GFC claims life cover

More than 65 per cent of consumers consider affordability to be a key reason for cancelling a life insurance policy, according to a recent independent study commissioned by ING. Australians are increasingly stating the Global Financial Crisis as a reason to cancel a life insurance policy as they struggle with the prospect of recession, unemployment, stock market declines and other bad financial news.

(source: Money Management)

What is negative gearing?

Negative gearing is when you borrow to invest and the income you earn from your investment is less than the interest and other associated costs. This loss is claimable against your other earned income – typically your salary or wages.

How does negative gearing work?

A property is negatively geared when the costs of owning it – interest on the loan, bank charges, maintenance, repairs and capital depreciation exceed the income it produces. In simple terms, your investment must make a loss before you can claim the tax benefit. Negative gearing not works only for property, but also other investments like shares and bonds.

Claimable expenses

Property owners can claim deduction and depreciation against income on the property. There are three main classes of deductions available to investors:

1. Revenue deductions – These include interest on the loan as well as ongoing maintenance and expenses such as agent’s fees, council fees, advertising charges, bank fees, body corporate fees, cleaning expenses, and insurance.
2. Claims for capital items – Large capital items such as a hot water service, white goods, etc are subject to depreciation. This means the owner must claim the cost over a number of years rather than all at once.
3. Claims for building allowances – Owners can also claim depreciation of capital works, specifically for building and landscaping. The current rate is 2.5% over 40 years. Commissioning a depreciation schedule from a qualified quantity surveyor is a good way to maximise your depreciation allowances.

Keeping it at arm’s length

In order to claim deductions your dealings with tenants and lenders must be at arm’s length. If you’re renting your property to a family member or a friend at less than the commercial value then you’re not acting at arm’s length, and you cannot claim deductions as you would in a purely commercial arrangement

Keeping records

It’s easier to get your tax right if you’re keeping good records, and this is very true of rental deductions. If you’re keeping good records, it’s much easier to understand which category your expenses fall into, and makes completing your tax return a much simpler task.

Risks associated with gearing.

There is an inherent risk associated with borrowing to fund any investment. While gearing can help you increase your gain on borrowed funds, the losses can be large in adverse circumstances.

As a general rule, only investors with the financial capacity to absorb the effect of potential falls in investment values, as well as an increased cost in interest payments, should consider negative gearing.

You can minimise the risk of gearing by:

1. Choosing your investment property carefully. You need to try and select a property that is likely to increase in value throughout the investment period.
2. Having sufficient income to cover the interest repayments if your tenants are late with their rental payments, or if your property remains vacant for any time. You also need to be able to fund ongoing repairs and maintenance.
3. Taking out Mortgage Protection Insurance with your investment loan

What is investment risk?

All investments have some form of associated risk: they all expose you to the chance you could lose money (either notionally or permanently). Here are seven of the more common types of investment risk.

1. The risk of permanent loss of capital. Poor quality investments usually experience falls in their value from which they never recover. In extreme cases, their value can fall to zero.
2. The risk of volatility. Investment volatility is the risk of the value of your investment moving up and down. With high quality investments, their values should move up more than they go down.
   Investments which are expected to produce higher long-term returns (such as shares) tend to
   experience higher levels of short term volatility. On the other hand investments which are expected to generate lower long-term returns (such as bonds) usually experience less volatility in the short term.
3. Wealth risk. This is where your investments do not generate sufficient returns to help you achieve your wealth or retirement objectives. This is typically the case when a person chooses not to employ an asset that has a higher level of investment volatility (and also a potentially higher return). In that case, the person will need to lower their wealth or retirement expectations.
4. Credit risk. Credit risk usually applies to fixed term investments and means that the institution you have invested with may not be able to make the required interest payments or repay your money.
5. Inflation risk. This is where your money loses purchasing power because your investments do not keep pace with inflation. Cash is a good example of an investment that usually falls prey to inflation risk.
6. Liquidity risk. Investments which are fixed term expose you to liquidity risk. For example, if you need to access your money from fixed term investments before the term expires, you may be prevented from doing so under the contract. Or, if you can access your money, it might take longer than you want, and/or you may be charged significant penalty fees. Poor quality share and property investments also expose you to liquidity risk. The risk is that no one will want to buy them from you or will only buy them at a substantial discount.
7. Currency risk. When you invest overseas, your money is usually converted to the currency of the country in which you invest. If the Australian dollar subsequently rises in value compared to the other country’s currency, your investment will be worth less to you. On the other hand, if our dollar falls in value, your investment will be worth more.

How can you manage investment risk?

Investment risk can be managed using three prudent principles of investing:

1. Only invest in high quality investments.
2. Construct a properly diversified portfolio.
3. Regularly review your investments to ensure they continue to maintain their quality

Talk to a qualified financial planner about the best way to invest and manage risk associated with your investments

Women falling into a financial trap

Of all those who need a helping hand planning their financial future, women approaching retirement with a modest net worth are highest on the list. I was recently asked to contribute to an article on this subject for the Courier Mail Newspaper here in Brisbane.

You can view the full article here:

http://www.news.com.au/business/money/story/0,25479,23758162-5013953,00.html

The super self-employed

By Jaeneen Cunningham

A report by the Association of Superannuation Funds of Australia (ASFA) says that Many self-employed Australians remain unprepared for retirement with little or no superannuation or other appropriate savings. According to the chief executive of ASFA, Pauline Vamos, the research has revealed a significant gap in the retirement savings of the self-employed when compared to wage and salary earners in Australia. The report shows that while the self-employed sector makes up over 10 per cent of labour force, 28 per cent of the sector has no superannuation at all, while a further 53 per cent has a super balance of less than $40,000.

We know small business is under greater financial pressure than ever but given the tax incentives aimed at boosting contributions, self-employed people should consider superannuation as part of a strategy to increase their retirement savings. If you're self-employed its imperative you dont let all the years of hard work slip away by not providing adequately for youself in retirement. Look at your expenditure and find a little to make those important contributions now!

Creating Wealth with regular savings

With rising interest rates and rising house prices, your dream of one day buying your own home is possibly just that - a dream. You can give your medium term financial goals a kick start by setting up a regular savings plan now.

A regular savings plan is an arrangement you make with a fund manager or someone similar to invest an initial lump sum followed by regular investment installments; the most common installment period being monthly. A lump sum amount of $1,000.00 will get you started and minimum monthly amounts usually start at around $100.00. You can invest anything above these amounts according to what you can comfortably save. If you're like most of us, it can be a good idea to have your monthly payments direct debited from your bank account to make sure you stick with the plan.