How to budget for a baby

Posted on 8 August 2019
How to budget for a baby

Money and Life
(Financial Planning Association of Australia)

With a little bit of planning you should be able to successfully avoid having the joy of starting a family compromised by the financial burden of doing so.

Based on research by the National Centre for Social and Economic Modelling (NATSEM) it costs over $406,000 to raise one child from birth until they finish their education.

In light of these costs, here are some initial considerations that might be helpful.

Before baby arrives

This is an ideal time to assess your financial situation, and how it will be impacted by a new baby. For starters, consider the requirements before and immediately after the birth.

If you're planning to 'go private', you have to decide whether the cost of prenatal care, can be covered by existing private health cover. Some private health funds have waiting periods before you can claim on pregnancy and birth-related costs, so it pays to check.

Income protection and health insurance

During pregnancy, it's not just your family's health insurance you should be thinking about. It's equally important to consider what type of life insurance cover, including income protection, disability insurance and/or death cover, might be appropriate.

Having sufficient cover in place means you'll have a contingency plan for your family's lifestyle if you're temporarily unable to work through injury/illness. The good news is by organising this cover via your superannuation, you don't have to eat into the household budget.

Once baby is home

The next step is to realistically assess the upfront costs of caring for your baby over the first 12 months. If budgets are being pushed, focus on what you absolutely need to spend money on now like baby-proofing your home, extra furniture like a crib, change-table, baby bath, car seat, stroller, bedding and clothes and what can wait.

Try to work out what your weekly outgoings will be on things like nappies, milk formula, and baby food. Being willing to accept hand-me-downs or buy second hand can save you a lot of money.

Family entitlements

If you're planning time off after baby arrives, remember to tell your employer well in advance. It's equally important to ensure you receive all the benefits you're entitled to from paid parental leave through to any baby bonuses, and family tax benefits.

Child-care and education

If you're planning on your child receiving a private education which at the secondary level typically costs an average $20,000 a year it's never too early to put money away. One way to do this is to open a high-interest saving account. There are also tax benefits for opening education-specific managed investment funds.

There are also onerous costs even before your child gets to school. For example, based on data by Stockspot, parents will on average spend $26,000 on childcare between the ages of three and five.

In light of these costs, it pays to honestly assess, what assistance you can expect to receive from immediate family. Equally important, assess how easy it will be to juggle time off, and how receptive your employer is to flexible workplace arrangements.

Ongoing costs of child raising

The cost of raising children has jumped sharply over the past two decades. Based on Stockspot numbers, parents on average spend $82,000 on a child between ages six and 12, and close to $131,300 during the following six years, with the bulk of this cost going on education.

Clothes swapping for school uniforms and buying home-brand or generic items in supermarkets, are practical measures to help managing finances. However, seeking help with budgeting can also drive your money further.

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What you need to know about deeming rates

Posted on 2 August 2019
What you need to know about deeming rates

Money and Life
(Financial Planning Association of Australia)

For older Australians looking to make the most of their finances in retirement, deeming rates can be an important factor in their income situation. Find out what deeming is all about and how the recent changes in deeming rates could affect your retirement income.

What is deeming?

The deeming rate is used by Centrelink to work out assumed income from your financial assets. It assumes these assets earn a set rate of income, no matter how much they really earn.

The deeming rate can be important for older Australians when they're applying to receive Age Pension payments. To be eligible for the Age Pension, you must reach Age Pension age and be under assets and income test limits. The assets test takes into account the dollar value of savings plus any assets you own, in Australia and overseas, except for your family home if you live there.

For the income test, Centrelink apply a deeming rate to your financial assets to calculate an assumed income earned from those assets. The real amount you receive from your assets whether that's dividends from shares or interest from a term deposit could actually be more or less than the Centrelink calculation. The deeming rate used for your income test depends on the total value of your financial assets. For assets up to a certain threshold, the lower of two deeming rates will be used to calculate your income. For assets above that threshold, Centrelink will use the higher rate. That threshold will be different depending on whether you're single and or in a couple.

Whether you receive a full or part pension depends on calculations for both the income and assets tests. Whichever of the two tests gives a lower rate will be the one used to determine whether you'll be paid a pension and how much your pension will be.

Changes to deeming rates

On 14 July 2019, the Federal Government announced cuts to the lower deeming rate from 1.75% to 1% and the upper rate from 3.75% to 3%. The lower rate will apply for single people with up to $52,000, and for couples with up to $86,000, in financial assets.

The last time deeming rates had been changed was in March 2015. Since then, the Reserve Bank of Australia has cut the cash rate five times, reaching a new low of one per cent on 2 July 2019. Given that interest rates have been falling for more than four years, this change will be welcome news to older Australians who may have actually been earning less than the deeming rate from their savings and other financial assets.

What does this mean if you're retired

Whether this change is going to make a difference to your finances, depends on your individual situation. "It really depends on whether it's your assets or your income that determine your Age Pension entitlement," says Anne Graham, CERTIFIED FINANCIAL PLANNER® professional and CEO at Story Wealth Management. "If your pension rate is based on the assets test, the change in deeming rates is unlikely to have an impact on your eligibility for the Age Pension or how much you receive. On the other hand, for older Australians who aren't receiving the Age Pension due to the income test, or are getting less than the maximum payment, they may benefit from the change in deeming rates."

Anne also suggests the change in deeming rates could take the pressure off retirees struggling to meet their cost of living in a low interest rate environment. "Many people prefer not to take risks with their money because they know it's got to last them throughout retirement," says Anne. "They'd naturally lean towards a savings account or term deposit to earn an income from their capital. But if they're not getting enough in earnings from these defensive assets to cover their living costs, they might go against their risk preferences and switch to growth assets like shares and managed funds. They can be torn between the need for income and the potential risk of losing capital."

"If a cut to deeming rates allows people to rely on the Age Pension for more of their essential living costs, it may help them get the balance right between maintaining their current income and having peace of mind about their financial future."

Who can help you manage your retirement income

Deeming rates are just one of the factors involved when managing your finances to maximise retirement income from all sources, including government benefits. "There really are so many different inputs involved and some of them can be very complex," says Anne. "Deemed income for the Age Pension is one consideration, then there may be tax considerations for your actual income when you're making choices about financial assets, including property as well as savings and investments."

The Moneysmart and Centrelink websites are both a good starting point for information on deeming rates, the Age Pension and other types of retirement income. Some Centrelink hubs provide a Financial Information Service (FIS)where you can talk to an officer about your finances. "These are great sources for the detailed information you might need to make decisions," says Anne. "But they're not able to offer advice on your different options. A CERTIFIED FINANCIAL PLANNER® professional will talk to you about the Age Pension and the rest of your finances within the bigger picture of your retirement lifestyle and goals. They can help you come up with a strategy for a secure income that takes account of potential changes to all sorts of things, whether that's deeming, interest rates, inflation or current superannuation policy."

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How much will I get back from my taxes?

Posted on 1 August 2019
How much will I get back from my taxes?

Money and Life
(Financial Planning Association of Australia)

The Australian Taxation Office (ATO) refunds billions of dollars to over three quarters of all taxpayers annually, but it takes a little effort to ensure you get as much tax back as you can. But while Australian taxpayers receive on average around $2,500 in tax refunds annually, there's no guarantee two people earning the same income, will receive the same tax refund.

That's because many Australians fail to maximise their tax deductions they're legally entitled to, and even worse, ATO estimates around 200,000 taxpayers who failed to lodge tax returns last year, would have received a refund.

Getting your financial house in order

While tax deductions are the easiest way to maximise your tax refund, there's some homework to be done to ensure you maximise the tax you get back.

Much of this homework revolves around good record keeping, to ensure everything you claim as a tax deduction is substantiated with a valid receipt. For example, if you're claiming driving expenses for a car that you own, make sure they're diarised along with dates and mileage. It's no different when you're claiming back charitable donations for any amount over $2, so make sure you retain all receipts.

The key variables

Most of the key variables that impact on how much tax you get back, revolve around legitimate work-related expenses that your employer hasn't already reimbursed you for.

If you're unsure of what's tax deductable, why not check what other people in your job are claiming as deductions? But regardless of the industry you're in, generally speaking, most deductions include expenses relating to:

  • Vehicle and travel expenses for travel between work and home
  • Clothing, laundry and dry-cleaning expenses
  • Mobile phone, internet and home phone expenses
  • Overtime meals
  • Self-education expenses
  • Tools, equipment and other equipment
  • Other work-related deductions, like union fees and professional subscriptions
  • Expenses incurred on things like heating, cooling, lighting while regularly working from home

If you're unsure about what work-related expenses you can claim, check out the ATO website.

Super, investment costs or other items

Another way to receive a bigger tax refund is either by making a personal contribution to your super or by adding to your spouse's fund before the end of the financial year. A maximum rebate can be achieved by contributing $3,000 into super.

Given that tax matters relating to investments are inherently complex, having a professional correctly review other investments can return in spades. For example, it may be appropriate to consider offsetting the loss you're carrying on any assets (like shares and units) against a profit made on the sale of others' assets, on which capital gains tax is now payable.

A timely review of the income protection insurance (you already have through your super), can also result in tax benefits. That's because a policy taken out in your own name (this financial year) can be claimed against assessable income, thereby potentially reducing the up-front cost of protecting your income. Similarly, if you earn more than $90,000 (singles) or $180,000 (families and couples), you can avoid the Medicare Levy Surcharge(calculated at the rate of 1% to 1.5% of your income) by having hospital cover, which in addition to providing the cover you need, may also be cheaper than the surcharge itself.

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How criminals steal your identity information to steal your money

Posted on 23 July 2019
How criminals steal your identity information to steal your money

ACCC (Australian Competition & Consumer Commission) & SCAMWATCH

Scams reported to the ACCC involving identity theft or the loss of personal/banking information have cost Australians at least $16 million this year, and this figure is likely to be just the tip of the iceberg.

Four in 10 Scamwatch reports in 2019 involve attempts to gain information or the actual loss of victims' information.

"If you think scammers might have gained access to your personal information, even in a scam completely unrelated to your finances, immediately contact your bank," ACCC Deputy Chair Delia Rickard said.

"Timeliness in alerting your financial institution is absolutely crucial, and will give you the best possible chance at recovering your funds."

Some of the ways scammers obtain personal or banking information are:

  • phishing emails and text messages which impersonate banks or utility providers seeking your login details
  • fake online quizzes and surveys
  • fake job advertisements
  • remote access scams in which the scammer has direct access to everything on your computer
  • sourcing information about you from social media platforms
  • direct requests for scans of your driver's license or passport, often in the course of a dating and romance scam.

"No one is really selling an iPhone for $1, or rewarding the completion of a survey with expensive electronic goods or large gift vouchers. They're scams to get your valuable personal information," Ms Rickard said.

"The identity thieves can make victims' lives a nightmare. They'll change the victims' phone carrier so they lose service and set up mail redirections so they're in the dark about what's going on."

Scammers can empty victims' bank accounts, take out tens of thousands of dollars in bank loans under victims' names, and purchase expensive furniture or electronics under 'no-repayments for 12 months' schemes.

Lost personal information also leaves victims more susceptible to future scams. Scammers will use the victim's personal information to seem more convincing in cold calls.

"The trick is to be alert to the signs. If your mobile phone suddenly loses coverage, you haven't received expected electronic or physical mail, or you receive unexpected notifications from a financial institution, call your bank."

If you have been the victim of identity theft, contact IDCARE on 1300 432 273. IDCARE can guide you through the steps to reclaim your identity.


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How much do I need to retire?

Posted on 18 July 2019
How much do I need to retire?

Money and Life
(Financial Planning Association of Australia)

How much do you need to save to make sure you have enough to last throughout retirement? It very much depends on what your living costs will be after leaving work.  Find out more about how to budget for the retirement income you'll need for the lifestyle you're planning for.

When you plan to retire will often be determined by whether you can afford to stop working and still have enough income to maintain your lifestyle. Latest figures from the Australian Bureau of Statistics show the majority of men (36%) and women (22%) chose to retire at the time when they became eligible to draw on their superannuation and/or the age pension. And their average age at retirement was 63.5 years.

If you're planning to delay retirement until your super balance reaches an amount you can comfortably live on, just how do you determine what that target should be? There are a number of factors that will affect how far your money will go, including your life expectancy, how your money is invested and other choices you make for managing your income. But one of the most important steps to planning for a secure financial future in retirement is to be realistic about your living costs.

How your living costs might change

As you stop working and have more time to yourself, your routine will change and you might save on some costs as a result. Spending on transport could fall as you no longer have to commute. If buying lunch and takeaway coffees has been a daily habit while working, you could also make significant savings by leaving these out of your retirement routine. Other living expenses, such as buying groceries and clothes and paying household bills are likely to be much the same before and after retirement.

Thinking about how you'll spend time in retirement and where you're planning to live will also give you clues about how your spending might go up or down. If a few trips overseas are on the cards, you'll need to allow for these occasional costs in your overall budget. But if you're planning to limit travel to domestic holidays only, then you won't need to allow for these expenses in your financial plan.

Start with a ballpark estimate

How much travel you plan to be doing is just one of the many daily and one-off costs taken into account in the Retirement Standard estimates for annual expenses. Updated every quarter by the Association of Superannuation Funds of Australia (ASFA), these figures can give you a rough idea of what you can expect to be spending day-to-day in retirement.

There are two estimates available, a higher one for a comfortable lifestyle and a lower amount for a modest lifestyle. As at December 2018, the amount you'd spend as a single person aged around 65 years enjoying a comfortable lifestyle is $43,317 and for a modest lifestyle the annual budget is $27,648. The estimate for couples is $60,977 and $39,775 for comfortable and modest lifestyles respectively.

To give you an idea of how differences between a modest and comfortable budget might impact on your retirement plans, the annual travel budget is a good place to start. A couple living modestly can expect to spend approximately $2,500, with no allowance for overseas trips. On a comfortable budget, a couple can splash out more than $5,000 each year on travel, with roughly a third going towards international travel.

The cost of lifestyle changes

Although it's wise to build a budget based on what you expect to be doing in early retirement, your overall plan should also take into account potential for lifestyle changes as you age. Travelling for longer periods, dining out and entertainment and taking part in sports and hobbies could taper off as you grow older. Health and aged care costs, on the other hand, could make up a larger share of your budget in the later years of retirement.

A plan to see you through retirement

Your expenses are just one side of the whole budget planning process. Taking a good look at all your retirement income options is just as important to figuring out how much you'll need and when you'll be ready to take that step. From the age pension to the equity in your home to retirement income products such as annuities and account based pensions, there are all sorts of ways to support yourself financially towards having the lifestyle you want.

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