Insurance News

While discussing “worst-case” scenarios may not be the most thrilling topic of conversation, it is an important aspect of a well-thought-out strategy.

Stay informed by reading our insights on the latest news, trends and changes related to insurance advice.

Insurances when you have children

Insurances are always an important part of any good wealth creation plan or strategy but they become even more important when you have children. For the purposes of this short blog we are referring to personal insurances, these include; life insurance, total and permanent disablement, trauma and income protection. These insurances are there to protect you and your family financially if something was to happen such as you passing away prematurely or if you were unable to work due to injury or illness.

 

Why does having children make insurances more important?

The simple answer is you now have someone else dependant upon you. Not only are children dependant upon you because of the things that you do for them but they are completely financially dependant upon you to provide for them as well. No longer are you in the position of only having to think about yourself. In the past if you would have passed away prematurely there may not have been any impact financially to anyone else but now you would be leaving someone behind who has no means to financially provide for themselves.

Life insurance should be there to provide for your child and family if you are gone. You not only need to make sure that you have a good life insurance policy in place but also that you have an appropriate amount in place. In order to determine how much cover you will need, you should go through an exercise called a needs analysis to determine an appropriate amount of cover. Money Smart has a good one to calculate life insurance needs here – https://moneysmart.gov.au/how-life-insurance-works/life-insurance-calculator.

Other than life insurance there is trauma and total and permanent disablement are there to help with some mortgage relief and also have funds available for out of pocket medical expenses and are important because events like that have the potential to financially derail a family. The other very important type of insurance when you have a family is income protection. That is there to provide usually 75% of your income if you’re unable to work due to illness or injury.

Pretty much everything in your life works and functions due to your ability to earn and generate an income, therefore it becomes important that we insure your family’s most important asset, which is you! A lot of people will often insure their car which may be worth $30,000 or so but won’t insure themselves. If you need your income to survive and afford your lifestyle, then you need income protection, it really is as simple as that.

 

What if cashflow is tight at the moment?

This is a common concern for people who have just had children as no doubts your general living costs have increased, the main point I often make when this is the case is imagine how tight things would be if you were to lose your income. If things really are that tight, a lot of insurances can be held inside super and whilst they might not be as good as an individually owned policy in the case of income protection, it is still much better than not having any protection in place.

Whilst it’s important to understand that superannuation is still your money and using those funds to pay for your insurances can impact upon your retirement goals, having appropriate protection currently in place is so important that it is often worthwhile doing as the alternative can often be disastrous for your financial situation. We can also always catch up with extra contributions to your super later in life.

If you are really against using your super funds to pay for your insurances and cashflow is tight then it might be time to look at your household budget and check the priority of where your money is going because this is important.

 

How can I put insurances in place?

There are many ways you can put insurances in place, you can go and sit down with a financial planner or insurance broker who will be able to help guide you through the process. I may be a little biased but this is the best way to go about getting insurances in place, a good broker or advisor will be able to guide you through the process, make sure you have appropriate amounts and also choose the right insurer for you based on your needs and wants from there list of insurers available to them.

Like most things, you can also go online and do your own research but beware when going online as there are a lot of sub standard insurers out there and whilst their prices may be attractive, the main reason for putting these insurances in place is to get you paid if an event was to happen, so make sure you are checking their reputation. If you are wanting cover inside your superannuation, you can give your provider a call and they should be able to help you out as well.

I understand that not many people like paying for insurances but it is the grown up medicine we have to take when we are bringing another person into the world. If you need your income to live or your family relies on your ability to generate an income, then it is highly likely that you need to put some insurances in place.

 

 

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Budget 2020 – what you need to know

This is without doubt one of the most exciting times of the year, well at least for some of us. Last night the Treasurer, Josh Frydenberg, released the Government’s highly-anticipated 2020-21 Budget, featuring the bringing forward of tax cuts, superannuation reforms, measures for Centrelink clients and additional aged care funding.  After going into a record deficit of $213.7 billion to support individuals and businesses during the Coronavirus crisis, the focus of this year’s Budget is to regrow the economy by creating job opportunities and encouraging spending.

Pekada’s team have reviewed the Budget and prepared a summary of the key measures for you, and will be updating our the Federal Budget 2020 page here throughout the day.

NOTE: It’s important to remember that the Budget announcements are still only proposals at this stage. Each of the proposals must be passed by Parliament before they’re legislated – and could change.

 

TAX CHANGES

Personal tax cuts
The Government has announced that it will bring forward stage two of the previously legislated tax cuts that were due to take effect from 1 July 2022 by two years. As a result, from 1 July 2020:

  • the Low Income Tax Offset (LITO) will increase from $445 to $700. The increased LITO will be reduced at a rate of 5 cents per dollar between taxable incomes of $37,500 and
    $45,000. The LITO will then be reduced at a rate of 1.5 cents per dollar between taxable incomes of $45,000 and $66,667.
  • the top threshold of the 19% tax rate will increase from $37,000 to $45,000, and
  • the top threshold of the 32.5% tax rate will increase from $90,000 to $120,000.

What this could mean for you

  • The following chart shows the tax cuts you might receive this financial year based on your income levels and the amount of tax you’re currently paying.

Low and Middle Income Tax Offset
The Low and Middle Income Tax Offset (LMITO) was introduced in the 2018 Budget, to complement the existing Low Income Tax Offset (LITO). In 2019, the base rate for the LMITO increased from $200 to $255 and the maximum payment increased from $530 to $1,080. The Government had planned to discontinue the LMITO when the stage two cuts were to be introduced in mid-2022. However, even though the stage two cuts have been moved forward to the current financial year, the LMITO will also remain in place for the
2020–21 financial year.

What this could mean for you

  • If you qualify for LMITO you will receive payment after you submit your next tax return. Depending on your income, the maximum LMITO you can receive is $1,080. However, the LMITO is scheduled to cease next year. This means you could end up paying more tax in the 2021–22 financial year than in 2020–21. Dual income couples can both be eligible for the LMITO, up to a combined total of $2,160.

 

SUPERANNUATION CHANGES

Default super accounts
Currently, if you start a new job and you don’t let your employer know where you want them to pay your super contributions, they will open a super account for you. The account will be in your employer’s default super fund. This may result in you having multiple super accounts.

By 1 July 2021, your employer will be able to obtain information about your existing super account from the ATO. They will then pay your super contributions into this account, unless you instruct them to pay it to a different account.

For people who don’t yet have a super account, their employer will be able to open an account for them in their default
super fund.

What this could mean for you

  • Over 4 million Australians currently have multiple super accounts, and this means they’re paying more than one set of super fees and possibly multiple insurance premiums as well. The Government estimates that this is costing Australians $450 million each year. The intention of this change is to keep people’s super accounts attached to them, so they can take them from job to job.
  • By having only one super account, you can stop paying unnecessary fees and insurance premiums that may be eroding your super balance. Having all your super together can also help your super savings accumulate faster.

Performance testing for MySuper products
MySuper products follow a strict set of government guidelines. They tend to offer their members lower fees, simple features and limited investment options.

The Government feels there are too many underperforming super funds in the market, and this is impacting members’ retirement savings. From 1 July 2021, MySuper products will be subject to an annual benchmarking test. If the fund is found to be underperforming, it will need to inform its members by
1 October 2021.

Further, if a fund is found to underperform for two consecutive years, they won’t be permitted to accept new members until their performance improves.
By 1 July 2022, all super funds will need to do the annual benchmarking test – not just MySuper products.
What this could mean for you

  • How your super fund performs can make a big difference to the amount of money you have when you retire. This change means that your super fund will need to tell you if your fund has underperformed compared to other super funds. You can then make a decision about whether you want to stay with your fund or change to another fund.

YourSuper online comparison tool
To help members easily compare super funds, the Government will release an interactive online comparison tool called YourSuper by 1 July 2021 which will:

  • rank MySuper products by fees and investment returns
  • provide links to super fund websites
  • show if you have more than one super account so you can consider consolidating them.

What this could mean for you

  • Choosing a super fund can be daunting. This comparison tool will make it easier to see what each super fund charges in fees and how they have been performing. However, it’s important to remember that past performance is not always an indication of future performance.

 

HEALTH, WELFARE AND JOBS

Additional support payments for welfare recipients
Government support recipients will receive two separate economic support payments of $250, to be paid progressively from December 2020 and March 2021.

This follows two previous payments of $750 to eligible recipients, with the new payments estimated to cost a total of $2.6 billion.
What this could mean for you

You may be eligible for the two payments of $250 if you’re currently receiving:

  • Age Pension (including Age Pension (Blind))
  • Carer Allowance*
  • Carer Payment
  • Commonwealth Seniors Health Card
  • Disability Support Pension (including Disability Support Pension (Blind))
  • Double Orphan Pension*
  • DVA Gold card
  • DVA Payments
  • DVA Seniors Card
  • Family Tax Benefit (fortnightly recipients)*
  • Family Tax Benefit (lump sum recipients)*
  • Pensioner Concession Card (PCC) holders (covers non- income and asset test PCC holders and people who have an extended entitlement to a PCC even though their payment has stopped).

 

Health services
Coronavirus has taken its toll on the mental health of many Australians. Therefore, the number of psychological services funded by Medicare will be doubled from 10 to 20, effective immediately.

The NDIS will also receive additional funding of almost $4 billion, to provide essential support to Australians living with a disability.

Women facing ovarian cancer will now be able to access the drug Lynparza through the PBS. Rather than costing $140,000 per course, general patients will now pay around $41 for a script while concession card holders will be charged $6.60.

What this could mean for you

  • If you currently access any of these services, or think you may need to in the future, it’s important to understand what you’re eligible for. As the first step, we recommend you speak with your doctor.

New jobs in key industries
The Government is committing $1.5 billion over five years from 2020–21 to support the building of competitiveness, scale and resilience in the Australian manufacturing sector. It will focus on six key industries of strategic interest:

  • defence
  • space
  • medicine and medical products
  • food and beverages
  • resources technology
  • recycling and clean energy.

Rural communities will benefit from $2 billion in funding over 10 years to improve water infrastructure, while regional businesses will benefit from an expansion of the instant asset write-off scheme. Regions that rely on international tourism will benefit from their share of $51 million in funding over two years to diversify their markets.

While the Budget doesn’t offer much financial relief to female workers currently impacted by Coronavirus, the government is committing $240 million over four years towards a range of employment initiatives for women. These include increasing female workforce participation in male-dominated industries such as construction.

What this could mean for you

  • With the pandemic causing massive job losses around the country, these measures are designed to get as many Australians back to work as possible. While some industries may currently offer more opportunities than others, it’s likely that many industries will be in a state of flux for years to come.

 

For our ongoing service package clients, your adviser will be in touch with any specific actions or impacts to your situation.

If you have any queries in the interim or would like further clarification in regards to any of the above measures outlined in the 2020-21 Federal Budget, please feel free to give me a call to arrange a time to meet so that we can discuss your particular requirements in more detail.

 

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How to curb rising insurance premiums

In recent times when everyone has been getting their renewal notices for their personal insurances such as income protection and life insurance, they have usually been subject to a decent rise in cost of premiums. Most people don’t like paying for insurances but understanding it’s importance, however no one likes to receive a letter stating a decent increase in the cost of that insurance, so in today’s blog I’m going to run through some of the things you can do to curb the cost of your insurance premiums.
 

Review your level of cover

This one is quite obvious but one way to stop insurance premiums going up can be to lower the amount of cover you have if you have lump sum covers such as life insurance, total and permanent disablement and trauma covers. If you have income protection you could also maybe look to lower the cover however it may be better to look at other options such as extending out your waiting period.

Your need for insurance may be less as you go through different stages of life, especially if your children are getting older or you have paid down more of your debt then you may find that the level of insurance you signed up for at the start is not appropriate any more and you may be over insured.
 

Look at other options

There are plenty of options in terms of other insurers and like the way you shouldn’t just take out a mortgage and leave it with the same lender for the whole life of the loan without reviewing, you should be reviewing your insurance provider. This is where you should make sure to be getting in touch with someone like a financial adviser to review your current insurances and to see if there is a better option out there for you.
It is important to note that if you are changing insurers you should always make sure to keep your old insurances in place up until your new policy is put in force, this will ensure that you are never left without cover or you are able to hold onto your old cover if the new insurer offers you amended terms that aren’t as favourable.
 

Check the extra options with your cover

It may be that you have a very comprehensive level of cover with all the bells and whistles which you feel you may need, and you may be able to save some costs that way. You can also look to see if you have indexation turned on for the policy, this is where the policy automatically increases your cover each year and you may feel that you no longer need that. Make sure that you will not need the extra policy definitions though because sometimes these can be the difference between getting a successful claim and not been successful.

As with any part of your financial plan, insurances should not be a set and forget strategy. You should be constantly reviewing and making sure what you have is the best option for you both in terms of cost and policy definitions. If you feel your insurances have grown a lot higher lately be sure to reach out to us and we can review them to see if there is a better option.

 

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What happens to your SMSF when the unexpected occurs?

Your SMSF is a long-term plan. Much can happen during this time including illness, incapacity or death of a member.

It is best practice to have contingency plans in place to deal with unexpected events. For example, if a fund member dies, leaving you as the sole member are you happy to continue with the SMSF

Outlined are some issues to consider planning for as trustees. Leaving the planning to when, and if an event happens may be too late.  

Death 

Think about where you want your superannuation to go on your death. The introduction of the $1.6 million transfer balance cap means larger sums of money may need to leave the superannuation system sooner, as a result planning has never been more critical. You may need to think carefully about who receives your superannuation on death to maximise its benefit for your beneficiaries.

The rules of your SMSF, as set out in your trust deed and related documents, determine how the trustee structure is to be reconstructed on the death of a member. It also details how death benefits are to be handled by you and your fund.

A lot of careful consideration needs to be given to understanding the member’s wishes to ensure that your fund’s trust deed and broader governing rules are drafted appropriately to achieve these requirements.

Legal tools to help direct your superannuation can include making a binding death benefit nomination to nominate who will receive your superannuation on your death or providing for your pension to continue (or revert) to a permitted beneficiary (such as your spouse) following your death.

You may also consider appointing a corporate trustee. If the membership of an SMSF with individual trustees changes, the names on the funds’ ownership documents must also change. This can be costly and time-consuming. A corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member. This is a significant succession-planning issue for an SMSF as well as for the estate planning of its members.

Diminished or loss of capacity

Consider the consequences if you become unable to act as trustee (e.g., due to mental incapacity). You can appoint an enduring power of attorney to act in your place as trustee, if required. This is someone who can be trusted to handle your financial affairs and can be appointed as trustee of the SMSF. 

Member leaves the fund 

How would your SMSF be affected if one or more of the fund members decided to exit the fund? For example, an SMSF heavily weighted in real estate may have to sell the asset or introduce a new fund member to allow the exiting member to transfer out of the fund.

Separating couple

Family law contains a number of options for superannuation to be split between a couple who separate or divorce. Your superannuation is treated separately to your other property, and specialist advice may be needed.

Reviewing your insurance 

SMSF trustees should regularly review insurance as part of preparing your investment strategy. This includes considering whether or not insurance cover should be held for each SMSF member. Your insurance cover may be essential if an unexpected event occurs.

In some circumstances, you may already be holding insurance through membership of a large super fund. This policy may exist due to an employment arrangement and may be more cost-effective than an equivalent valued policy that you could hold within an SMSF. However, not all insurance policies are the same, so seeking advice will help you to understand your needs.

Administration of your SMSF

If an unexpected event occurs you may need to consider winding up the fund if managing the fund will be too time-consuming, onerous or costly for the remaining members.

As annual SMSF running costs generally remain fixed, your superannuation balance may fall to a level where it is not cost-effective to remain in an SMSF – at this point, it may be appropriate to transfer out of the fund (e.g., to a retail or industry fund).

How can we help?

If you need assistance with planning for an unexpected event or reviewing your current strategies, please feel free to give me a call to arrange a time to meet so that we can discuss your particular circumstances in more detail.

 

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Does my income protection cover me for COVID-19?

With the likely continued spread of the Coronavirus one question we have been asked quite a lot is whether or not your income protection will cover you for COVID-19. Each individual policy and insurer is slightly different in their definitions but from my research this is what I’ve found. It is very important to check your specific policy as some industry funds have a pandemic exclusion, however some have said this would not be invoked for COVID-19. Most insurers and industry funds have been good at updating their website with information regarding COVID-19 so it’s important to jump on your particular insurers website and check the PDS and policy documents for further details as every policy can be different. For policies that are about to go in force or about to be applied for, there may be extra questions regarding recent travel and so on.

 

I have COVID-19, will my income protection pay?

If you come down with the COVID-19 virus then your income protection will pay providing you are unable to work due to the virus for longer than your waiting period and you contracted the virus after your policy has started. Most waiting periods will sit at around 14-90 days so it’s important to check that first.

From what I’ve looked at most cases of COVID-19 will be cured before you are able to claim however if you are unlucky and have a severe case or it has effected you severely and you are unable to work due to the illness past your waiting period time then you will be able to claim subject to meeting the definitions of your particular policy.

 

I have lost my job due to the Coronavirus, can i claim on my income protection? 

The short answer unfortunately in almost all cases is no. Income protection policies don’t cover you for loss of job but rather for when you are unable to work due to illness or injury. There are some policies that may have inbuilt benefits such as a few months of mortgage repayments if your loan is with the same institution that your income protection is however this is quite rare but may be worth double checking.

It’s always important to ensure that you carefully read the product disclosure statement (PDS) and policy documents to understand what you are and aren’t covered for. For recent policies you will find them on the insurers website, but if you have an older policy type then you may need to contact your insurer directly to get the relevant copy emailed out to you.

As always if you have any questions be sure to email me at zac@pekada.com.au

 

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Changes Coming To Income Protection

Recently the Australian Prudential Regulation Authority (APRA) has been looking into the proitability (or lack thereof) of insurers and have put some policies in place in response to the substantial ongoing losses in the income protection market. These changes will have big effects on future insurance policies issued.

 

So what are the changes coming in March?

 

From the 31st of March, agreed value policies will no longer be available. This means that all policies issued after that date will be subject to the indemnity rules, meaning that you will have to prove what you earn at the time of claim rather than locking in an agreed amount at the application stage. This means that you will need to make sure that you are constantly reviewing your income protection policy going forward because if you have a higher amount and you have taken on a job earning less money or potentially have gone part time you may not get paid out for the amount of cover that you are paying for.

 

What other future changes are coming?

 

From 1st of July 2021 there are a number of future changes coming to income protection policies, these include:

  • Benefits will be based on your earnings from the past 12 months and you won’t be able to go back further than that.
  • Yearly guaranteed renewable will be replaced with contracts that cannot be guaranteed renewable for greater than 5 years. While it proposes that the policy owner can elect to renew their contract for further periods (not exceeding 5 years) without having to undergo a medical review, the renewal will be subject to an analysis of changes in your occupation and financial circumstances. This means that if you start a new job that is what’s defined as a ‘riskier’ occupation you could be adversely affected.
  • To encourage clients to recover and return to work sooner, insurers should have controls in place to reduce the risk of long-term benefit periods. This will mean harsher disability definitions and setting internal benchmarks for new income protection products with long benefit periods. This could mean that it becomes harder to claim on new income protection policies.

 

In addition to all this, insurance companies will have to provide data to APRA so that it can keep an eye on what is happening.

 

So what does this mean for me?

 

If you are in the process of putting an income protection policy in place then it might be important to get moving on it quickly so that you’re not affected by the changes. If you already have an income protection policy in place then you need to be aware that by re writing your policy with another insurer after the date of the proposed changes may mean that you’re subject to the new rules and therefore disadvantaged so be sure to double check if you’re looking to move or cancel your income protection that you know the consequences of doing this.

 

If you have any questions about the proposed changes, feel free to email me at zac@pekada.com.au.

 

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Podcast – Dealing With Uncertainty

In this episode Pete and Zac discuss financial strategies in helping you deal with uncertainty.

 

Follow us on spotify here. 

Transcript:

Pete:

Okay, we’re back after a quick break. Wet the whistle a little bit. So now, resilience, flexibility, dealing with uncertainty is part of your financial plan. I think this is a core, it’s a foundation piece of any financial, plan to make sure you can cope with the curve balls, the shit storms that life naturally throws at you. And we’ve all had them. And they can be medical. They can be children, family, work. You know and at the moment it’s-

 

Zac:

Somebody’s car broken down or something like that.

 

Pete:

Yeah, I saw someone literally walking into the office today, someone’s car’s has been broken into and the cops are all outside. So it was absolute shemozzle out there. So yeah, all these sort of things. So I think, how do we get started? I think you sort of… Do want to kick us off with… I think you just need this as part of every financial plan. I’ve had a peek at your notes, so…

 

Zac:

Obviously. Looking over the shoulder.

 

Pete:

I agree.

 

Zac:

So the first tip, and probably what I think is the most important one, is having a cash buffer, an appropriate cash buffer too. So that amount might be different for everyone. But is there a rule of thumb that you normally look at in terms of expenses, amount of monthly expenses?

 

Pete:

I think you have, six months I think is a really good buffer. Because you think about if you’ve lost your job or something significant happens, if you’ve covered six months worth of your living expenses and don’t just put your core living expenses, your lifestyle expenses as well, that should give you enough breathing space to at least sort of make some decisions. And what you’re trying to do is, it’s not trying to solve all the problems, but it’s trying to give you breathing space.

 

Pete:

So I think best practice is minimum six months and perhaps, if you can, six to 12 months. And in terms of where do you put that? I guess the place you wouldn’t put it, is into growth assets or into your super fund, unless you’ve satisfied all the conditions of release. You want to make sure you can get access to it. So where would you be sort of squirreling these funds… or where are your funds?

 

Zac:

Would be sitting in a cash account, most likely or a high interest savings accounts. Maybe a term deposit.

 

Pete:

Term deposit? Jeez, you’d be very…

 

Zac:

And you might need to break it, but-

 

Pete:

Yeah, you might want to do it. You could do a 30 day notice saver or something like that. But otherwise like an offset account, for most people, would be the most logical place, if you’ve got a mortgage.

 

Zac:

If you’ve got a mortgage offset account.

 

Pete:

But otherwise you want to get as much interest as you can, but you want it to be a call. So you want it to be secure. And the main point of it is, don’t get too upset. It’s going to look frustrating to go, “I’ve got a chunk of money doing or earning nothing.” But it does serve a very valuable purpose. Because it should give you peace of mind that you can sleep easy knowing that whatever gets thrown at you, you should be able to absorb it and make sure that you’re sort of… you know, you’ve got time to make decisions about how to deal with other assets.

 

Zac:

Yeah, exactly. And it’s important too that, having the cash buffer then allows you to mean that you’re not, as you said, forced to sell other assets and we never want to be forced to sell. Because things might go wrong in a bad time in the market. And then if you don’t have your cash buffer sitting there, then you’re going to potentially have to sell an asset at a time that it’s not desirable. And yeah, that has further implications for your overall financial plan.

 

Pete:

Yeah, understood. And then the other thing is, if you do draw on your cash buffer or your cash reserve, make sure you top it back up. So don’t sort of fall into the trap of going, “Oh great, I’ve, I’ve used my cash buffer. Nothing ever bad will happen again.”

 

Pete:

Well from experience, life continues to throw challenges at you and curve balls. So make sure you’re constantly getting that back up to that level as well. And that might be selling down assets or doing different things.

 

Zac:

Cool. Definitely. So what’s your next tip Pete?

 

Pete:

I think, what I like is I think you need to have a really rock solid and clear vision and sort of goals into the future about sort of where your life and sort of where trying to get to.

 

Pete:

And the reason why this is so important and is a really strong part of that foundation of a good financial planning strategy, is when something does happen and you need to potentially access your cash reserve or you need to veer off the straight path that you had set for yourself, you can find your way back more easily and get yourself back on track, because you’ve got something to measure against and go, “Hey, okay I was expecting that I’d have this much in assets, this much in savings, this much in super. My loan would be down to this. Hey look, something happened. I lost earnings capacity or I needed to redo parts of the house or I needed to pay for X bill. Okay, I’m behind track.”

 

Pete:

So unless you’re measuring it, unless you’ve got goals and you’ve sort of mapped it out, you have no idea how far off you are. So it’s harder to get back on track. So I think the clearer you can map out your future and especially the end game, and I think that’s the most important-

 

Zac:

Well that’s the most important part. Because you’ve figured out what the end game is, and then you work back from there and going, “Where do I need to be at each stage.”

 

Pete:

Yeah. And I think that’s the thing. Like the longer you’ve been, I guess running a financial plan or sort of monitoring your financial strategy and your progress, you know that it’s not linear. It’s not like the same every… It’s not, “Oh yeah, rinse repeat, every year the same thing.” Returns are different. Returns can be negative. Earnings are not always the same. You know, pay rises are not always the same. Expenses aren’t always the same.

 

Pete:

So all those sorts of things, and sometimes these can be really good things and positive things like you might have like, oh I had a just a swag of people getting married and then having babies. So you’re going, “Oh, there’s more gifts, there’s more parties,” there’s new suits that you need, and all those sorts of things that go along with these events. Or they’ve got them overseas and you’re paying for travel costs as well. So it doesn’t necessarily need to all be bad things you need to plan for, but that robust vision, very, very good as a good foundation to build off.

 

Zac:

Definitely.

 

Pete:

What else you got up your sleeve there?

 

Zac:

So the other one in terms of dealing with uncertainty would be to make sure you’ve got a good insurance plan in place. So insurances are often there to look after you in uncertain times. And that’s the whole reason. The best insurance is the one that he never going to have to claim on. But insurance is like in the ones that we normally talk about, a life insurance, total and permanent disablement trauma and income protection. Because they’re all going to work in tandem with each other to make sure that if something does go wrong medically for you or something even worse if you or your partner was to pass away or something like that, that financially you’re not going to be impacted upon.

 

Pete:

Yeah, absolutely. And I think it’s good. And you need to make it work for you. So you don’t want to have it being shored up to the eyeballs, but you want to have the appropriate amount of cover because it’s your plan B to fall back on. And it’s not there to make you in a better financial position. It’s literally just there to keep you going, and definitely not there to make you in a better financial position. That’s called moral hazard, Zac. That’s when people go on honeymoons and one of them doesn’t come back potentially because they’re insured for too much and it’s too appealing. But yeah, the financial outcome. So, thank goodness I survive that. So… Yeah, so I think that’s definitely like insurance is really, really fundamental part of any robust financial plan.

 

Zac:

Well, especially with the income protection, like if you think about for most people at the moment, most listeners, I’m sure your lifestyle and how you fund your lifestyle is based solely upon your ability to generate an income. So unless you’re in the retirement phase of life, but for most people it’s going to be that your ability to generate an income is how you live and fund your daily expenses. As soon as that goes away due to illness or injury where you can no longer work and your sick leave starts to stop and different things like that, then it’s pretty much only Centrelink that’s going to be potentially coming in for you at that stage. And then depending on what your lifestyle looks like now, that might not necessarily be enough. So it’s important to have income protection there.

 

Pete:

It’s definitely not enough to cover my lifestyle at the moment. So-

 

Zac:

Yeah, exactly. Especially with two kids under two.

 

Pete:

Oh, it’s horrible. The thought just is to go, “Hey, if that’s my plan B, the amount of things I would need to forego and sort of changes and sort of the way we run our day to day life, would be horrific.

 

Zac:

Yeah, because I mean for a lot of people, mortgage repayments are no longer been able to be met. Different things like that. So having income protection in place, is really important. And having appropriate income protection to your salary.

 

Pete:

Yep. Absolutely. All right, so another one that I’d like to sort of cover off on today is spending less than what you earn. I think that, you just need to be disciplined before these things happen. So it’s too late to plan for uncertainty when you’re already going in that period. So I think you need to get on the front foot and have really good financial habits now.

 

Pete:

So yeah. The sooner you can start these things, the better. And the main problem that most people have in… that holds them back from accumulating wealth, retiring early and building financial independence, is people spend beyond their means. And they keep increasing their expenses and their lifestyle every time their incoming increases.

 

Pete:

So I think sort of prescribing that, the percentage formula of going always putting a certain amount of your money away-

 

Zac:

That’s the most basic rule for generating wealth isn’t it?

 

Pete:

Yeah.

 

Zac:

Spend less than what you earn.

 

Pete:

But it sounds really simple. And I definitely do that now. But as a younger lad I was definitely not doing that. And it can get out of control really quickly cause then okay, you’ve can fall into problems with debt and then the debt compounds at a rate over and over again. So then it sort of starts to get away from you and it can become actually quite taxing mentally on you as well. So there’s a lot of financial stress. Continues to build and build and build. So I think if you can do that and make sure, with that surplus money that you’ve got and that you’re redirecting, I think definitely put some of it into that cash reserve you were talking about, but get some of it going into growth assets. Because I think the quicker you can build a pool of growth assets, investment assets outside of your family home and the family home’s an important one, the better you’re going to be. And the more resilient you’re going to be able to be in the future because you’re going to have assets to fall back on.

 

Pete:

And then in the future you can actually have passive income. So that stuff that’s not reliant on you. So that’s going to be less susceptible to a lot of loss challenges to do with employment problems and health issues as well. Because that’s what we’re trying to work towards to create. Because it will help you in achieving financial independence sooner.

 

Pete:

So I think if you can apply a formula, and for some people that would be a dollar formula. I like percentages because you can sort of stick with them for the long term. And you should be aiming to be putting away 30 to 40% into your future you. And that might be at the start, it might be debt repayments on your home mortgage and getting that down or paying it into an offset account. Some of it into a cash reserve, and definitely some of it into some growth assets.

 

Pete:

So whether it be shares, property, sort of investment assets that have capital growth and the ability to produce a passive income in the future, is really important to sort of setting you up really, really strong financially.

 

Zac:

Yeah, especially with the way that interest rates are at the moment. Putting something somewhere where it has the ability to generate something over 2% or one and a half percent, it becomes very important. Because otherwise you’re really just keeping up with inflation or in in most cases, you’re below it.

 

Pete:

And you’ve got to be planning for the long term as well. A financial plan is not a one-time transaction or a sort of a 12-month thing, it’s for the rest of your life. And you know, depending on how old you are, the listeners out there, you know, it’s decades and decades and decades or perhaps really… depending on, you know, might have people that are shorter than that, but it’s still a longterm plan. So you need longterm thinking as part of it. So definitely making sure you set that formula. So whether it’s 15% into, you know, short term sort of cash debt repayment and 15% into growth assets. And I still think you should do a bit of both, because it gets you good financial habits. You’ve got anything else up in your kit bag there?

 

Zac:

Yeah. So following on the part of talking about growth assets and things like that, I’d be making sure you have diversification in your portfolio. So this will help you and times of uncertainty, especially in the markets. We see a few people come in every now and then, they might have a portfolio that’s just maybe 10 ASX top 200 stocks or something like that where they’re highly, highly for banks. You know, Coles, Woolworths, BHP and Rio, highly diversified.

 

Zac:

Yeah. But if something was to go wrong locally, then then they’re highly susceptible to potentially losses on those types of accounts. Whereas if you have a portfolio that’s got a mix of Australian and international equities and property exposure, some fixed interests and different things like that, then you’re more likely to be able to not get hurt as much when things do go wrong and in those uncertain times.

 

Pete:

Yeah, I think we’ve covered most of it. I think probably the one, and I’m thinking more in terms of investment market uncertainty here, is just know what you’re comfortable with. And also know what you don’t know. And I think what I’m, what I’m talking about here is understand what your tolerance for risk is, because there might be events in the market or downturns in economies where you don’t want to panic and make bad financial decisions. And the difference between good longterm returns is often poor human behavior in terms of transacting too often or panicking and hitting the sell button too early.

 

Pete:

So things like that and there’s tools to go through that. So you can go through risk profiling, but really just going in with eyes wide open to financial decisions to say, “Well, okay, am I going to be comfortable if this money that I’m putting into this investment, drops by 30, 40%? Because if it’s a growth asset, that’s a realistic possibility. It’s happened before. Could happen with shares, could happen with property, could happen if you bought a factory, or you might’ve bought a business or whatever that is, that’s sort of a growth vehicle for your wealth.

 

Pete:

It’s subject to volatility and that’s the risk and reward trade off. So you’re getting paid additional return above the crappy cash rate that we’ve got at the moment, because you’re taking on additional risk. So there’s no free lunch when it comes to finance, but you do want to try and make sure that you are taking the appropriate amount of risk. Because without taking any risk, you get no return.

 

Pete:

So it’s walking a bit of a tight rope and getting that balance right. And I think the more you can understand that and have a conversation with your trusted network or your advisors out there. And advisors don’t need to be a financial advisor, they might be a financially successful person that’s in your circle of friends. I think that’s really important.

 

Pete:

And then the other thing is knowing what you don’t know. I think in these low interest rate environment times, people get seduced into investments outside of their circle of competence and their understanding.

 

Zac:

Bitcoin a couple of years ago.

 

Pete:

Yeah, well even Bitcoin now. But also things like term deposits that pay five times more than what the big four banks term deposits are. It should ring alarm bells, but sometimes that lack of understanding and labels can be misinterpreted and those sort of things. So just make sure you know what you’re getting into, because if you don’t have that, you can’t really have confidence that the asset structure that you’ve got in place, can be called upon if you do get sort of something out of left field, that you need financial resources for. I think that’s it from my end.

 

Pete:

I’ve exhausted my kit bag. I’m running on empty first week back. So, but yeah, hopefully you’ve got something out of that today. And if you’ve got any other suggestions or any other tips that people could utilize or something that you’ve benefited from in a time where you’ve experienced a bit of uncertainty, send it through. Happy to hear from it.

 

Pete:

And if you have enjoyed the podcast, please do share it. Because the more people that are listening, the more people that can benefit. And also, it will improve the quality of the guests that we can get on the show. Not that Zac’s… well you’re not a guest anymore. You’re a co-host. So yeah, that’d be really good. And then we’ll see you back next week and we’re going to empty the mail bag. There’s been a fair few questions that came in over the break, which is good. So I think we’ve run out of time for today, so we’ll tackle a fair few of those next week as part of the show as well. So, we do appreciate you sending it through, we’re not ignoring them. So we will get to them. So we’ll see you all next week.

 

Zac:

Cheers.

 

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