Rating: Excellent
Making Money Made Simple blurb excerpt: People are living longer, government budgets are stretched, and financial markets are increasingly challenging. With this perfect storm, it’s never been more important to achieve financial independence and take ownership of your future. Luckily, this book is here to help! Making Money Made Simple teaches you how a few simple disciplines can unburden you from a lifetime of financial stress, freeing you up to enjoy all that life has to offer. You will learn:
Simple steps to a lifetime of financial security
A foolproof plan to get out, and stay out, of debt
The guaranteed secret of wealth
How to negotiate the best deal when buying a house
How to save tens of thousands of dollars on your home loan
The blueprint to invest in shares safely and easily
How to protect your hard-earned wealth
Strategies to minimise tax
Proven methods to turbocharge your superannuation
How to identify and defeat (once and for all) your financial enemies
My opinion:
I loved this book and I don't say that often. It covered a wide variety of topics, gave practical examples, and kept the content short and simple so it was easy to consume. If you're somewhat new to personal finance and based in Australia, I highly recommend this book. For that outside of Australia, be warned the target audience is Australians.
Lessons from Making Money Made Simple:
To successfully attain the goal of financial independence you must buy into four basic principles:
Spend less than you earn
Take responsibility for your own financial future, up to and including retirement
Recognise and avoid the major traps that reduce your wealth
Get inertia working for you, not against you
Your motivation for your goals will play a significant part in your success. You need a clear understanding of where you are now, and where you want to be. Next, you need to map a path to get there. Finally, you need to recommit to your goals every single day. More money is not the solution. The average person's financial problems are usually due to poor money management. A Good money Manager:
Saves something out of every pay
Minimises borrowing for items that depreciate
Has a definite goal
Works to their plan
Mixes with successful money managers
Knows that budgeting is a must
Seeks professional advice
Is keen to learn
Invests in items that gain value
Takes responsibility
Where can you take advantage of compounding interest? Or reduce it. Short-term loans for liabilities limit the impact that interest will have. Side note, if you are borrowing money and the interest is not tax-deductible, pay it back fast.
You need three factors going for you if you want to build your net assets:
Capital that has the ability to increase in value (SUM)
Time for compound interest to work (TIME)
A good rate of return to speed up the compounding process (RATE)
If you are investing, start early to give your money time to grow and for compounding to work its magic.
There are two basic principles of investing:
Increasing the amount you invest will proportionately increase the amount you get back
Increasing the time or rate will disproportionately increase the amount you get back
The rule of 72: 72 / compounding rate of return = the number of years it will take your investment to double in value.
Benefits of saving:
It gives peace of mind.
It enables us to buy better (In bulk, on time, or at the right time)
It enables us to invest and make better choices
Aim to save 10 - 15% of your income. If you can't do that start with what you can afford right now. Can you simultaneously increase your income by 10 - 15% whilst also reducing expenses by 10 - 15% to improve your efforts?
How to prioritise your budget:
Investments - Set up an automatic deduction from your payroll. You don't ever want to see this money. If you have personal debt, pay that first. Next, create an interest-bearing account. Once you have enough switch to a suitable investment, such as an index fund.
Essential fixed expenses - rent / mortgage / car payments / school fees etc
Essential variable expenses - food / fuel / phone plans / electricity
Contingencies - car repairs / house repairs / emergencies
Discretionary expenses - clothes / holidays / entertainment / takeaway / gambling
Credit card debt - eliminate it! Roll your debt into a low-interest offering or one which offers zero-interest for balance transfers. Now start a plan to pay off aggressively.
Good Debt is money borrowed to acquire growth assets, such as property or shares. The interest on the loan is normally low, and it is tax-deductible if it is for investment purposes. Bad Debt is money borrowed to acquire stuff that rapidly depreciates in value.
How to destroy bad debt:
List your "bad" debts from smallest to largest.
If any of them are credit card loans, cut up the credit card.
Calculate 10% of the total repayments you are making and figure out a way to increase your income or reduce your expenses by that extra amount.
Direct extra payments, in addition to your current repayment, towards paying off the smallest loan first.
Once that loan is paid off, add both the extra payment and the amount you were paying on the smallest loan to the next smallest remaining loan.
Repeat until all bad debts have been paid off.
*Not mentioned in this book, but I have also seen it ranked and paid based on the debt with the largest interest rate. Doing small first does however build momentum.
Keep a high Credit Score. At worst a low credit score may mean that you cannot get a loan, at best it means you will pay a higher rate of interest if you do manage to get a loan approved. There are many online tools to find out what your credit score is and how to repair them.
Home Ownership:
There are many factors that affect the value of a property. These include how comprehensive the infrastructure is, how well the local government is catering to the needs of the population, how fast the population is growing in relation to the reducing supply of comparable dwellings, and changes in building costs. If you buy land, check the location of the boundaries with a survey company, complete a soil test, and get an estimate of site costs from your builder. All these should be written in as contract conditions that allow you to pull out if necessary.
Ask for a property report from CoreLogic. Pay for a professional building and pest inspection.
Large sums of money can be saved, or made, by skillful negotiation. There are three ingredients present in every negotiation:
Information
Time
Power
The supply of these three is a bit like happiness: most people think that others have more than they do, and they are often wrong.
Sellers may accept a low price if it is unconditional or settles quickly.
You increase your power in the negotiation by having the most information, the most time, and the best negotiating skills.
From a time perspective - does the seller need an urgent sale and short settlement, or are they building elsewhere and want a longer settlement to ensure their new home is built?
Home Loans - things to consider:
If you don't have a 20% deposit you will need to pay mortgage insurance of 1 - 3% of the value.
Does it provide flexibility such as a redraw without having to pay variation fees?
Do you intend to live in it, or is it an investment? Investments are tax-deductible. If this is not an investment property, it is a non-deductible debt. Therefore you should be aiming to pay it off as quickly as possible.
Do you have an offset account set up in case you wish to move or upsize?
What are the set-up fees, ongoing charges, bank fees, redraw fees, and early termination fees?
Is your rate variable or fixed? Or do you split it and focus on paying off the variable component?
If your loan is fixed, how much extra can you pay off per a fixed period? Is there a lock-in fee?
Can you make a monthly repayment of $11 per a thousand dollars?
Look at all aspects of the loan - features, flexibility, fees, interest rates, can you redraw, can you have an attached offset account.
Be aware that variable interest rates can increase, and fixed rates can be expensive to exit early.
If you have equity in a property you can borrow against it by providing the lender security over your home + the property you intend to buy.
Before you buy an investment property, run your loan structure and contract past your accountant. Do not take tax advice from your bank.
Home loans are principal-and-interest loans which means that each payment contributes to paying down what you borrowed, as well as paying the interest on that amount. You can also take out an interest-only loan which under certain circumstances can be advantageous.
Stamp Duty: When you buy property, you pay stamp duty, which is a state tax. The only time stamp duty is not applicable is when you leave property to someone on your death.
Rental Yield: Rent is taxable, and the cost incurred in producing it is tax-deductible. The main deductible items are management fees, repairs, bank charges, accounting fees, insurances, advertising, and borrowing expenses such as interest.
Tax on sale of property: When you sell an investment property, you are subject to capital gains tax. In short, you pay tax on any positive difference between the purchase price and the sale price.
Borrowing Money to invest enables you to:
Buy an investment today instead of trying to save whilst the price is also rising.
Buy a more expensive investment to achieve a greater capital gain.
Practice the strategy of gearing to increase your rate of return.
Buy an investment in today's dollars and watch it grow in value as you pay for it with future dollars that have been depreciated through inflation."
Negative gearing - where there is a shortfall between income and interest. The good news is the shortfall is tax-deductible, which means the ATO pays up to 47% of it (depending on your tax bracket). Gearing will increase the amount of loss you experience if prices do fall.
Avoid borrowing for items that depreciate in value unless you have a very good reason to do so. Pay down non-deductible loans first.
Avoid guaranteeing anyone else's debt.
The golden rule of investment is: The higher the expected return, the higher the risk. Education is a way to mitigate risk.
A balanced investment portfolio should contain:
Cash - bank accounts or bonds.
Property - direct ownership or through property trusts/syndicates.
Shares - either on your own or through such avenues as share trusts, superannuation, and insurance bonds.
Factors that impact how you balance your investment portfolio include your goal, appetite for risk, need for control, term of investment, liquidity, and need for specialized knowledge.
Smart investors regard a fall in the market as a time to buy, not to sell.
If you hold too much cash, you are robbing yourself of good returns: money can be lost to inflation just as surely as if it had been stolen.
Some positives of investing in property:
Income-producing
Property is the preferred security for lenders
It provides stability
It's scarce
There are tax benefits
Negatives include:
High barrier to entry
No liquidity
Easy to make a bad investment
Shares:
Equities - Yet another alternate name for shares.
Dividend - A distribution of profits to the shareholders of a company.
Franked Dividend - Dividends from companies who have paid Australian company tax on profits before those dividends are paid.
Imputation Credit - the amount of tax already paid.
Dividend Yield - theoretical yield to a buyer based on the last sale price.
Exchange-Traded Funds (ETF) - are funds that trade on the stock exchange, just like ordinary shares. They combine the investment advantages of a managed fund with the ease and cost-effectiveness of share trading.
Dollar-Cost Averaging - is a strategy to smooth out volatility by investing the same dollar amount into shares each month, no matter what.
Shares simply:
Shares give you a financial interest in a business.
Share indexes measure the movement of multiple shares.
Index funds spread your investment over a wide range of shares.
Quality shares and index funds should significantly out-perform bank interest over the long term. Put your money to work.
Avoid investments that are highly speculative and whose price depends on people's expectations rather than the intrinsic value.
If you don't understand it, don't invest in it.
You spend the money you think you have, but you don't miss the money you don't get. Reinvest your earnings! You won't miss them as you never had them, and they will enable the power of compounding. Similarly, changing your home loan repayment to fortnightly instead of monthly will allow you to make more repayments in a calendar year.
Tax:
Income tax is progressive: the more you earn the higher the rate of tax you pay.
Your marginal tax rate is far more important than your average rate: plan your affairs around it.
Taxation can affect investments in two ways: by taxing the income while you own the investments, and by taxing any profits on sale when you dispose of them.
Capital gains tax is the money you make when you sell an investment.
Generally, income earned from your investments is taxable, and any expenses incurred in gaining that income are tax-deductible.
To obtain investment expenses as a tax deduction, they must be necessarily incurred in producing assessable income and reasonable in relation to the size of the portfolio.
You have to hold on to an asset for 12 months to qualify for the 50% discount on any capital gains. Your home is normally exempt from GCT.
Superannuation:
Workers can contribute to superannuation until the age of 65, over that age there are restrictions.
Concessional contributions reduce your taxable income and are taxed at only 15% on entry to the fund if you earn less than 250,000 a year.
Non-concessional contributions are made from after-tax earnings, so there is no superannuation tax at the entry point. They are limited to $100,000 a year. Although 3 years contributions may be bought forward and made in one year.
How much superannuation do you need? A rough way to calculate is $100,000 in assets for each $8,000 a year of retirement income you need. Another way to calculate is to multiply your required annual income by 12.
Money is not available until you reach the preservation age - currently 55 - 60 years.
Low-income earners can benefit from the superannuation co-contribution.
Consider paying your life insurance premiums through your super fund, effectively making the cost tax-deductible.
Examples:
At 55, you are earning $125,000 and still have a home loan of $200,00 at 5% interest. To pay it off in 10 years would cost $2,121 in after-tax dollars per month. This really costs you $3,478 (because there is $2,121 left over when a tax of 39% is deducted from $3,478). Interest-only repayments would cost $838 a month (requiring $1,366 in pre-tax dollars), leaving $2,112 to salary sacrifice into superannuation. After the 15% contribution to tax of $316 is deducted, there is a net $1,795 a month going into superannuation. If the fund achieved a 9% a year return, this would be worth $327,000 in 10 years, at which time $200,000 could be withdrawn tax-free to pay off the loan. Using salary sacrificed gains an extra $127,000 in super.
You and your friend Sam both want to buy an investment property priced at $450,000, while limiting your repayments to $1,083 a month. You decide to get an interest-only loan, but Sam sticks with principal and interest. Sam is concerned with interest only, stating you never actually own anything. You stick to your plans as you see interest only as a more effective way to minimize tax and make the best use of your resources. To keep your repayments within budget, you will need a deposit of only $50,000 to buy the property. Sam takes many years longer to save up the huge sum of $318,000 which will make the P&I repayments more affordable. You think this is crazy, as you plan to invest the extra $268,000 as you acquire it into a managed fund. You know that even in a conservative option it should grow to more than $657,000 over a 10-year period. In addition, when you have owned your property for 10 years your equity of $50,000 will have increased 5.4 times, where as Sam's will increase by less than 2 times over the same time period.
Fred and George have $400,000 each. Fred buys a house for $400,000 that is returning $500 a week. George is more adventurous and buys two houses for $400,000 each. Because he only has $400,000 cash available he borrows another $400,000 on an interest-only basis to complete the purchase, using the rents to help with the loan repayments. In 14 years' time, if we assume the house values grow by 5% a year, each house will be with $800,000. Fred will have a house worth $800,000, and George with have two houses worth a combined $1.6 million, less a mortgage of $400,000. Fred has doubled his money by using gearing, George has done much better and has tripled his.
Making Money Made Simple Quotes:
“The average person needs only two things to become wealthy: the knowledge of what to do and the discipline to do those things."
"Have it today - pay for it tomorrow. And pay you will!!"
"Compounding interest is the eighth wonder of the world. He who understands it earns it. He who doesn't pays it."
"Learning is a treasure that will follow its owner everywhere"
"If you want to succeed financially, put something into your own pocket."
"Don't tell me what your priorities are. Show me where you spend your money and I'll tell you what they are"
"The person who never has money enough to pay their debts has too much of something else"
"Do not save what is left after spending - spend what is left after saving"
"The borrower is servant to the lender"
"Don't hate tax; love making money"
"You must pay taxes. But there's no law that says you gotta leave a tip"
"To win a negotiation, you have to show you're willing to walk away. And the best way to show you're willing to walk away is to walk away."
"Almost everybody who started with nothing and achieved wealth has done it with gearing"
"Good advice doesn't cost - it pays"
"Taxes usually take less of your potential wealth than ignorance or idleness"
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