A high income does not imply high wealth
Statistics shows that a high income does not mean high net worth
In our previous article, “Household income and wealth in Australia”, we examined the progress toward financial independence being made by the wealthiest 20% of Australian households, with wealth measured alternatively by household net worth and household gross income. We found that the net worth measure of wealth was a better indicator of current financial independence than was household gross income.
The official statistics [1] on which our analysis was based clearly reveal that a high income does not imply high net worth. In fact, they indicate that only about 34% of households that rank in the top 10% by gross household income also rank in the top 10% by household net worth.
You can be better off paying capital gains tax!
Surely, it’s better to defer paying tax
It is not unusual for clients to have sizeable exposures to individual shares that they have held for long periods of time. We generally would encourage them to sell these holdings and invest the proceeds into highly diversified investments to reduce the risk of their portfolios, without a loss of expected return.
However, we often experience considerable resistance to this advice if sale of the shares would result in the crystallisation of significant capital gains and the obligation to pay capital gains tax. Clients reasonably ask “What’s the point of taking an unnecessary action that brings forward the payment of tax?”
DIY Financial Planning – The real costs may not be evident
DIY Financial Planning appears to be a low cost alternative
There are a lot of smart people who make some rather dumb choices with respect to their finances. More often than not this is driven by short term thinking and the desire to save an immediate out of pocket expense. There is often a failure to lift the eyes and see the bigger picture.
An example that highlights this is the use of superannuation. We’ve talked previously about the significant benefits of making pre-tax contributions to super. However, in this article we look at the benefits of making post-tax contributions to super.
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Maximising Super Contributions – Beware
The super contribution rules changed from July 2007
If you’re planning on maximising your super contributions, it pays to be vigilant when managing and implementing your strategy. There can be a nasty sting in the tail if you’re not careful.
Prior to the introduction of “Simple Super” there was a limit on the amount of pre-tax contributions you could make to super. But after-tax contributions were unlimited.
The “Simple Super” changes not only put a limit on after-tax contributions. They also changed the nature of pre-tax contributions.
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How far to financial freedom?
What you live off when you’re not working …
In our introductory meetings with potential new clients, we want to obtain a preliminary view of their “Net Investment Wealth”. It quickly gives us an idea of how far along the road to financial freedom or financial independence they have come and how far they have to go.
Net investment wealth is your net worth less your lifestyle assets. It’s the stuff available to live off when you are no longer earning income from your work.
To make the concept more concrete, consider Steve and Kate Wilson. Their assets and liabilities are shown below:
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Mortgage or Super?
Are you better off reducing your mortgage or contributing to super?
A lot of people ask this question. Unfortunately, as with many wealth management decisions there is no straight forward answer. The appropriate choice depends on a number of issues, some of which we address in this article.
The obvious starting point is to look at the numbers. Assume you have 15 years until you can access your superannuation benefits free of tax. You have a mortgage that is costing you 7.0% a year (after tax) and a small amount of super. Over the next 15 years, you expect to have at least $13,375[1] a year of surplus cash flow.
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