(03) 9020 2905Debt Man column – The West Australian (Business)
January 20, 2012.
Bruce Brammall
Debt Man
January is a pretty good time to be alive in Australia.
The sun’s out. The tennis is on. We’re annihilating India by complete innings. Driving to work’s a breeze. Beer tastes better. The extra daylight hours knacker the kids. It’s Happy Days, without Richie Cunningham’s moaning.
February brings reality. Traffic returns to chaos. The workload returns to frenetic. Mid-week hangovers lose their acceptability. Football returns with the Mickey Mouse pre-season competition.
Kids return to school.
And then that niggling thought resurfaces, as it does every year. “I wonder if my kids will get a massive scholarship?”
Educating the tin lids isn’t cheap. Private schooling is particularly un-cheap. And Australian schools don’t hand out scholarships to dumb jocks, such as Ogre in Revenge of The Nerds, like they do across the Pacific.
But kids at any age are expensive. Clothing, feeding, housing … crèche-ing, iPodding, iPhoning, iPadding.
And as investments, they don’t pay cash dividends, unless they’re Tiger Woods or Shirley Temple.
Given we know it’s coming, why do so many of us leave funding that thundering expense until it actually hits?
Private school fees can be above $20,000 a year. But let’s assume $10,000. Times two kids. Times six years each. That’s $120,000 in today’s money.
If the kids are two years apart, there are four years where you’ve got to find $20,000 a year and four years where you need to find $10,000 (ignoring inflation).
So, how to do you ease that pain? Start some planning/saving earlier of course.
For example, saving a straight $6000 a year for 20 years, from the birth of the first child till the end of year 12 for the second – ignoring compounding returns and inflation – will also get you to $120,000.
But more importantly, what do you do with that money? Here are the main options.
Your mortgage
One of the easiest and most tax-effective ways is to put the extra money into your mortgage (in an offset or redraw account) and then redraw it when required.
The advantage of this is a guaranteed, tax-free, return of whatever interest rate you’re paying on your home. If the average home loan interest rate now is around 6.75 per cent, high income earners earn an effective pre-tax return of 12.61 per cent. For average income earners, the effective pre-tax return is still 10.98 per cent.
The big risk here is “trust”. Can you trust yourself not to dig into the money? If you don’t have a good record there, this could be difficult to manage.
High interest accounts
For renters, high-interest accounts can be a good option. But note the following.
First, you’ll have to pay tax on any interest earned, so put the account in the name of the lower-earning spouse. Second, you’ll need to chase the best rates every few months, as many providers reduce your rate after a honeymoon period.
Investment bonds
These products have a few restrictions, but can make good sense for higher income earners, as they are tax-paid at 30 per cent inside the fund.
You can’t put in more than 125 per cent of your previous year’s contribution and there’s a minimum of 10 years to get the full tax-paid benefits. An upside is that you don’t have ready access to the money.
Education savings plans
These are education specific bonds that can have some particularly attractive tax benefits, if the money is used for education purposes. But be aware that some have serious restrictions on what the money can be used for. Read the fine print.
Direct investment
This can take the form of either managed funds or directly held shares. It comes with much greater flexibility, but if you’re not using an adviser, you’ll need to take responsibility for the investments.
Buying direct shares is relatively cheap, but requires regular supervision, while managed funds will take most of the supervision headaches away for a fee.
Tattslotto and scratch tickets
For dreamers. A million-to-one, load of rubbish, act of desperation. Not recommended. Extreme likelihood is that you’ll just make others rich. But I know it won’t stop some.
Most importantly, get started now, well before the midgets’ fees bear down.
Make your resolution to act early now. Then celebrate tonight with a drink as you savour the rest of January.
Bruce Brammall is the author of Debt Man Walking (www.debtman.com.au) and a licensed financial adviser. bruce@debtman.com.au .