Navigating tricky times
With rising interest rates and cost of living pressures, we’ve been having more discussions with clients about ways to better juggle costs and cash flow.
If you’re tightening your belt, or perhaps your kids or grandchildren are feeling the pinch, in this newsletter we share some tips for getting through uncertain times to build a secure future.
Unlocking financial independence for the next generation
It’s natural to want to help the next generation get ahead, but how can this be done in ways that work effectively for you and your family? Here are some ideas:
Set up a long-term savings account
A simple and direct way to help your children or grandchildren is to set up a savings account that passes to them at 18 or 21. Rather than having youngsters fritter away birthday or Christmas money each year, a lump sum when they really need it can be life-changing. Even consider investing the money in shares on their behalf to give them a taste of investing.
Prioritise financial education
Educate the young people in your life on the basics of money management such as saving, investing and compound interest – it can be something to talk about as part of getting their pocket money. While they may not embrace it, more sinks in than you realise and understanding the value of money is a lifelong benefit. When they get their first job, introduce them to your financial adviser to guide them on wise long-term financial decisions. It’s never too early to start learning!
Help out with a real estate deposit
In today’s environment, saving up a 20% deposit can delay a property purchase by years. Contributing to your children’s deposit can put them way ahead in terms of capital gain. Setting the condition that it’s used for a real estate investment ensures it isn’t wasted. You could also consider setting up a capitalised loan facility to help with repayments in the short term. This could include asset protection mechanisms to prevent wealth transfer if a future de facto relationship goes south. We can help you with the details around this.
Invest regionally, live locally
Many children simply can’t afford to buy in the suburbs near their parents. Rather than moving away, they could consider investing in a property in a more affordable area. They’ll have rental income and can use this to rent locally so they can be near family. As the property appreciates, they can build up collateral and trade up over time. This way, they can get into the property market early, rather than waiting until they can afford something locally.
Get creative with dual-living home design
Joint ownership and property division is becoming increasingly popular. For example carving out an independent unit within your property, or converting the garage, where your kids can live with subsidised rent while they save for a deposit. This should also add value to your property when you go to sell, so it’s a win-win. We’re also seeing clients buy joint properties with their children with granny flat accommodation for themselves. This can not only leverage wealth, but it can also keep families together.
Fund school or extracurricular activities
If you have capacity, helping pay for your children’s tertiary education or your grandchildren’s schooling can give them a head start in life. Or consider providing financial support for music lessons, sports activities or other pursuits that can help them develop life skills and pursue their passions. It’s an investment in their future as well as a direct financial help.
Life insurance policies and estate planning
Last but not least, make sure you have your own estate planning and life insurance sorted so that intergenerational wealth is transferred effectively, as per your wishes and in a way that doesn’t cause conflict. On that note…
Do you really need life insurance?
Sometimes put into the too hard basket, having the tough conversation about life insurance is a central component of a comprehensive financial plan. It is the most effective way to secure the financial well-being of your loved ones if you face illness, injury or death.
In Australia, there are four common life insurance products that can be used in combination depending on your stage, dependents and circumstances:
- Income protection: IP pays you an agreed portion of your salary if you are unable to work due to illness, injury or disability. This allows you to continue to meet your living expenses and care for your family while you recover.
- Total and permanent disability: TPD pays you an agreed lump sum if you face illness or injury that prevents you returning to work at all. You can vary the terms, for example you may want to set an amount that would clear your mortgage if you weren’t able to work.
- Trauma insurance: TI pays out an agreed amount if you are diagnosed with a critical illness or injury. It is designed to help you and your family better manage the situation.
- Life cover: Sometimes referred to as ‘term life insurance’ or ‘death cover’, this pays out a lump sum to your nominated beneficiaries if you pass away. Again, it may be used to clear debts or give your loved ones a secure safety net.
A combination of one or more of these options not only gives you and your family peace of mind, but they provide practical help in tough times. Benefits include:
- Replace your income to help your dependents maintain their standard of living
- Clear debts like loans or mortgages so your family is not burdened
- Prevent your family from having to sell the family home to give them security and stability
- Fund your retirement plans where unexpected medical expenses may have depleted your savings
- Help ensure that your affairs and assets are distributed in line with your wishes without causing family conflict
- Cover funeral expenses to ease the stress and costs on your loved ones
As with any financial decisions, it’s best to consult with your financial adviser or insurance professional who can assess your specific situation and guide you on the options that suit you. If you want to update or assess your life insurance cover, we’d be happy to talk.
Ten ideas to cope with rising mortgage rates
With the RBA ratcheting up rates to their highest since 2012 and many fixed rate mortgages ending this year, Australians are feeling the squeeze.
If you or your family members are stretched, here are a few short-term tactics to get through uncertain times:
- Call your existing bank retention team: A good first step is to get in touch with your mortgage provider and ask if you can get a better deal. Home loan competition is fierce so lenders should be doing all they can to keep your business. Call the bank and ask to speak with the retention team to see if they can offer a reduced rate.
- Refinance your mortgage: Get our mortgage broker to investigate your refinancing options with a new lender to see if you can get a better deal. You may want to consider moving to a fixed interest rate to provide you with more predictability and protect you from future rate rises.
- Consider moving to interest only repayments: Pausing principal repayments can be used as a short-term cash flow option until rates or cash flow stabilises.
- Extend your loan term: Making your loan term longer, for example moving from a 20 to a 30 year loan, will reduce your monthly repayments.
- Explore offset accounts: Some mortgage products offer offset accounts linked to your mortgage that allow you to offset the interest charged on your loan with the balance in the account. By keeping your savings in an offset account, you can reduce the interest you pay on your mortgage.
- Make extra repayments: Whether it’s an inheritance, a generous birthday gift or a large tax refund, if you have some spare cash, consider making extra principal payments or a lump sum payment off your mortgage (or your child’s mortgage!). While a luxury in these times, it can reduce the interest you pay over the life of the loan and help pay off your mortgage sooner, reducing your exposure to future rate increases.
- Make more frequent repayments: You’ll need to check with your lender on how they calculate your repayments, but in many cases making repayments more often, for example switching from monthly repayments to fortnightly, will save you money on interest over the course of a year.
- Review your budget: When mortgage rates rise, it’s a good idea to go line by line through your expenses and trim where you can – TV subscriptions and food delivery apps I’m looking at you! This can free up funds to contribute to mortgage payments.
- Increase your cash flow: If you do find yourself in need of extra income, you could consider selling some assets such as shares, downsizing your property or exploring accessing your superannuation early. You may want to contemplate getting a second job or doing some freelance work on the side.
- Seek professional advice: Consider consulting with a mortgage broker or financial adviser to assess your options and develop a sustainable long-term financial plan. They can help you navigate through the complexities of mortgage products, analyse your financial situation and recommend the most suitable strategies based on your goals and circumstances.
Seven things to consider when choosing the executor of your will
Death and taxes are never popular topics, but it’s crucial to lock down your estate plan details to avoid any costly and complex scenarios down the track.
Choosing your executor is a key step. They are responsible for carrying out your instructions, managing the estate assets, paying off any debts or taxes, and distributing the estate assets to beneficiaries according to the will.
Whether you choose a spouse, partner, adult child, friend, lawyer, accountant or another professional here are 7 factors to consider:
- Trustworthiness: Number one is choosing someone you trust implicitly to handle your affairs honestly and responsibly in the best interests of everyone.
- Availability: It’s not a role to spring on someone. Check that your executor is willing and able to dedicate the thought and administration time required.
- Financial and legal literacy: It can be complex so they should have a basic understanding of financial and legal matters, and administrative processes.
- Resilience: Emotions can run high during the process so consider whether your executor will be able to cope. Sometimes someone with a little personal distance can work.
- Objectivity: Money can bring out conflict in families. Your executor should be impartial and make decisions considering all interests objectively. Clear instructions help here too.
- Age and health: Generally choosing someone younger can be a good idea so they are in good health down the track to manage the estate administration.
- Geography: Usually the process requires face-to-face meetings and approvals, so having someone nearby can be advantageous.
If you don’t have a suitable candidate or have complexities in your estate like businesses, trusts or international assets, it’s very common to appoint a professional executor or co-executor who has expertise in managing such matters on your behalf.
What is an appointer and do you need one?
The appointer plays an important role in more complex estate planning. The appointer has the power to appoint and remove the trustee of a discretionary trust, a common structure used for estate planning, particularly for high-net-worth individuals or families.
Typically named in the trust deed, the appointer is responsible for managing the trust assets, making decisions in the best interests of the beneficiaries, and resolving any issues that may arise. For example the appointer can remove or appoint trustees in situations involving the insolvency or death of a trustee, or when a trustee is not acting in a satisfactory manner.
Your appointer should be knowledgeable about the objectives of the trust, and understand the needs of the beneficiaries to make sound decisions. Often, the appointer is a trusted family member or a professional advisor with expertise in trust administration and estate planning.
Like an executor, the appointer can be called on to play a significant role, especially if there are disagreements between beneficiaries. It is always recommended to consult with a qualified financial planner or estate planning professional to understand your requirements and legalities involved.
Don’t overlook your end of year tax planning
As another June 30 rolls around, it’s a good time to take a closer look at your tax position. Here are a few points to consider or areas to discuss with your adviser.
- Salary sacrificing to make additional superannuation contributions
- Making trust distributions to a Pty Ltd holding company
- Prepay income protection for the year ahead
- Home office or car expenses
- Delaying derivation of assessable income
- Bringing forward deductible expenses or losses
- Ensuring minimum pension amounts have been taken out of SMSF
- For business owners review equipment depreciation, stock valuation options, writing off bad debts, asset investment write offs, accelerated depreciation deductions and loan agreements for owners who have borrowed funds from their company
We’re here for you
Financial Decisions is your one-stop, expert financial and legal partner for generations to come. If you have any questions or need advice, please call us on (02) 9997 4647.
Disclaimer: This publication has been compiled by Financial Decisions (AFSL/ACL Number 341678). Past performance is not a reliable indicator of future performance. While every effort has been taken to ensure that the assumptions on which the outlooks given in this publication are based on reasonable data, the outlooks may be based on incorrect assumptions or may not take into account known or unknown risk and uncertainties. Material contained in this publication is an overview or summary only and it should not be considered a comprehensive statement on any matter nor relied upon as such. The information and any advice in this publication do not take into account your personal objectives, financial situation or needs. Therefore you should consider its appropriateness having regard to these factors before acting on it. While the information contained in this publication is based on information obtained from sources believed to be reliable, it has not been independently verified. To the maximum extent permitted by law: (a) no guarantee, representation or warranty is given that any information or advice in this publication is complete, accurate, up-to-date or fit for any purpose; and (b) Financial Decisions nor its employees are in any way liable to you (including for negligence) in respect of any reliance upon such information or advice. June 2023
Contact: Financial Decisions PO Box 484 Mona Vale NSW 1660, T 02 9997 4647, F 02 9997 7407