Revamp, re-evaluate and reinvigorate your wealth strategies, writes business editor, David Potts.
Trust you're having a happy silly season. Let me divert you for a moment with the thought of being a few thousand dollars better off by the end of the year.
We already know interest rates and the dollar are trending up; public transport, education, gas and electricity prices anything to do with state governments are going to rise by at least double the inflation rate; the sharemarket is at or close to its peak, based on profit valuations; and property has passed its peak. So the rules for turning this into a year of riches are more obvious than usual, if a lot harder to turn to your advantage. But you can do it.
In fact, the first half of the year should be easy going. It's the second half that'll be bumpy.
Debt
Start with interest rates since we can be pretty sure that, if they do anything, they'll go up. As it is, most borrowers are paying 0.5 per cent too much on their home loans, one mortgage broker has estimated.
"Almost anyone [can] get at least 0.5 per cent off the standard variable rate without sacrificing features,'' Nicholas Gruen of Peach Home Loans said. And that's without counting el-cheapo lenders, such as RESI and Wizard, which aren't available through mortgage brokers. Their mortgages start from 5.89 per cent a saving of $924 a year from the bank standard rate on the average home loan of $250,000.
So use your spare time to shop around, or at least get a mortgage broker or two working for you. They're free and unless they talk you into borrowing too much such as suggesting you take the overseas trip now while the dollar's up and put it on the home loan you're off to a flying start on the road to riches.
Don't try to be too smart, though, and fix. The fixed rates on offer are anticipating another rate rise or two, so all you're doing is paying for it in advance. Not smart. Unless, that is, you can get one for less than you're paying now the best deal is from St George, which last week cut its five year rate to 6.95 per cent, a smidgin below the standard variable rate.
If you're tempted, don't forget mortgage discharge and application fees and lawyer costs if switching lenders and whatever.
Besides, as mortgage broker Tony Harris of The Money Store explained, the cut just shows how the banks pushed fixed rates too high to begin with.
Meanwhile, savers have never had it so good, though you may need some convincing. Don't be duped into thinking 4-5 per cent returns are low. Thanks to the rise of the dollar, inflation is likely to be only 2 per cent, if not less, by the end of the year, so in real terms interest rates are unusually high which, by the way, could see the economy unravelling in the second half of the year.
Still if you've got some spare dosh, it's always better to put it towards the mortgage or, even better, other high-cost debt such as credit and store cards than leaving it in the bank or a debenture. That's because you're getting a tax-free benefit. On the top tax rate, for example, paying off more of the mortgage is akin to earning about 12 per cent. And to get that rate you'd have to be taking a big risk anyway.
If you have no savings but lots of debts now we're talking your best move is getting a credit card with a six-month introductory rate, then pay it off at least by the same amount as you were before, so you don't squander the benefit of the lower rate.
Wait to the last minute of your billing cycle on the old card, though. Once you transfer money between cards it's counted as a cash advance and the interest rate meter starts ticking.
On the other hand, if you've got lots of savings and no debts, lucky you. Don't keep your money in the bank or a cash management trust just because you think rates are going up.
Like the banks, the money market anticipates an increase, so when it happens you're unlikely to get much more than you can now. Investing in three-year to five-year terms works out better over time than chasing the best short-term bargain, Simon Watkin of bond dealers FIIG Securities has calculated.
Budgeting
Oh dear, that word has crept in budgeting. But it doesn't have to be all bad. If you're going to travel overseas this year, put everything on the credit card. The way the dollar's going, your trip will be almost self-funding by the time the statement arrives and you're back.
Besides, there are a few painless things you can do that will save you at least a few hundred dollars this year. One is to buy petrol early in the week when, the Australian Competition and Consumer Commission says, prices are lowest.
If you have got the time, you can save even more in fuel. Coles and Woolies offer a 4 cents-a-litre discount if you spend more than $30. So on the weekly household shop you should take a partner, split the shopping into two trolleys, and get two discount tickets. Only kidding.
Mind you, if you shop at an IGA supermarket on a Friday and take your petrol receipt (on which you already received a 4 cents a litre discount) you can double-dip because you'll get the equivalent of a 4 cents a litre as a discount at the checkout.
Since NSW and Victoria will almost certainly bump up power charges this year to help offset declining stamp duty revenues from the former property boom, you can do little things such as using energy saving lights.
Taking a packed lunch to work each day instead of getting takeaways will also save you a motza over the year. If you really want to get serious, write down everything you spend in a week, or better still a fortnight. You'll be amazed at what gets frittered away and can be saved without making you mean and miserable.
Tax
Which brings me to the taxman. There are some perfectly legal, and profitable, ways of cutting your tax and the silly season is ideal for organising your paperwork.
If you're investing in term deposits or debentures, pick an interest payment maturity date of July 1 or after. That way you won't have to pay tax on it for another year.
If you're negatively gearing, make sure you're claiming the loss through the year, rather than a refund in six to 12 months' time. Better still, stop negatively gearing in the first place.
Nobody is expecting great shakes from either property or shares this year which is not to rule out just plain old shakes so all you're doing is sharing your loss with the tax man who, of course, can afford it. Can you?
Make sure you arrange any new investments in the name of the lower-earning spouse. Be careful with investments you have, though. Switching names will incur capital gains tax if there's a paper profit in there.
It goes without saying that this is a good time to acquire a shoe box to collect all your receipts for anything related to work or investing (from postage stamps to Medicare claims). So I won't.
Investing
Since the sharemarket is in its customary new year rally, also known as the Santa rally, the silly season is perfect for profit-taking and tidying up.
If you don't have a portfolio, you need to start one. Owning shares in just one stock is unlikely to make you rich. Sell some and diversify.
Many financial advisers say you should re-balance your share portfolio each year. That means a nip here and a tuck there so that your share portfolio sticks to your original settings.
For example, if you were lucky, er, sensible, enough to own shares in Newcrest Mining then because of the 73 per cent rise in price last year, they're now worth proportionately more of your portfolio than they were when you first bought them. Nothing wrong with that, except rebalancing is an excellent discipline in forcing you to take some profits by selling some of the shares to get their value back in kilter with the rest of your portfolio.
Rebalancing works in reverse as well. If the price of a stock has slumped, then, assuming you got it right in the first place when you worked out your portfolio, you should be buying extra shares to restore the original proportion.
If you didn't get it right in the first place, all the more reason to be rejigging your portfolio.
Rebalancing can be extended to your other investments, too. Real estate, property trusts and shares have had a good run and the outlook for each isn't what you'd call exciting.
Property is groaning under the weight of its own excesses, not to mention the prospect of another rate rise, property trusts have become overvalued and the sharemarket is susceptible to Wall Street, which has run far ahead of itself.
So whatever you can keep in cash, after you've paid off your debts, could prove handy later in the year. If you're selling shares for rebalancing, it might be better to keep the proceeds liquid since real interest rates are generous.
Super
Unless you're about to retire, it's true that whatever you do with super won't make you instantly better off. Even so, committing yourself to adding a little extra to your super each pay day will eventually produce big returns. As a rule, if you're an employee there aren't immediate benefits to making voluntary contributions to super since you don't get a deduction. But over time, you do get the 15 per cent concessional tax rate on the income your contribution earns.
Exceptions to the rule are if you are an employee and earn less than $40,000 a year, in which case the Federal Government will match, up to 100 per cent, your contribution up to $1000. And you don't have to wait until June 29 to make voluntary contributions the sooner you put them in, the faster they'll grow.
Then there's the spouse rebate a refund of up to $540 a year on contributions to a low-income-earning spouse's super fund.
If you have a low-income-earning spouse, it might even pay to shuffle between the rebate and the Government's co-contribution grant.
But salary sacrificing remains the mother of all super moves.
By cutting your salary and getting it paid into your super instead, you get a big tax break, although less so in the top bracket where you face the super surcharge as well.
Finally, check out the insurance you get from your fund. Most super funds provide life and disability insurance for much less than you can get yourself. You never know, you may even find that you've been doubling up on life insurance.
Smart moves to start flying ahead
1 Get your salary paid into your mortgage account, then withdraw as you need it. This will save interest and, because it isn't in your pocket or purse, the money is less likely to be spent. Stick the credit card in the freezer or under your bed just to make sure. If you don't have a mortgage with this facility, or don't like the idea, then save yourself at least 0.5 per cent and get a no-frills mortgage. That's worth almost $1000 a year on a $250,000 loan.
2 Pay a fixed percentage of your pay packet into a separate, untouchable bank account. This account can be used only for long-term savings or emergencies.
3 Write down what you spend in a week or a fortnight: you'll see instant savings staring at you that will require almost no sacrifice. Financial advisers swear by this.
4 Give top priority to paying off store and credit cards, even if it means cutting back mortgage repayments or super contributions. Just paying the monthly minimum is not enough you're borrowing at up to 18 per cent interest rates.
5 Take a packed lunch to work. All those takeaways and cafe lattes add up. Just saving $10 a week will give you about $500 extra by the end of the year. But your savings probably will be even bigger.
6 Buy petrol early in the week when it's almost always cheaper. If you're serious about saving, downsize your car, too. The savings in fuel and insurance will run into the thousands.
