Sunday, November 27, 2011

I forgot my parachute!

"That is amazing" .... "I just can't believe this" ....

The tears in his eyes welled up but I could see he was trying hard to not let them start rolling down his face.  This was a 40-something man in my office and his real-life story goes like this:
I took an appointment that sounded like it was going to be fairly standard. A man calls the office concerned about his financial position and he wants to talk.  The appointment rolls around and we chatted for about 15 minutes during which he tells me that he and his wife and are under some financial pressure.  His wife may need to go back to work and the prospect was making him very unhappy.


I asked him why he was unhappy about his wife returning to work.  He tells me that three years ago she was diagnosed with non-Hodgkin's lymphoma, the treatment has been hell and it was amazing she survived and came through it at all.
He goes on to explain that he probably feels this way because he was so close to losing her and since then they have been living beyond their means - taking lots of holidays, saying yes to the kids more than they should and they are now feeling pressure to pay down the mortgage and start saving for their retirement.
As he continues telling me about his wife's traumatic treatment plan and recovery, I am flicking through their insurance documents.  He owns a trauma policy on his wife which covers, amonst other things, a range of cancers, heart attack and stroke.  Non-Hodgkin's lymphoma is a cancer of the lymphatic system.  There was $110,000 worth of cover, just sitting there, waiting to be claimed to help them manage the costs of treatment and recovery.

I said to him "you know you have this trauma policy - why haven't you claimed on it?"  After a brief pause, he quietly says "to be honest, I didn't even think about it".  I contact the insurer, process the claim and within four weeks I am handing them the cheque for $110,000.  And yes, I'm pleased to report that they have made the most of it - significantly paying down their mortgage and leaving enough to make some great family memories on their next "guilt-free" holiday.

This story has a happy ending but of course this isn't always the case.  Not everyone recovers and not everyone seeks the financial safety of insurance. Given the likelihood of being diagnosed with cancer (some statistics below), let alone any other major medical trauma, take this as a timely reminder to think about your own real-life story.


The Trusted Adviser.
 



Lifetime Risk
Cancer Type
45 year old Male
45 year old Female
All Cancers
1 in 3
1 in 4
Breast Cancer
-
1 in 11
Prostate Cancer
1 in 11
-
Colorectal Cancer
1 in 17
1 in 26
Melanoma
1 in 25
1 in 35
Lung Cancer
1 in 22
1 in 45
Non-Hodgkins Lymphoma
1 in 66
1 in 88
Cancer of the Uterus
-
1 in 75
Cancer of the Kidney
1 in 76
1 in 143

Statistical data provided by IRESS: Risk Researcher 2011

Image: Michelle Meiklejohn / FreeDigitalPhotos.net

Wednesday, November 23, 2011

Trick or Treat?


Did you have children knocking on your door for Halloween on October 31st?   It seems to have become quite popular in our neighbourhood over the last few years and again this year we had a few groups of kids knocking on our door, bags at the ready.  I never say "Trick" because I don't fancy washing eggs off the front windows of my house.  So we had our stock of treats in preparation for the hungry hordes and by treats I mean chocolate and lollies, not a piece of fruit, fresh or dried thankyou very much.  I understand the whole "healthy snack" principle but if I am a kid, I'm not getting all dressed up and running around looking for fruit!

Anyway, in the spirit of Halloween, The Trusted Adviser will make a habit each year around October 31st of asking a "Trick or Treat" question about investing.  

This year, we are going to talk about a certain type of "property educator" that promotes investing in property, often, but not always, through "wealth-creation seminars".  I will kick off by quoting directly from one of these "investment mentors":

"Our earnings come through property developers.  This means we can offer our advice and support free to clients.  We are not here to "sell you a property" - we are here to help you build a property portfolio and achieve financial independence."
OK, so how much do they receive from property developers for finding you "the best investment property": 4% - 6% of the property sale price.  That doesn't sound like "advice and support free to clients" does it. You don't have to be Einstein to work out that this is all about selling a property and it is being dressed up as financial advice ....... and it certainly isn't free!  

These property investment gurus sell these development properties for a commission and their sales angle is emphasize the tax benefits.  Principally, they show the "magic" of claiming depreciation allowances to reduce your personal income tax bill.

My advice to you if ever you find yourself getting the hard sell from one of these "property educators" - remember these three things:


  1. More than half of the purchase price of these development properties can be attributed to the building and yet we know that the building depreciates.  When buying investment property, you want to be putting most of your money into the land component because it is the land on which the house is built that goes up in value over time.
  2. The building depreciation allowance that is being used to promote these properties is deducted from the purchase cost (i.e. cost base) when it comes time to sell, resulting in a higher capital gains tax assessment.
  3. When the tax benefits of an investment are being heavily promoted, think twice about the quality of the investment.
So next time you are invited to a seminar selling development property and you are offered advice for "free", I would suggest that you give it a miss or at least take some eggs with you!  

financial advice
Image:  A Jack o' Lantern made for the Holywell Manor Halloween celebrations in 2003.  Photograph by Toby Ord on 31 October 2003.

Sunday, November 6, 2011

Word of the year?

If I asked you to name the top word for each of the last five years, what would you say?  I’m guessing that you are thinking along the lines of Global Financial Crisis (GFC), or perhaps the gravity-defying rise and rise of Apple (contrary to Newton's law), or even the Social media phenomenon.  If this is where your mind was taking you, then you would be right – at least according to the American Dialect Society (ADS).

For the record, the ADS chose the following over the last four years:

2007:  Sub-prime
2008:  Bailout
2009:  Tweet
2010:  APP  (and surely an honourable mention must go to “Vuvuzela”)

My guess for a front-runner in 2011:  Austerity

In essence, “austerity” means lower spending and at the moment, its utterance is so closely connected with the word “Greece” that the two could almost be hyphenated.  But the Greeks don’t have this urge to over-spend all to themselves do they.  And I’m not just talking about other governments.  It has become part of the human condition.  And at the very heart of the problem – spending on credit!  Which brings me to my point.

Cash is King and managing your cash-flow is paramount to financial success.

If you want to make smart choices with your money, then you need a cash-flow plan just as all successful businesses do.  You need to know what's coming in, what's going out and have a plan for the surplus. If you don't have a surplus, more work needs to be done on the first step to ensure you don't live beyond your means.

People that need credit cards, do so because of poor money management - they've had something unexpected come up and don't have emergency funds, or they are constantly spending more than they have available and keep thinking they'll clear it next month!

Or the marketing con of frequent flyer points has won them over – paying a surcharge of 1-3% (or even 10% in the case of taxi fares) for the privilege of using credit. There is your free flight each year, if you weren't using credit.  And then there are the higher annual credit card fees if attached to a frequent flyer program.  We know, because we see it all the time.  People managing cash-flow on credit cards spend more than they planned to each month and end up paying more than it would have cost for the trips that they are earning for "free".  It’s a false sense of benefit!

The convenience argument is now gone, as debit cards provide the same convenience and you are spending your own money.

The emotional impact is known – you will always think a little longer if you are paying in cash, versus whacking it on the credit card.

Avoid your own taste of “austerity” by making a smart financial decision – develop a cash-flow plan that works without credit.financial advice