Warren Buffet is the world’s second richest man. He built his wealth through stock market investments. Here are some interesting facts about Warren Buffet (and the lessons we can learn from them):

• He bought his first share at age 11 and he now regrets that he started too late!




• He still lives in the same small 3-bedroom house in mid-town Omaha , that he bought after he got married 50 years ago.




• He never travels by private jet, although he owns the world’s largest private jet company.





• He bought a small farm at age 14 with savings from delivering newspapers.



• He drives his own car everywhere and does not have a driver or security people around him.




• He does not socialize with the high society crowd. His past time after he gets home is to make himself some pop corn and watch Television.

Warren Buffet’s advice to young people


“Stay away from credit cards & bank loans and invest in yourself and remember:

• Money doesn’t create man but it is the man who created money.




• Live your life as simply as possible.




• Don’t do what others say - listen to them, but do what you feel good doing.”

What an amazing man !!!!

Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Cuppa Time | 8 Comments »

Divident Impuation

If you are a shareholder of a company then you in fact a part owner of that company (however big or small). Most profitable companies pay ‘dividends’ to all their shareholders - a share in the profits of the company. Many times these dividends are paid from the after tax profits - i.e. the company has already paid the tax and the dividends are distributed from the after tax money. Assume you received these dividends - if you have to pay tax on them again then would that be fair? Isn’t that double taxation?. The company (of which you are a part owner) paid the tax once and then you have to pay it again on your individual tax return.

In 1987, the Federal Government introduced ‘Dividend Imputation’ to combat the double taxation problem. As per the ‘Dividend Imputation’ system, the shareholder gets a tax credit for the tax already paid by the company. The tax credit you get is called the ‘Franking Credit’. They are also called ‘Imputation Credits’.

Franking Credits

There are three types of franking credits:

• Fully Paid Franking Credit
  
  
  This means the entire dividend amount was paid from after tax profits of the company. So in this case you get a 100% tax credit - hence the name ‘Fully Franked Credit’.
  
  
  
  

  Here is an example: Assume you have invested in ‘xyz’ company shares.
  
  

  Fully Franked Dividend Received $70
  Franking Credits Received $30 (the company tax rate is 30%)

  Taxable Distribution $100

  In the above example, you would get a $30 tax credit - because the tax paid by the company (for the dividend portion) is $30 ($100*30%)






• Partially Franked Dividend
  
  
  If only a part of the dividend was paid out from after tax profits then only that portion should be eligible for the tax credit. So the franking credit in this case is not 100%. Going back to the above example, if the franking was 50% then the franking credit would be $15.






• UnFranked Dividend



If none of the dividend paid comes from the after tax profits then you will receive no tax credits. So the franking credit is 0% - there is no franking. Going back to the above example the franking credit is 0.

Tax Benefits From Franking

Let us explore the tax benefits from the franking credits:

• Marginal Tax Rate Higher Than 30%
  
  
  If your tax rate is higher than 30%, then the tax you pay on your dividends is the difference between your tax rate and the company’s tax rate.
  
  

  Going back to the above example:
  
  

  Case One
  
  
  Personal Income Tax Rate 40%
  Tax Payable For Your Dividend $40
  Franking Credit Received $30

  So Actual Tax Payable (40-30) $10
  
  
  
  

  Case Two Personal Income Tax Rate 45% Tax Payable For Your Dividend $45 Franking Credit Received $30 So Actual Tax Payable (45-30) $15

  
  

• Marginal Tax Rate Below 30%
  
  
  If your tax rate is less than 30% then you are left with an unused portion of a franking credit. This extra credit can be used to offset your income from other sources. If you have no other income that it can be offset against then you can claim a refund from ATO.
  
  

  Going back to the above example:
  
  

  Personal Income Tax Rate 15%
  Tax Payable For Your Dividend $15
  Franking Credit Received $30

  So Actual Tax Payable (15-30) $-15





See, how in the above example you are left with an unused portion of 15 dollars. This can offset against other taxes payable or if you have no more tax to pay then you can claim it from ATO.





Therefore when comparing two dividend paying companies, don’t just look at the dividend amount being paid, look also at the type of dividend they are paying - franked or unfranked. One important point to note though is that fully franked dividends are not tax free. The tax has already been paid and hence you are exempt from paying tax again. Shares that offer franked dividends are tax effective not just for individuals but also for super funds (since super funds pay tax at 15%).








Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Shares | Leave Your Comment »

August 27th was the ‘Equal Pay Day 2008′. For a given job, women in Australia are paid much less than what men are paid. The story is probably the same in many countries around the world. I cannot believe that in this day and age this kind of discrimination still exists. The Equal Pay Day received a bit of coverage in the media and that is good news. All talk of ‘equal rights’ is of no significance if this difference in pay exists. In Australia, the pay difference is highest in WA (27.4%). It is lowest in Tasmania (9.3%)

Here are some statistics that can alarm you (well it alarmed me): (please note that I have got this statistics from ‘Australian Council Of Trade Unions’ website)

• Women earn on average ($196 per week) 16.3% less than men
• Women have $3 for every $10 men have in their superannuation accounts
• Women are almost twice as likely to be under-employed than men
• Two thirds of female public servants don’t get promoted after returning from maternity leave

According to the Equal Opportunity Agency, to earn as much as the average man, a woman technically has to work about two months more - not fair.

Tell me what you think about this issue…

Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Cuppa Time | Leave Your Comment »

Insurance Bonds are like unit trusts but with some special tax advantages. To enjoy these special tax advantages, the investment has to be held for a minimum of 10 years.
Insurance Bonds are coming back in vogue now. AMP and Commonwealth Insurance have recently launched a range of insurance bonds. Usually there is selection of different insurance bonds in offer from each issuer - example: capital guaranteed, growth, Australian equities etc. Switching between these funds is quite easy and free (no switching fee).

Taxation Advantages

1. The insurance company that issues the bonds will pay the tax on the income and gains of the bond. The tax will be paid at a company tax rate of 30% (of course the tax is coming out of the bond funds). Investors will have no additional tax to pay, provided the hold on to the investment for a minimum of ten years. You don’t even have to declare it in your tax return. So for someone on a high tax income bracket, these bonds can be quite a tax effective investment. If you however withdraw prior to ten years, then you will have to pay tax (there will tax offsets of 30% though).

2. You can make regular contributions but the contributions have to be only up to 125% of the previous year’s investment. The beauty of the insurance bonds is that these contributions also get the same tax treatment as the initial investment. Let me explain what I mean here:

Initial $1000
Year 1 $1250
Year 2 $1562
Year 3 $1952
Year 4 $2440

Year 5 $3050
Year 6 $3813
Year 7 $4766
Year 8 $5958
Year 9 $7448

So in the above scenario, the contributions you make in your ninth year will be invested only in one year but you don’t have to pay any tax. Imagine if your initial investment was $10,000.

If your contributions exceed the 125% rule then you will lose the tax benefits. So it is probably best to stick to 125% rule and if you need to make more contributions then may be just open another policy.

Perfect Situations

Here are some situations when insurance bonds can be an ideal investment:

• Future Education needs of your child
• You are in the high tax bracket and are looking for an effective tax investment vehicle
• An investment with not much paper work. When it comes to tax return, there is hardly anything you need to do with insurance bonds.

A Couple Of Points To Be Noted

• There is a contribution fee (for initial and regular contributions) and is usually around 4%.
• If you are on a lower income tax bracket (anything lower than company tax rate) then the bonds don’t have any tax advantages.









Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Managed Funds, Saving Money | Leave Your Comment »

Most of us have investments in managed funds (super and non-super funds). Like with every financial product, managed funds have fees. There is a new service in Australia which pays you back a significant portion of the fees you pay to the fund manager. Trust me on this one - it is a true and a legitimate service. Let me start by giving you a bit of background into managed fund fees and then will take you through the new service.

Trailing Commissions

Trailing commissions are commissions paid by the fund manager to the adviser. The advisers are supposed to review the clients’ portfolio every year and make sure that the fund is still ideal for the client. Theoretically it is for this review the advisers gets paid every year. But in reality the commission is paid to the adviser as a ‘thank you’ for recommending the fund to their clients. If the commission was paid from the fund manager’s pocket then we have little to complain about. But the commission is paid from your investment - the commission is usually up to 1.2% of the total value of your investments each year.

Even if you don’t have a financial planner, these commissions are still taken out of your investments. In this case, the commission is taken out and retained by the fund manager. Most of the investors are not even aware that this is happening.

Entry Fees

Every time you make an investment contribution (be it initial or periodic contributions) you will be charged an entry fee. This entry fee is usually between 4 and 5%. So if you make a contribution of $10,000, then you lose between 400 and 500 dollars.

Refund Of Fees

A lot of financial planners refund their clients the entry fees and a part of trailing commission. Basically to get the refund you either have to invest through a financial planner or a broker, who is willing to to refund you the money. But not every one has a financial planner or a broker - in fact a vast majority invest into managed funds on their own. Take my case for example - I did some research and picked my own super fund. I have no financial planner. But I pay trailing commissions (and the entry fees).

It would be nice if I could get back the commissions and fees (at least some of it). But signing up with a financial planner means seeking his advice and following his suggestions. At this stage I am not ready for that. Imagine though a broker who is your broker only for the purposes of refunding you the money and does not offer any financial advice. That would be nice, wouldn’t it. This imagination has now become a reality. A company called ‘Your Share’ does exactly that.

Your Share

It is an Australian licensed broker. To get the refund, you have to nominate them as your broker. Then the fund manager starts paying them the commissions and they refund you a significant part of the fees you paid the fund manager.

Here is how you gain:

1. For all your existing funds you will receive a cash rebate for 50% - 70% of the trailing commission you paid. The rest is their fees for offering this service to you. All that you have to do is send them your email address and they send you a simple form to fill in. The form asks for your fund name and account number. Send the form back to them and they will inform the fund manager that they are your new brokers.

2. For all new funds (i.e you start investing in a fund today) you pay no entry fees on your initial contributions and no entry fees on your regular contributions. That is significant savings.
To be eligible for this, you have to select a fund from their list, nominate them as your broker on the application form and start investing in that fund. For your new funds, apart from entry fees, you will also receive a cash rebate for 50% - 70% of the trailing commission you paid. ‘Your Share’ has a huge list of funds in their database, so the chances of you finding the fund you are after on their list are very high.

Which Funds For ‘Your Share’

If you have one of the following investments, you can make use of the service offered by ‘Your Share’:

• Managed Funds




• Superannuation




• Pensions and Annuities




• Master trusts or Wrap accounts




• Insurance policies




• Margin Loans

Conclusion

Here are a couple of important clarifications about ‘Your Share’:

1. You are only nominating them as your broker. They have no access to your funds.
2. All your cheques are made payable to the fund manager and not to ‘Your Share’.
3. They do not offer you any financial advice.

To find out more about them click ‘Your Share’.

Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Product Reviews | 1 Comment »

In a recent post I had written about the launch of Woolworths Credit Card. This credit card is the first step towards many more financial product offers from Woolworths. All its financial products are being offered under the brand name ‘Every Day Money’. Sticking with the new brand name, the credit card is called ‘Every Day Money Credit Card’. The credit card is a Master Card. The cards come in 4 different colours - green, blue, black and pink.

For the past couple of weeks, Woolworths has been promoting its credit card heavily. So its about time I reviewed the product. Here we go:

Basic Features Of Every Day Money Credit Card

Annual Fees: There is no Annual Fee in your first year. After your first year, you will be charged $49. The average market rates are between $25 and $50. So $49 is on the high end. But having said that the annual fees of cards that offer rewards program is usually towards the higher end. Woolworths offers a rewards program and hence $49 is justifiable.

Apart from annual fees, the credit has the other usual fees like the late fees, overseas transaction fees etc…

Interest Rates: I have no complaints about the interest rates. They are quite competitive and in line with the market rates - currently 18.99% p.a. on purchases and 21.99% p.a. for cash advances.

Zero Per Cent Interest Rate: Up to February 2009, you pay no interest on your purchases (does not apply to balance transfers and cash advances). You have to pay the minimum monthly repayments - otherwise there will be charges.

Interest Free Period: After February 2009, there will be a 55 day interest free period for all your purchases. This is in line with the industry standard.

Balance Transfers: You can transfer your balance from your old credit cards (except from HSBC Cards and Store Cards). You only pay 5.99% on this balance transfer for the first six months and thereafter the interest rate reverts to cash advance interest rate. Note that the cash advance rate is higher than the normal credit card interest rate. The current cash advance rate for the Easy Money Credit Card is 21.99%.

Every Day Money Credit Card Insurance: This insurance covers your credit cards payments, up to a maximum of $25,000. This insurance can be claimed if you are made redundant or if you are totally and permanently disabled or you can’t work due to sickness. This insurance costs 60 cents for every $100 monthly outstanding balance. So if your current monthly outstanding balance is $2000 then you pay $12 towards your insurance premium. The insurance might not cover you if you have assets to cover your payments (even if you satisfy one or more of the above criteria). So check the fine print for this.

ePump They offer an ‘epump’ service. At Woolworths co-branded fuel outlets, this card offers customers a new way to pay for fuel and redeem fuel saving offers at the pump. No more long queues. You can pay at the pump itself rather than going to the cash counter. Surely will impress many (especially on popular Tuesdays). This technology has not been implemented yet and will be in stores some time next year.

Rewards Program

Here is how you can earn points with this card:

• 3 points for every dollar spent at Woolworths or Safeway supermarkets. Online purchases does not however qualify for this. I am not very pleased that they excluded online shopping. A lot of people are opting for online grocery shopping these days - so I am not really sure what the logic behind this exclusion is.




• 2 points for every dollar spent at Big W, CALTEX WOOLWORTHS/SAFEWAY co-branded fuel outlets, epump, Woolworths/Safeway Liquor, Dick Smith PowerHouse and participating Dick Smith Electronics and Tandy stores.




• 1 point for every dollar spent on other purchases

Every four months, if you have at least $20 worth of points, you will be sent a shopping card. You can redeem the money on this shopping card at one of Woolworths family of shops. You will need 3448 points to get a $20 worth of card. So if you do your grocery shopping at Woolies, then you will need spend around $1150 to get a $20 card.

Apparently you can also be eligible to certain promotions at Woolworth’s family shops - example interest free purchases .

Application Of Payments

One of the big things to watch out with low interest rate balance transfer credit cards is how credit cards apply your payments. Any payment you make is usually applied towards the lower interest rate portion first. So I was naturally curious to check out how this card works. Current purchases have a zero interest rate till Feb 2009 and so to make financial sense for you, your payments should first go towards reducing your balance transfer and only after that is all zero, your payments should go towards reducing your current purchases. So I called the customer service department to verify how the easy money credit cards work. According to them, any payments you make (payments in addition to your minimum balance) will go towards reducing balances in the following order:

1. Interest And Fees
2. Balance Transfers
3. Cash Advances
4. Current Purchases
5. Promotional Purchases (like interest free purchases from Woolworth’s family shops)

So I am happy on this front.

Woolworths Umbrella

Here is a list of all the stores under Woolworths umbrella. Here is where you should be shopping to get maximum benefits out of this card:

• Woolworths Grocery Stores
• Dan Murphy
• Big W
• Dick Smith
• Woolworths Co branded fuel outlets (usually Caltex).
• Beer Wine Spirits
• Tandy
• Safeway Store

My Final Thoughts

1. Interest rates wise it is competitive with what the market offers. In fact it is about one per cent less than what most rewards credit cards offer.


2. Not very pleased with the rewards program. Other cards offer slightly more for every dollar spent. Plus online shpping at Woolies is not given any special treatment.

3. The low balance transfer rate is okay but there are lots of cards in the market which offer much lower rates. So if you want to choose this card, then don’t make the low balance transfer rate your reason.


4. The annual fee for this card is quite competitive and less than what a lot of other rewards credit cards charge.


5. If you have huge outstanding balances in your old cards then you might be tempted to consider this card because of low balance transfer rates plus zero interest on new purchases. Valid reasons t be tempted. If you have outstanding balances, I do recommend low interest balance transfer cards but the new card has to be used only for clearing off outstanding balances and not for any purchases in the future. I am afraid that the zero per cent interest rate can tempt financially indisciplined people to take on more debt.

All in all, the card is good but could have done better on the rewards front. Check out the card here.

Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Product Reviews | 2 Comments »

If a borrower defaults on mortgage repayments, the lender will take over the property and auction it. Assume now that the proceeds from the sale of the property is less than the loan outstanding amount. This is where Lenders Mortgage Insurance comes into play. It basically protects the lender if you default on repayments and the lender is unable to recover the entire loan amount. This insurance is required only when your deposit is less than 20%.

Lenders Mortgage Insurance is commonly misunderstood as an insurance that provides to protection to borrowers. It protects the lender but the premium has to be paid by the borrower. It is a one-off premium payment and has to be paid by the borrower at the time of taking out the loan. The amount of premium depends on the deposit amount and loan amount.
There is also a GST component and stamp duty and all this is added to the premium and charged as a one-off payment.

If you are borrowing for an investment property, then this insurance is part of your borrowing costs and is hence tax deductible.

If you repay your loan or refinance within a short period of time (usually within 24 months) then you can get at least a part of the premium back. Your lender has to help you with this but some lenders can be a bit unhelpful. In such case contact the banking ombudsman.

Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Property | Leave Your Comment »

What Is First Home Owner Grant?

Back in 2000, the Federal Government introduced the First Home Owner Grant. This grant is administered under the legislation of each individual State or Territory. The grant was introduced to compensate home buyers for the effect of GST on home buying costs and to encourage Australians to buy their first home. Th grant is a one off payment of $7000.

Criteria and Key Points About First Home Owner Grant

1. You obviously have to be Australian Citizens or permanent residents to get this grant.

2. The grant is only for your first residential property - If your first property is a commercial property then you are not eligible for this grant.

3. You have to live in this property for at least 6 months and this has to begin within the first 12 months of settlement or completion of the property.

4. When you buy a property, you will get the grant at settlement. For an owner-builder property, you will get the payment on certificate of occupancy/completion.

5. If you or your partner had owned property before or received a grant before then you are not eligible. Check with your state or revenue office for further details.

6. This grant is not means tested.

The Best Use Of This Grant

The best use is to put it back into your mortgage. I purchased my property before the grant was introduced. So am not sure about the exact details - but I am quite sure that you can organise it such way that you receive the funds in time for your settlement. Check with your lender - they will assist you in applying for this grant. Click this First Home for more details.

If you got this grant then share with us any tips or details you might want to…

Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Property | Leave Your Comment »

I started working from home in 2002. My daughter was born in 2001. Prior to her birth, I was working as a software programmer in a 9 to 5 job. I loved my job and had every intention of returning back to full time work after my maternity leave finsihed. As it got closer to the completion of my maternity leave, I started having second thoughts. I loved being a stay at home mother. But I also loved to work. It was this dilemma that led me to start my first business. I started writing software for small and medium enterprises. I wrote customised software for my clients. Things went well - I was happy. It was a struggle to find the first few clients but after about a year, things started going reasonably well.

My son was born in 2006. After about a couple of months of his birth, I got back to work. My son had an accident in his first year which made me rethink my priorities. Anyways, in October 2007 I decided to close my doors and by the end of December I had finished up with my ‘first business’.

The past 6 years has been a good ride, sometimes a bit bumpy but all in all an enjoyable ride. I have learned a lot from my first business - I made plenty of mistakes - Mistakes I don’t want to repeat. Dealing with the aftermath of the mistakes I made was hard but the lessons learned from those mistakes are ‘golden nuggets’. Here are some of my ‘golden nuggets’:

1. You need to write your goals down. Writing them down somehow puts the stamp of urgency on the goals. It kind of makes you more accountable.

2. Don’t ever comprise on the prices you quote. Don’t make price your point of differentiation. As long as you provide good quality work, don’t be afraid to charge what you are worth.

3. Take it slow - Once you decide to go into business, spend some time to map out what your vision is and how you plan to get there. Details are very important.

4. Check how much revenue you are making regularly - you are running a business. It is not a hobby. If it is a one (wo)man show, run it like big business.

5. Finally, have regular time away from work.

Though some of these lessons might seem like common sense now, but it definitely did not seem so whilst I was in the thick of things. My ‘first business’ did well financially but when I look back, ready to take my next step, I want to concentrate more on the lessons I learned from the business.

I will write more about what I am doing now in my future posts.

Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Cuppa Time, Entrepreneurship | Leave Your Comment »

The recent increases in property prices has forced many people to consider no-deposit home loans. In the past 6 years or so, the property prices have risen at a faster rate than incomes. Savings are not able to keep up with the property prices.

If you are struggling to save for a deposit for your house and are looking at other options, then here are things you need to know about no-deposit home loans.

1. The loan that offers you 100% of purchase price of your property is called a ‘no-deposit’ home loan. The normal recommended deposit is 20% of your property purchase price. But with these no deposit loans, you need zero per cent deposit. You don’t need to save for a deposit.

2. You still need to save for legal fees, stamp duty, property inspection charges plus other miscellaneous expenses.

3. The interest rate can be slightly higher for these loan types than the traditional loan types. There can also some be additional fees - double check with your lender. Make sure your loan at least has a redraw and additional repayment facility.

4. Only go with a lender who is a member of MFAA.

5. With no-deposit home loans you have to pay the lender mortgage insurance. This is a one off payment (only paid when you take out the loan). This insurance covers the lender. The amount you have to pay depends on the loan amount and the property purchase price.

6. Remember that with these loans you actually have no equity in your house at the time of buying. The lender owns 100% of your property. For a $300,000 loan at 9.5% and a 30 year time frame, it will take you at least couple of years to get 1% equity in your house. Some lenders also offer 105% home loan - this loan will also cover your fees. So for a $300,000 loan, it will take you 5 years (or slightly more) to own 1% equity in your house. In the mean time, if you are for some reason are forced to sell out, then you will end up owing to the lender if the property prices stabilize or fall.

7. Don’t borrow more than you can afford to repay. The one good thing to come out of the sub-prime crisis is that borrowers have become cautious and most will now not lend you more than you can service. Make sure that your monthly repayments are never more than 30% of your income (income after taxes). If you have more than average household expenses every month then your monthly repayments has to be less than 30% of your nett income. Make a detailed list of all your expenses - think, analyse and then borrow.

I personally don’t recommend these loans. The 105% home loans make me pull my hair out. My reaction towards the no-deposit home loans is no better either.

Share your thoughts…If you have taken this type of loan, do you have any tips or suggestions?

Digg

Stumble Upon

Del.icio.us

Buzz

Topics: Property | 1 Comment »