This is a good starting point but nothing else.
To maintain market share, or to at least maintain profitability, in this changing world, it is important to review what you are selling and what value-adds are attached to your product/service. By determining what your value-adds are, you can then highlight them in your sales process. You need to justify your customer’s purchase decision to buy from you, rather than an online dealer. These value-add items mean that you may also be able to justify a price that is higher than the online retailers, which ensures that your business remains viable and profitable.
Often the value-add is as simple as the face-to-face relationship that you can establish with the customer, reinforcing that what they are buying is exactly what they need/want. For example, a clever shop assistant in a clothing outlet can highlight that an outfit being sold to a customer will be perfect for the upcoming occasion and help them visualise the wonderful experience that the customer will have at the occasion because they are wearing this particular, unique, personalised outfit. Whereas an online website can never achieve that level of personal interaction, focusing rather on colour, size, delivery time and price. That personal service is worth paying for!
Obviously, to run a profitable business, we need our sales revenue to be higher than our costs. For long term success, we need the sales revenue to be repeatable. Therefore, we need to have happy customers who will return to buy from us again and again and who will recommend us to other new customers.
As a business owner, the ideal price is the highest price you can charge a customer and still have the customer feel as though they’ve received value for money. This means that they will happily return because of the perceived value that they have received, but also means that you have maximised your revenue and therefore, hopefully your profit from the transaction as well.
At Potts and Schnelle, we are happy to talk to you about your business model and your marketing ideas. Call us for an appointment on Ph 02 60332233.
Insurance – How much is enough?
We had a case recently of a client who was in severe pain from her knee, and needed a replacement. The dilemma for her was that if she took off the 4 months required to recover from a knee operation, then how would they meet their home loan repayments and keep up with their other household costs? She was the primary earner in her family as her husband was suffering from a long running illness and only earning sporadic part time income. She did have 4 weeks of personal leave owing to her, but that wasn’t enough to get them by. They had little in savings, surviving with a growing family on essentially one income.
The good news was that she had taken out Income Protection Insurance many years ago and had maintained the cover even though it was getting quite expensive. The problem was that although she was in pain, she was still functional at work and so the surgery was effectively “elective”. Consequently, she was still capable of earning an income and it was questionable, whether the insurance company would cover her for “lost income”.
We queried the insurance company and they agreed that they would pay her under the policy, even though the operation was effectively elective. She had her operation, the insurance company paid up and she is now back at work pain free and the family finances are no worse off.
The moral of the story is that good quality insurance policies with good quality companies are worth the few extra dollars.
With the New Year upon us, we are recommending that you review your insurances to make sure they are adequate and suitable to your personal needs. Researchers commonly find that most Australians are “chronically under-insured”. That means that they don’t have enough cover and consequently, in the event of their death or illness, they will not only leave an emotional hole in the heart of their family, they will also leave a financial hole in their future.
Most of us have no idea how much insurance is enough so we let someone else make the decision for us. The most common amounts covered are, firstly, to pay out loans (because the bank said it was a requirement) and secondly, the default amount provided by our superannuation funds (because we didn’t make a choice).
There is nothing wrong with that, as something is better than nothing, but really, what is the right amount and will the insurance company pay up when you lodge a claim?
The answer is, it all depends! Answers to the following questions will help you decide how much is right for you:
- How much debt do we have?
- How much savings/superannuation do we have?
- What other financial costs do we have?
- What can we afford?
When determining affordability, remember that generally, premiums get higher as you get older, so consider taking out a level premium option if you think you will need the cover for a long time. Level premiums start out more expensive, but work out cheaper over the long run. Consider splitting the policy with a level premium for long term needs and a stepped (cheaper) premium for short term needs.
Living Well with a Living Will
Christmas is traditionally a happy time to catch up with family and good friends, so talking about death and tragedy is a bit off-side, but if you don’t take the opportunity to discuss it now, time can quickly move on and the opportunity lost.
Here is a list of questions to table at Christmas Dinner, or at least over a Coffee and a piece of Christmas Cake. These are guaranteed to get the conversation flowing:
To your brother/sister
- Have you got an up to date Will in place?
- Who will look after your kids if you die?
If it is you who gets the kids …also ask
- Will there be enough money or should you top it up with Insurance?
To your adult children
Repeat questions 1 – 3 above except also ask
- How can we do that caravan trip around Australia in retirement if we also have your kids (that’s your grandkids) and you are underinsured?
If that stopped the conversation try:
- If you were on life support, what would you want to happen to you medically?
- Who would make those medical decisions for you if you are incapacitated?
- What about financially, who will have the power to pay the bills until you get better?
- Will there be enough money or should you top it up with insurance?
If that goes well, try the same questions 1-4 to
your brother/sister, parents, spouse, next door neighbour!
On a roll….. now go to group loitering around the esky and ask…
the brother-in-law who has his own business
- Have you got any key employees at your business?
- If you or the key employee weren’t able to work for six months, would that cripple your business financially?
- Did you know you can insure against that?
……. If you take our advice and use these questions over the Christmas functions, chances are you may not get invited next year! Nevertheless, we’re sure you agree that they are topics that deserve consideration and topics that should be openly discussed with caring family and friends.
In our financial planning business we help clients with these matters every day. Wills, Power of Attorney, Living Wills (Advanced Directives) and Personal Insurance are important discussion points on our review checklists. Our job is more than just tax and superannuation.
If you would like to meet with us and allow us to help you sort out your personal affairs, we have referral partners that we regularly work with to help you get “your ducks in a row”. Call us and make an appointment to turn over a new leaf in the new year and get these important issues addressed and have peace of mind.
Contact us NOW: 02 6033 2233
Finally, the team at Potts and Schnelle would like to wish you all a very happy and healthy 2018 and thank you for supporting our business over the past year.
Compounding to Success in 3 Easy Steps
The power of compounding never ceases to amaze me. Whether it’s a snowball rolling down a hill, a small seed growing into a large tree, or a chant at the MCG during a Richmond game, the way that a small effort to get something started can gain impetus and grow into something huge is fascinating.
From a financial point of view, compounding works the same way. A small and regular effort can grow exponentially if given enough time. The numbers are easy to explain and the message is that the earlier you start, the longer that compounding has a chance to make a difference and therefore the better the result.
Let’s look at an example of two school leavers, just finished Year 12, both 18yo. Let’s call them Jim and Jane.
Both Jim and Jane worked hard at Maths, so they know about compounding. They know that if they can invest some money and earn some interest and reinvest that interest back into the investment that it will grow quicker. That’s because after the first year, they then earn interest not only on the original investment, but also interest on the interest, then the next year interest on the interest on the interest etc.
Jim sets up a spreadsheet and he works out that if he can earn 8%pa interest on his investment and reinvest it, the investment will double in size in approximately 9 years. Jane works out that at 18yo they have approximately 50 years to go before they will likely retire from the workforce, so if they can double their money every 9 years, an investment made today will double 5.5 times. That means it will be 47 times bigger in 50 years’ time.
Both Jim and Jane start working soon after leaving school and find that after 6 months, they have each saved $10,000. Jim sees a really nice car he likes and spends his $10,000 buying it. Jane also buys a car, but finds an older car that belonged to her grandmother, and spends $2,000. She invests the remaining $8,000 into her superannuation fund which she estimates will earn 8%pa based on past performance. Over the next 50 years, Jim and Jane have similar investment habits. But, because Jane put that $8,000 into Superannuation at the start, when they retire it will have multiplied by 47 times, meaning she will have $376,000 more than Jim.
That’s quite a difference at the end, caused by the power of compounding. What’s really interesting is how the numbers change with a little tweaking. For instance, if the investment can earn 10%pa instead of 8%pa, the growth over 50 years is 117 times. That means that Jane’s extra $8,000 would be worth an extra $940,000 at retirement……. Crazy!
Now this is all just simple maths, but the reality is that it is easy to re-create in real life. It only requires three things.
Firstly, save some money in an investment vehicle like superannuation or a managed fund.
Secondly, choose an investment option that will generate a healthy return over the long term (don’t panic over short term fluctuations). Shares and property are the most likely investments that will give you a higher return. Look to diversify the investment by pooling with other investors to reduce the risk of permanent losses.
Thirdly, reinvest the earnings and give it time to grow. The longer the better. In the example above, the difference between Jane and Jim after 32 years was only $94,000. The next 9 years produced another $94,000 and the last 9 years another $186,000. It is the power at the end that counts. If you don’t start early enough, you never get there.
We are always keen to help young people establish a savings plan to help set them up for future financial security. It’s not the size of the pay packet that counts, it what you do with it. If you want some help to set a path to financial security, give us a call at Potts & Schnelle on 02 60332233 and come and see one of our financial planners.