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How to build a cash buffer...fast · The Money Puzzle

0:10
Speaker 1: Hello, and welcome to The Australian's Money Puzzle podcast. I'm
0:13
Speaker 1: James Kirby. Welcome aboard everybody. Now, look, it's indisputable. I
0:16
Speaker 1: think we can say at this stage that investment markets
0:19
Speaker 1: share market in particular are at an inflection point. And
0:23
Speaker 1: this obviously is based on credible, logical, rational concern over
0:31
Speaker 1: the unleashing of the tariff policy in the US and
0:36
Speaker 1: the consequences of that for markets. Some of the biggest
0:39
Speaker 1: names and best minds, if you like, in investment are
0:45
Speaker 1: openly expressing concerns. Ray Dally, Oh, I'm sure a lot
0:49
Speaker 1: of you have read or heard of talking great concern
0:52
Speaker 1: over ever recent days. On our own show, Chris Coff
0:55
Speaker 1: in the which you shouldn't miss if you did miss it,
0:58
Speaker 1: which was the last before Easter, and he talked about
1:01
Speaker 1: his concerns for the market, and you know, I thought
1:03
Speaker 1: it was great that he came out and expressed clearly
1:06
Speaker 1: what he was thinking. Now we don't no one knows
1:09
Speaker 1: who's right and who's wrong just now. No one knows
1:11
Speaker 1: the future. But he was extremely skeptical about buying the
1:13
Speaker 1: dip for instance, and this is someone who's outstanding fund
1:17
Speaker 1: manager legendary fund manager in Australia on the board of
1:20
Speaker 1: UNI Super, the fourth biggest super fund, on the board
1:23
Speaker 1: of RGO, the listed investment companies. Someone really plugged into
1:27
Speaker 1: investment committees and where they're coming from. So you have
1:31
Speaker 1: this issue that it is a time that you should
1:34
Speaker 1: have cash. This is the common denominator of you, like
1:37
Speaker 1: among what these people are saying. Now that's not to
1:40
Speaker 1: say that you shouldn't bargain hunter or whatever, but today
1:43
Speaker 1: I am going to concentrate on that single issue, okay,
1:47
Speaker 1: which is building cash buffers at a time of great
1:51
Speaker 1: unease in the markets, which is exactly where we're at.
1:54
Speaker 1: To help me with this, I have financial planner Liam
1:57
Speaker 1: short of the son of S Group, who has been
1:59
Speaker 1: on the show before and is particularly expert on this issue,
2:03
Speaker 1: and I talked to him regularly about this. How are you, Liam,
2:07
Speaker 1: Good morning.
2:08
Speaker 2: Let's just talk to you, James.
2:09
Speaker 1: I knew nothing at all about cash, but I knew
2:11
Speaker 1: I should have cash. I would be aware of a
2:14
Speaker 1: couple of things that the rate cycle, as far as
2:17
Speaker 1: I know, has topped out. So the RBA did its
2:20
Speaker 1: first cut in years, only one cut so far, everyone's
2:23
Speaker 1: talking about more cuts but in terms of cash, having cash,
2:28
Speaker 1: where to put it on, how much you could get
2:31
Speaker 1: for your cash at the moment. Can you give us
2:33
Speaker 1: an idea what the settings are and what the momentum is.
2:38
Speaker 2: Yeah, So you always need to be aware the banks
2:40
Speaker 2: are moving a lot faster than the Reserve Bank. So
2:43
Speaker 2: for example, four months ago, we were getting five point
2:46
Speaker 2: three percent for a one year term deposit. Now the
2:49
Speaker 2: best right we're seeing is about four point six. Okay,
2:52
Speaker 2: so even though there's only been one rate cut, we're
2:54
Speaker 2: almost priced in three rd cuts into the term deposit rights.
2:57
Speaker 2: So then we have to talk about this two types
3:00
Speaker 2: of cash. There's lazy money that you just leave sitting
3:03
Speaker 2: in a check account or a low interest savings account,
3:07
Speaker 2: and this cash that you get working for yourself, that
3:09
Speaker 2: you can afford to either not touch it for a
3:12
Speaker 2: month or longer, and that you can make sure it's working.
3:15
Speaker 2: What we're seeing is some of those some of the
3:17
Speaker 2: banks have still got their high interest cash accounts. So
3:20
Speaker 2: those cash accounts where they're adding the bonus interest if
3:23
Speaker 2: you put in an extra two hundred dollars or fifty
3:25
Speaker 2: dollars a month, they're really worth while taking care of, Okay,
3:29
Speaker 2: and using them. But you've got to use them smartly.
3:32
Speaker 2: If it says that you've got to put in an
3:34
Speaker 2: extra fifty dollars a month and you have to do
3:36
Speaker 2: four transactions, set those up as automatic. Set fifty dollars
3:41
Speaker 2: in there, automatically. Pay some small bills that you pay
3:46
Speaker 2: on a monthly basis, Set them up as automatic so
3:48
Speaker 2: you don't miss that key bonus interest because it's often
3:52
Speaker 2: the base interest rate is one point five or one
3:54
Speaker 2: point seventy five and the bonus is three or three
3:57
Speaker 2: and a half.
3:58
Speaker 1: And this is this is standard fair, now, isn't it like?
4:00
Speaker 1: This is really yeah, this is unfortunately you can't just
4:05
Speaker 1: it's almost rare that you get a clean cut. Here's
4:07
Speaker 1: the rate. It has to be sort of strings attached.
4:10
Speaker 2: Yeah, and don't be loyal to any one bank. Shop
4:12
Speaker 2: around and see what you can get. And then we're saying,
4:17
Speaker 2: if you've got money that's available for more than one month,
4:19
Speaker 2: look at term deposits, look at laddering term deposits. Six nine,
4:22
Speaker 2: twelve months before rights started dropping, we were lucky in two, three,
4:27
Speaker 2: four and five year term deposits and also some annuity,
4:30
Speaker 2: so we were.
4:31
Speaker 1: Able to elain if you were to the listeners about
4:33
Speaker 1: what laddering means exactly, and they have this in bonds
4:37
Speaker 1: in the US, I know, but if you might just
4:39
Speaker 1: explain to listeners the concept behind laddering.
4:41
Speaker 2: Yeah, and I'd probably talk about it in terms of
4:44
Speaker 2: funding your retirement. We always want to have two to
4:48
Speaker 2: five years pension money or income that you require in
4:52
Speaker 2: cash and fixed interest. But if you don't need some
4:54
Speaker 2: money till the third year to finance the third year,
4:57
Speaker 2: instead of just constantly rolling it over one year, turn deposits,
5:01
Speaker 2: lock it into a three year, turn deposit, lock it
5:03
Speaker 2: into a two year, lock it into a four year,
5:05
Speaker 2: so that you're timing the maturities at the same time
5:09
Speaker 2: as when you'll actually need the funds, and not leaving
5:11
Speaker 2: yourself open to a variable interest rate on a savings
5:14
Speaker 2: account that's a more life you're going to drop fairly
5:16
Speaker 2: fast over that period. So it's all about making sure
5:19
Speaker 2: that the money is invested for the times you need it,
5:23
Speaker 2: for the timescale you need it on the timeline.
5:26
Speaker 1: Yeah, that's the laddering approach. So it's and it's working
5:30
Speaker 1: on the assumption, obviously, the fairly fundamental assumption that the
5:32
Speaker 1: longer you lock it up for the more you'll get,
5:35
Speaker 1: and then what would be the range at the moment
5:37
Speaker 1: between say a month and a year and four years.
5:40
Speaker 2: So on one month you can some of the banks
5:43
Speaker 2: are paying as little as three percent. For one year,
5:45
Speaker 2: as I said, we can get four point six. With
5:48
Speaker 2: the average bank nails down to four point three, you
5:52
Speaker 2: can still get around four point six for two years
5:54
Speaker 2: and three years. So we've all some people have already
5:57
Speaker 2: missed about. Okay, you should always be thinking about these
5:59
Speaker 2: things before they actually happen. You need to be thinking
6:03
Speaker 2: where we're seeing. If the markets are going well, if
6:06
Speaker 2: they're economies doing well, then it's time to start putting
6:09
Speaker 2: money away for the bad times. And it was being
6:12
Speaker 2: met very clear that the Reserve Bank was holding or
6:15
Speaker 2: not reducing interest rights, but that there was a bias
6:17
Speaker 2: towards reducing them as soon as they got the unemployment
6:20
Speaker 2: figures where they wanted and inflation where they wanted it.
6:23
Speaker 2: So six months ago we knew this was going to
6:25
Speaker 2: be happening, and so the people who managing their own
6:27
Speaker 2: money should have been moving money into these longer term
6:30
Speaker 2: exposures at that stage.
6:32
Speaker 1: And if somebody was of an opinion now a regular investor,
6:36
Speaker 1: but was saying, oh, hang on a second, I don't
6:38
Speaker 1: like the markets at the moment. They are highly volatile.
6:41
Speaker 1: We're seeing them moving up two and three percent. We
6:43
Speaker 1: had the worst day and the best day in since
6:46
Speaker 1: COVID inside a week recently. That's the signal if ever
6:50
Speaker 1: you saw wanted, it's highly volatized. So if somebody was saying, look,
6:52
Speaker 1: I never really had much cash. I like to be
6:55
Speaker 1: fully invested, but on this occasion, I am thinking about
6:59
Speaker 1: putting cash and investing it as an seeing it as
7:03
Speaker 1: an asset class for this period. And if someone was
7:06
Speaker 1: doing that, tell us that there's some guidelines. For instance,
7:10
Speaker 1: I go out and I see that I'm going to
7:12
Speaker 1: I'm going to use Combank. I don't know what the rates, however,
7:14
Speaker 1: I'm going to see that Combank has a rate for cash,
7:17
Speaker 1: and I'm going to see bank Zip Zip, that I've
7:19
Speaker 1: never heard of in my life, has a rate that's
7:21
Speaker 1: a percentage higher. They're both banks, they're both strictly and
7:25
Speaker 1: legally and technically approved depositive taking institutions, which means they're
7:29
Speaker 1: both covered by the guarantee. And this is the great
7:33
Speaker 1: thing about cash, which we must explain to listeners and
7:36
Speaker 1: the unlikely event, guys, that you don't already know it.
7:38
Speaker 1: All cash in banks or approved to posit taking institutions
7:43
Speaker 1: is guaranteed by the government in Australia to the tune
7:45
Speaker 1: of two hundred and fifty thousand per bank. So part
7:49
Speaker 1: I'm making Liam is if they're all guaranteed, need we
7:52
Speaker 1: worry about brand names or the fact that one bank
7:55
Speaker 1: is much smaller than another.
7:57
Speaker 2: Not really for the government guarantee. Remember also its per institution.
8:02
Speaker 2: So you can put two hundred and fifty thousand with
8:05
Speaker 2: Saint George and put another two fifty with Westpac, can
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Speaker 2: expect the guarantee. It's both so and that goes back
8:12
Speaker 2: to thinking about what banks merged during the after the
8:15
Speaker 2: GFC and so come Bank Bank, West nab On, New
8:19
Speaker 2: Bank and West pack in c George. So you've got
8:22
Speaker 2: to think in terms of institutions.
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Speaker 1: Okay, So a great point, Liam, and folks. The problem
8:27
Speaker 1: is the bank's virtually conceal this. If you're with Bank
8:30
Speaker 1: of Melbourne, you would not necessarily know that you're with
8:33
Speaker 1: the same group that also owns Saint George, which is
8:36
Speaker 1: West Bank, because they tried to keep the brands distinct.
8:39
Speaker 1: As Lean pointed out, if you're with Bank West, don't
8:42
Speaker 1: think that if you had half your money with Bank
8:45
Speaker 1: West and half with Combank, in fact you only have
8:47
Speaker 1: it with the one banking institution, which is the parent
8:50
Speaker 1: company Comebank, which owns Bank West. Really good point, Liam,
8:52
Speaker 1: really good, especially for perhaps that's maybe older listeners that
8:56
Speaker 1: had money in banks or had some faith in their
8:59
Speaker 1: local bank, so Bank of Melbourne which is actually owned
9:01
Speaker 1: by a Sydney bank, Westpac, for instance.
9:03
Speaker 2: Yeah.
9:04
Speaker 1: Yeah.
9:04
Speaker 2: The other thing is, yes, they're all covered by the
9:07
Speaker 2: government guarantee. But if you've got your one year money
9:12
Speaker 2: and you need to make sure that is liquid, yes
9:14
Speaker 2: the government guarantee is there, but you don't know how
9:16
Speaker 2: long it's going to be till it's paid. If a
9:19
Speaker 2: bank did collapse, okay, so possibly with six to twelve
9:23
Speaker 2: month money, we'd probably still say stick with the bank
9:25
Speaker 2: that's at least BBB triple B rated, so it's got
9:28
Speaker 2: a good credit rating. But overall, and I tend to
9:31
Speaker 2: not put the fill two fifteen. I'll put in two
9:33
Speaker 2: thirty five to make sure that any interest is covered.
9:38
Speaker 1: You are conservatively sure I'm dealing.
9:42
Speaker 2: With other people's money. So I've got a true I've
9:44
Speaker 2: got to take care of it and just making sure
9:48
Speaker 2: that don't have the loyalty to the banks. They have
9:50
Speaker 2: no loyalty to you anymore. So look for those best
9:53
Speaker 2: interest rates if possible, look for an abrary. Look for
9:55
Speaker 2: a facility that gives you access to more than one
9:58
Speaker 2: or two banks than going direct to each bank, because
10:01
Speaker 2: that can get complicated nowadays, having to prove your identity
10:04
Speaker 2: with all of them, having to have your logins and
10:06
Speaker 2: everything like that. So look at that. There are services
10:09
Speaker 2: out there like Australian Money Market and cashworks and stuff
10:12
Speaker 2: like that that that are offering access to twenty or
10:14
Speaker 2: thirty different banks, and you can have it all there
10:17
Speaker 2: spread across all the banks. At the end of the year,
10:19
Speaker 2: you get nice tax report for your SMSF for your
10:22
Speaker 2: all times.
10:22
Speaker 1: Yeah, they're your channel through to the different banks and
10:24
Speaker 1: they clip the ticket. I assume somehow.
10:26
Speaker 2: They get paid by the banks, so roughly you get
10:29
Speaker 2: the same as you're paid in the actual bank branch.
10:32
Speaker 2: So the banks have allowed for what the branches custom
10:35
Speaker 2: similarly allowed for what these wholesalers customers.
10:37
Speaker 1: Gee, yeah, a bit like I suppose a bit like
10:39
Speaker 1: mortgage brokers for the same sort of thing. They don't
10:42
Speaker 1: advertise much. They're not very well know what would the
10:44
Speaker 1: two you mentioned Again, we are not in any way
10:46
Speaker 1: picking these out as the best or anything, but two
10:48
Speaker 1: more popular ones. Liam.
10:49
Speaker 2: Yeah, So Australian money market is my one, and then
10:52
Speaker 2: there's I'm not sure if cashworks called cashworks, it might
10:56
Speaker 2: be called term deposit, dot com, dot au. There's a
10:58
Speaker 2: few out there, but Australian honey markets tended to be
11:01
Speaker 2: the leader in the space.
11:02
Speaker 1: Very good. One last thing before we go to the
11:04
Speaker 1: break about all that. It sounds very laborious because the
11:08
Speaker 1: banks do these honeymoon deals. So I go in, the
11:10
Speaker 1: bank says, listen, we're offering four point five percent right
11:13
Speaker 1: now on your cash. But three and a half of
11:15
Speaker 1: that is if you do this and this and you
11:16
Speaker 1: get a one percent basic rate. I forget to do
11:19
Speaker 1: it one week and it's all gone. And that is
11:22
Speaker 1: I don't get the rate. You're saying. Set up direct
11:24
Speaker 1: debits or automatic arrangements, which is very smart, but these
11:28
Speaker 1: honeymoon deeds they only last a year or so.
11:30
Speaker 2: Uh yeah, And that's why I use it for similar
11:32
Speaker 2: money market because at the end of the six months
11:35
Speaker 2: or nine months or twelve months, I just go in,
11:37
Speaker 2: I see the rates from twenty different banks from one
11:39
Speaker 2: month out of five years. Flicky button, and it moves
11:42
Speaker 2: to the other bank automatically.
11:43
Speaker 1: Can I ask a technical question, if you had a
11:45
Speaker 1: self managed super fund and you linked up with one
11:47
Speaker 1: of those intermediaries cashworks, money market, whatever they are, is
11:52
Speaker 1: that it will that do you for all the banks
11:53
Speaker 1: because traditionally, as I record, if you had an SMSF
11:56
Speaker 1: and you wanted to put cash in a term deposit,
11:59
Speaker 1: you've got to show your superannuation deeds and everything.
12:02
Speaker 2: So you do all that upfront one time with the
12:04
Speaker 2: actual provider, and then they researtified as advisors. It's on file.
12:09
Speaker 2: The money marketer whoever will use that then to open
12:12
Speaker 2: the account. So once a year we will update the
12:14
Speaker 2: IDs for example, but the trust needs is the trust aed.
12:18
Speaker 1: So it will serve for all banks exactly. Lovely. Okay,
12:21
Speaker 1: that's interesting, okay, folks. So we'll be back in a moment.
12:24
Speaker 1: We're going to develop this way of thinking about building
12:27
Speaker 1: buffers fast if you need to in what is a
12:30
Speaker 1: fairly wild investment market. Just now, hello and welcome back.
12:47
Speaker 1: To The Australian's Money Positive podcast, a fairly sober episode
12:52
Speaker 1: this folks, and could could you blame us for having
12:56
Speaker 1: this approach? Everyone that's been on the show is concerned
12:58
Speaker 1: about the markets levels. As I speak. This is Easter Tuesday.
13:04
Speaker 1: We just had another three percent drop last night on
13:07
Speaker 1: Wall Street because of what Trump is trying to do
13:09
Speaker 1: around the Federal reserve. These are absolutely fundamental concerns about
13:16
Speaker 1: how the market that we have known all our lives works.
13:20
Speaker 1: How does the federal reserves work inside of the US,
13:23
Speaker 1: how does the global trade order work? These are open
13:25
Speaker 1: and under questioned just now. And it's no surprise that
13:30
Speaker 1: the share markets are showing that fairly severely. Our ASX
13:34
Speaker 1: is down for the year to date by about five percent.
13:38
Speaker 1: The global market represented by Wall Street S and P
13:42
Speaker 1: five hundred is down for the year to date this
13:44
Speaker 1: morning twelve percent. That's a fairly rough market to try
13:49
Speaker 1: and make money in. And that is why we're talking
13:50
Speaker 1: about cash and liquidity today. Liquidity obviously being the ability
13:54
Speaker 1: to catch out something fast. Right, So a notoriously i
13:58
Speaker 1: liquid investment would your property right? You can't you own
14:02
Speaker 1: an apartment? It's worth the three hundred thousands, but you
14:04
Speaker 1: can't take twenty grand out of it. You just can't deliquid.
14:07
Speaker 1: But if you have listed investments of any description, as
14:11
Speaker 1: opposed to unlisted investments, you should be able to get
14:14
Speaker 1: your cash out as much as you want really, at
14:17
Speaker 1: any time fast, with the exception perhaps of some small
14:19
Speaker 1: cap stocks. So Liam, just to develop it a little bit,
14:24
Speaker 1: could you repeat Also, at the start of the show,
14:25
Speaker 1: you mentioned this was obviously for investors. Well it wasn't all.
14:32
Speaker 1: This was investors who need their investments to pay their income.
14:35
Speaker 1: I suppose you were talking about emergency funds. But let's
14:37
Speaker 1: just talk about liquidity tools for any investor of any
14:41
Speaker 1: age at this time. If you were I, you've explained
14:45
Speaker 1: to us about what to do with cash? What about
14:47
Speaker 1: raising cash? If I came in to you when I
14:49
Speaker 1: was a fully diversified investor and I said to you,
14:52
Speaker 1: I've always been fully invested, but I and I never
14:54
Speaker 1: paid much attention to cash. I need to now, where
14:58
Speaker 1: would you start the compass?
15:01
Speaker 2: Well, the first thing I'd say is stop any dividinary
15:03
Speaker 2: investment plans. You've got their fools game nowadays because of
15:07
Speaker 2: the fact that we've got dividends stripping funds out there
15:10
Speaker 2: that basically jump into shares before the dimendends are paid,
15:14
Speaker 2: stay the forty five days, and then exit. It means
15:17
Speaker 2: that usually when the d RP price is set, it's
15:19
Speaker 2: at the very peak of the share price. So the
15:22
Speaker 2: idea that you're getting a good deal by dividend reinvesting
15:26
Speaker 2: it's no longer true.
15:27
Speaker 1: That's very interesting, Yeah, very interesting. They have faded a bit.
15:30
Speaker 1: Have they Have you any sense of how many give
15:32
Speaker 1: them anymore? Maybe it seems to me, is it like,
15:35
Speaker 1: have you any idea how many of the top fifty
15:37
Speaker 1: give have DRPs that's dividend reinvestment plans folks, if you.
15:41
Speaker 2: Have honestly, I would say it's only third of it now.
15:43
Speaker 2: But as they are struggling to raise casher, they're trying
15:47
Speaker 2: to hold on to investors that some of them, especially
15:50
Speaker 2: unlisted funds for example, they're starting to offer discounts again
15:53
Speaker 2: under DRPs, so you can tell when they're stress for liquidity.
15:57
Speaker 1: Interesting, but you're telling me that in any event, the
15:59
Speaker 1: do is you're getting a raw deal because you're the
16:03
Speaker 1: listed company XYZ Limited that you have the d RP
16:07
Speaker 1: with they apply it on the day where the thing
16:09
Speaker 1: was at absolute peak because the dividends strippers are about
16:12
Speaker 1: to come in and play around that. See that's very interesting.
16:16
Speaker 1: So what your I don't want to go too far
16:19
Speaker 1: off track here, but are you are you generally do
16:23
Speaker 1: you generately tell people not to bother with dividend reinvestment
16:25
Speaker 1: plans because they do have a discipline leem I suppose,
16:28
Speaker 1: which is useful, just like investment property has a discipline
16:30
Speaker 1: makes you pay the mortgage.
16:31
Speaker 2: But if you're disciplined, you can have the same discipline
16:33
Speaker 2: by taking the DRPs and every three months looking and saying,
16:37
Speaker 2: where's the best place to pace that toward lay uly
16:40
Speaker 2: putting it into your existing portfolio. It may be the
16:43
Speaker 2: time to diversify it. In a time like this, you
16:46
Speaker 2: might say, well, look, instead of just divilinearlyinvesting, I'm actually
16:49
Speaker 2: all the dividends that come out. I'm actually going to
16:51
Speaker 2: specifically target it at a high yield fund or targeted
16:54
Speaker 2: at something that has dropped pretty significantly. So it's far
16:58
Speaker 2: better to be an investor who's actually thinking about the
17:00
Speaker 2: investments rather than just sit and forget. Because as we've seen,
17:05
Speaker 2: if somebody was just pumping money into the Magnificent seven,
17:07
Speaker 2: that have done great for the last couple of years,
17:10
Speaker 2: they would have been smashed this year. I've got clients
17:12
Speaker 2: who they take their dividary investments and they pump that
17:15
Speaker 2: into gold and they've done really well to that over
17:17
Speaker 2: the last few years. And it's just for them. It's
17:21
Speaker 2: just basically it's a regular routine of what they do
17:23
Speaker 2: with it. But also then for younger people with a mortgage,
17:27
Speaker 2: take those any dividends you've got and shove them into
17:30
Speaker 2: your offset account and build up a cash reserve. It's
17:32
Speaker 2: not affecting your income, so the offset account doesn't earn
17:37
Speaker 2: interest and just saves your interest on your loan, so
17:39
Speaker 2: it's not adding any tax of linking to your account,
17:42
Speaker 2: and it's basically making sure you're paying down your mortgage
17:44
Speaker 2: quicker that the money is available. Money in an offset
17:47
Speaker 2: account is your money. Money in a redraw is the
17:50
Speaker 2: bank's money, so they can always take away the redraw.
17:53
Speaker 2: The offset account is your money. So just be smart
17:55
Speaker 2: on things like that and just something off the cuff.
17:58
Speaker 2: I've seen a lot of people now bilding up a
18:00
Speaker 2: cash reserve by just going around their house and seeing
18:03
Speaker 2: what they don't use anymore, selling it on Facebook Marketplace
18:06
Speaker 2: or gum Tree and just building up that cash reserve.
18:09
Speaker 2: And I think when we go two times like this,
18:11
Speaker 2: when the cost of living has gone up, people are
18:13
Speaker 2: more willing to look around and go, look, I haven't
18:16
Speaker 2: use that thing for a year. We bought that on
18:18
Speaker 2: a win that we're going to go off camping, and
18:20
Speaker 2: we bought the full setup. I'm gonna three hundred and
18:23
Speaker 2: fifty dollars King's Age refrigerator. It has just been sitting
18:27
Speaker 2: in the garage.
18:28
Speaker 1: Every house has some version of that. Sure, I'm sure
18:31
Speaker 1: there's one in my house. Starting to think what it is,
18:33
Speaker 1: but I'm sure it's there more for our investors. More typically,
18:35
Speaker 1: I suppose it would mean in if you were an
18:41
Speaker 1: accumulation phase, the younger investor, and you had your self,
18:46
Speaker 1: you had your contributions going into SUPER every month through
18:50
Speaker 1: your salary the concession that is the thirty thousand you
18:53
Speaker 1: can put into SUPER each year pre tax. I expect
18:56
Speaker 1: that it would mean that you don't that you use
18:59
Speaker 1: for cash accumulation.
19:01
Speaker 2: Yeah, but what you do with that is during the
19:03
Speaker 2: year you save that in your offset account, so saving
19:05
Speaker 2: you interest, and then you just put it in the
19:07
Speaker 2: last month of the year. Okay, so you're still getting
19:10
Speaker 2: your tax deduction, but rather than sounding sacrificing or doing
19:13
Speaker 2: it early in the year, you put it into your
19:16
Speaker 2: offset account and then when it comes to June you
19:18
Speaker 2: do a lump sum and claim it as a tax
19:20
Speaker 2: deduction straight away.
19:21
Speaker 1: After that you put the thirty thousand one go.
19:24
Speaker 2: Well, you're already getting your employer contributions going in regularly,
19:27
Speaker 2: so you might only have ten.
19:28
Speaker 1: Or fifteen your voluntary contributions. Yeah, you've given one go yeah, yeah.
19:33
Speaker 2: And that's it. Yeah, So you're getting the best of
19:35
Speaker 2: boath worlds there. You're saving a bit of money. And
19:38
Speaker 2: then if you know the money that you have outside,
19:40
Speaker 2: what we try and do with young accumulators is fifty
19:43
Speaker 2: percent goes well, thirty three percent goes to short term savings,
19:47
Speaker 2: medium term savings that's a cash high interest account or
19:50
Speaker 2: the offset. Thirty three percent goes for lifestyle okay, paying
19:54
Speaker 2: for a wholiday, paying for not grade of the car,
19:56
Speaker 2: whatever they feel like, and then thirty three percent goes
19:58
Speaker 2: into ETFs. Okay. The good thing about those ETFs is
20:02
Speaker 2: that you can sell them down and they'll settle to
20:04
Speaker 2: your back cabin in three days. So it's thinking long term,
20:08
Speaker 2: but having that short term plan b that if things
20:11
Speaker 2: go wrong, you can dip in and sell them if
20:13
Speaker 2: you need to.
20:14
Speaker 1: Does your skepticism about the dividend reinvestment plans apply to
20:18
Speaker 1: ETFs as well.
20:19
Speaker 2: Yeah, for a dividend stripper, it's very attractive for them
20:24
Speaker 2: to go in there. But again it comes back to
20:26
Speaker 2: don't do lazy investing, Try and be smart. Take the
20:30
Speaker 2: dividends from the ETFs and every three to six months
20:34
Speaker 2: look and see where the opportunities are, or look and
20:36
Speaker 2: see where's the best place for my dollar. And it
20:39
Speaker 2: may be in a time with this for the best place,
20:41
Speaker 2: it's in the opposite the cat and you just leave
20:43
Speaker 2: it there. And as Chris Cuff said, it's probably not
20:46
Speaker 2: the time to buy the dip in the moment because
20:48
Speaker 2: we're not sure this is the dick. There's a ninety
20:51
Speaker 2: day tariff free zone that could come back in. Well,
20:55
Speaker 2: Trump could turn change his mind at any state and
20:57
Speaker 2: just bring it back in. So now the time to
21:00
Speaker 2: build up that buffer, and the buffers not just for
21:02
Speaker 2: your emergency funds, it's an opportunity fund as well.
21:05
Speaker 1: Yes, well, thinking like that, of course, yes, yeah, that
21:08
Speaker 1: it's a think of it. When I say build up
21:10
Speaker 1: cash buffers, I'm not suggesting that you go to cash, folks.
21:13
Speaker 1: I'm suggesting that you accumulate cash for either defending yourself
21:19
Speaker 1: your portfolio, or taking opportunities of what could be lower
21:24
Speaker 1: levels than we are have at the moment. One other thing, Liam,
21:27
Speaker 1: I supposed to go back to the thing about dividend
21:30
Speaker 1: reinvestment plans is there was always the notion that if
21:33
Speaker 1: your investor was good enough, it was good enough to
21:35
Speaker 1: do a d ORP plan with at the start. So
21:39
Speaker 1: let's say I select my investment, and there was always
21:42
Speaker 1: that theory that if if it's good enough, it's good
21:44
Speaker 1: enough to d orp. Is do you see a weakness
21:46
Speaker 1: in that theory.
21:48
Speaker 2: The weakness is that ninety five percent of trading now
21:51
Speaker 2: is computer training. So those different stripping algorithms are looking
21:55
Speaker 2: and saying if a stock is good value, well, they'll
21:58
Speaker 2: buy into it just before the evident I stripped the dividend,
22:01
Speaker 2: and then it will actually fall back down as that
22:04
Speaker 2: money leaves. So yes, long term, if you still believe
22:08
Speaker 2: in a company, you can still put money into it.
22:10
Speaker 2: But I don't believe that I believe that the d
22:12
Speaker 2: ORP you could be leaving three to five percent on
22:15
Speaker 2: the table, which in a lot of cases is you diffident.
22:19
Speaker 1: The exactly So the algorithms have have won on that one. Interesting,
22:23
Speaker 1: and I suppose that that ruling, or that that rule
22:25
Speaker 1: of thumb came from a different time. Okay, take a
22:28
Speaker 1: short break, got some very interesting questions. Hello and welcome
22:43
Speaker 1: back to The Australian's Money Positive podcast. James Kirby here
22:47
Speaker 1: with Liam short s h o Orte of the Sonnets Group.
22:53
Speaker 1: Is now Liam a couple of questions. Would you like
22:55
Speaker 1: to read the first one from Andrew.
22:57
Speaker 2: Yeah, there's been a lot of discussion about the capital
23:00
Speaker 2: Gains tax discount being unfair. Correct me if I'm wrong. However,
23:04
Speaker 2: it's in the purpose of the discount to address the
23:06
Speaker 2: inflationy component of the capital gain. In other words, when
23:10
Speaker 2: an acid appreciate and value due to inflation, why should
23:13
Speaker 2: the investor pay tax on it? Does something CGT discount
23:16
Speaker 2: offset the inflation component, And that's exactly why inflate why
23:20
Speaker 2: the CGT discount was brought in nearly forty years ago.
23:24
Speaker 2: But basically originally it was tied to inflation. So every
23:28
Speaker 2: year you've got you indexed the discount was indexed to
23:32
Speaker 2: the CPI, but the government or somebody decided that this
23:36
Speaker 2: was way too complex to do longer term, so they
23:40
Speaker 2: decided that they would put a flat fifty percent discount discount.
23:43
Speaker 2: I think it was held for more than twelve months.
23:46
Speaker 1: That's right. I think it was Peter Costello. I think
23:49
Speaker 1: maybe Andrew and obviously never advise or information only, but Andrew,
23:54
Speaker 1: maybe the discussion is more often that the capital gains
24:00
Speaker 1: discount is not so much unfair as unfairly large.
24:04
Speaker 2: At the issue, James, is the CGT discount can seem
24:10
Speaker 2: very unfair in a period where we've had low inflation
24:13
Speaker 2: for a long time, okay, but if we've had high
24:17
Speaker 2: inflation for a good number of years. So think in
24:20
Speaker 2: terms of an investment you did for one hundred thousand
24:23
Speaker 2: if when CPI was index link, if inflation went on
24:26
Speaker 2: only two or three percent a year, and you what
24:28
Speaker 2: you're the value of your funders worth two hundred thousand
24:31
Speaker 2: at the end of a ten or fifteen year period.
24:34
Speaker 2: You've got a very good deal because you're getting the
24:36
Speaker 2: fifty percent capital gain tax discount on it. But in
24:39
Speaker 2: a period where you've got very high inflation, that one
24:43
Speaker 2: hundred thousands. It would have to probably grow to two
24:45
Speaker 2: hundred thousand just to keep its own value over a
24:48
Speaker 2: ten or fifteen year period. Yet you're going to have
24:50
Speaker 2: to pay fifty percent capital gains tax on that rise
24:53
Speaker 2: of one hundred thousand. So in periods of high inflation,
24:56
Speaker 2: the capital gains tax discount is not actually a great deal.
24:59
Speaker 2: It's a poorly yes.
25:00
Speaker 1: Right, And what would you classify as high inflation plus
25:06
Speaker 1: five percent?
25:06
Speaker 2: Plus? Yeah?
25:07
Speaker 1: Right, which we nearly touched. We came close to, didn't
25:09
Speaker 1: wait in recent times? Okay, very good? All right, Peter asks,
25:13
Speaker 1: reading between the lines of a recent episode, your bias
25:16
Speaker 1: towards managed funds versus index is apparent. Nothing wrong with that.
25:21
Speaker 1: I'm sure you have declared your interest elsewhere, But for
25:24
Speaker 1: the sake of transparency, don't you think it would have
25:26
Speaker 1: been prudent to declare this bias during the podcast? Okay,
25:30
Speaker 1: thank you, Peter. Your claim that I'm biased in favor
25:34
Speaker 1: of I have to remember who I'm supposed to be
25:35
Speaker 1: in favor of managed funds versus index. No, that not
25:40
Speaker 1: the case. I would respectfully suggest it's not the case
25:43
Speaker 1: I recently had. We had another piece correspondence was it
25:45
Speaker 1: two weeks ago saying I was a bias against industry funds.
25:49
Speaker 1: There's no bias, please, I would hope that there is
25:52
Speaker 1: no bias of we're really looking for the best for all.
25:54
Speaker 1: Investors sometimes get over enthusiastic about something or other. But
25:58
Speaker 1: there's different strokes for differ from folks, let me tell you,
26:01
Speaker 1: and there is no there is. I think we could
26:05
Speaker 1: do a show one investor bias if I could get
26:07
Speaker 1: the right person to talk about it. Karen Neilson. Years ago,
26:10
Speaker 1: I saw him give an investment lecture which was one
26:13
Speaker 1: of the best lectures I ever saw, and it was
26:16
Speaker 1: all about sort of unconscious bias in our subconscious bias
26:19
Speaker 1: by investors. But that's a different thing that the notion
26:23
Speaker 1: that we are the show is pro x or y
26:25
Speaker 1: not really we're looking for the best deal. I would
26:27
Speaker 1: respectfully suggest to you, Peter, but thank you very much
26:30
Speaker 1: for the correspondent. Okay, Paul, there, Liam, if you want
26:34
Speaker 1: to have a go on that one.
26:35
Speaker 2: Okay, Suppaul says, I have a question regarding binding death
26:38
Speaker 2: nominations within super I've seen it written that a BDN
26:42
Speaker 2: is normally a more efficient and an effective way to
26:44
Speaker 2: get cash to adult children rather than through the traditional
26:47
Speaker 2: will process. Can you clarify there if there is a
26:51
Speaker 2: downside to using the BDN approach to leaving money to
26:54
Speaker 2: your children.
26:55
Speaker 1: Very good question, Paul. Can we just liam before we
26:57
Speaker 1: answer it? Can we just make it really clear what's
26:59
Speaker 1: going on here? The will traditionally was the key instrument
27:03
Speaker 1: for all inheritance. Many people now most of their money
27:06
Speaker 1: is in super apart from their family home, and so
27:09
Speaker 1: this binding death nomination is the will dimension of super
27:12
Speaker 1: isn't it right? So putting that on the table, then
27:15
Speaker 1: to go back to Pau's question, you might cover off
27:17
Speaker 1: on what he asked.
27:18
Speaker 2: So the first thing to understand is with our little children,
27:22
Speaker 2: you're super is a separate entity to your will, So
27:25
Speaker 2: your super will not automatically go to your will. So,
27:28
Speaker 2: especially with adult children, you have to use a binding
27:32
Speaker 2: death nomination either way and either send it to your
27:35
Speaker 2: will or send it directly to your children. Okay, The
27:38
Speaker 2: plus side of sending it to your children directly is
27:40
Speaker 2: that it will often go there quicker, and nowadays there's
27:44
Speaker 2: also a lot more chance of a will being challenged.
27:47
Speaker 2: So if if all the money goes into a will,
27:49
Speaker 2: then it becomes a bigger part and people look naturally,
27:53
Speaker 2: when there's money on the table, people are looking to
27:54
Speaker 2: get more of it. So one of the benefits of
27:57
Speaker 2: doing a binding nomination is basically it goes directly out
28:01
Speaker 2: of the children. One of the downsides is if it
28:03
Speaker 2: goes out to them directly, you're looking at the seventeen
28:07
Speaker 2: percent tax on the taxable component of your super So
28:10
Speaker 2: that's any money that you put into your employment or
28:13
Speaker 2: true salary sacrifice, that's called your taxable component. If that
28:17
Speaker 2: passes to your adult children or anybody else out of
28:20
Speaker 2: super you're going to pay seventeen percent. If you send
28:23
Speaker 2: us through the will, he saved two percent, okay, so
28:28
Speaker 2: you don't pay the Medicare levey on that part of
28:30
Speaker 2: it that goes should have.
28:30
Speaker 1: A very good information just to wind back a little bit, Liam,
28:33
Speaker 1: just to finish off for Paul. So the binding denominations
28:38
Speaker 1: in super should everyone do them if they have a
28:40
Speaker 1: super fund? And how often should they update them?
28:44
Speaker 2: Yeah? Well, look, thankfully nowadays there used to be almost
28:46
Speaker 2: three years maximum. Okay, So one I believe everybody should
28:50
Speaker 2: do them. And with a software superman, it's often a
28:54
Speaker 2: lot of lawyers will argue that it's better not to
28:56
Speaker 2: do it, to leave it up to the trustee because
28:57
Speaker 2: it's a husband and wife and it's the partner. I
29:01
Speaker 2: just believe the demand of blended families nowadays you need
29:03
Speaker 2: more certainty, So I believe a bonding nomination is essential.
29:07
Speaker 2: Now most funds will offer you the ability to have
29:09
Speaker 2: a non lapsing body nomination. That means that it doesn't
29:13
Speaker 2: expire every three years, it actually keeps on going beyond.
29:16
Speaker 2: That doesn't mean you don't review it. It just means
29:19
Speaker 2: that just in case your circumstances change, your mental capacity declinent,
29:24
Speaker 2: or something goes wrong, that it's still locked in what
29:27
Speaker 2: your wishes are locked in. And we back that up
29:30
Speaker 2: by saying, if you're doing an empower enduring power of attorney,
29:34
Speaker 2: mention in that enduring power of attorney the power to
29:37
Speaker 2: make a boding nomination on your behalf or make sure
29:40
Speaker 2: that no, I want it fixed as to where my
29:42
Speaker 2: super goes. I don't want the power of attorney to
29:45
Speaker 2: have the ability to change it. So think you're the
29:48
Speaker 2: big picture.
29:49
Speaker 1: Cutting through here. It's talking about fixing for sure where
29:52
Speaker 1: your super goes, and if you want to fix it
29:55
Speaker 1: for sure, permanently. That is permanently until you in your mind,
30:01
Speaker 1: a non lapsing binding death nomination should be made so
30:04
Speaker 1: that you say, my super goes to jack and jail
30:08
Speaker 1: whatever in the future. And that's how you wanted it
30:11
Speaker 1: divided separate to your will, because your will doesn't cover effect.
30:16
Speaker 1: Does your will not cover your super? How does it work?
30:18
Speaker 2: No? So, because the super is a separate trust, it's
30:21
Speaker 2: a totally separate entity. So to have it go to
30:23
Speaker 2: your will, you must specifically send it there. So you'll
30:26
Speaker 2: see on that binding nomination there's an option to put
30:28
Speaker 2: in your children or your spouse. At the bottom does
30:31
Speaker 2: the option legal personal representative and that's your state. That's
30:34
Speaker 2: the executor of your state. But that you have to
30:37
Speaker 2: use those specific world where it's legal person representative. So
30:40
Speaker 2: you'll find a lot we'll do hunder present to the
30:42
Speaker 2: legal personal representative and then deal with a trigger will.
30:46
Speaker 2: With the amount of will's being challenged nowadays, the amount
30:50
Speaker 2: of money we're talking about, you really need to get
30:52
Speaker 2: expert advice or from a lawyer and from your financial
30:56
Speaker 2: panel to ook, look, what are you actually trying to achieve?
30:58
Speaker 2: Where do you want this money to go to? And
31:00
Speaker 2: also through the way you got your will set up.
31:03
Speaker 2: Is it set up a testamentary trust so that there's
31:05
Speaker 2: flexibility for your beneficiary. So it's a big picture thing.
31:09
Speaker 1: Yes, but don't assume your will covers your super rock
31:13
Speaker 1: bottom piece of information from Liam shot this morning. Okay, terrific. Hey,
31:17
Speaker 1: thank you Liam. Great to have you on the show again.
31:20
Speaker 2: Loved it. Thank you very much, James.
31:22
Speaker 1: That was Liam Short of Sonna's Wealth Group and I
31:26
Speaker 1: thought that was something we should do folks. As I say,
31:29
Speaker 1: I think it's a time that you can have your
31:32
Speaker 1: own view as to where the markets are going, whether
31:34
Speaker 1: this is a risk or whether it's an opportunity. But
31:37
Speaker 1: certainly to be cash less in this environment is risky
31:44
Speaker 1: and obviously the older you are, the more that is
31:46
Speaker 1: a pertinent and Liam basically covered that at the start
31:50
Speaker 1: of the show. Terrific. Okay, we've got lots of questions
31:52
Speaker 1: coming in, keep them rolling, please, love to have some more.
31:55
Speaker 1: The Money Puzzle at the Australian dot Com dot Au
31:59
Speaker 1: and Today's Who was produced by Leah Sammerglue. Talk to
32:02
Speaker 1: you soon.