Noel Whittaker is one of Australia's leading Financial Advisors and he has written 13 best selling books including 'Making Money Made Simple'.
Having trouble saving money? Then let me share a true story that contains a lesson that could change your life. Last year a woman I’ll call Pat walked into our office to invest $6,000. That’s no big deal except that Pat is a single mother who lives with her teenage daughter - her only income is a government benefit. When we asked her how she managed to save up $6,000 her answer was “I never spend a five dollar note!” Every time a five dollar note comes her way Pat puts it straight away into a jam jar. By pretending she never received it in the first place, Pat manages to save the money while living on the rest of her income.
Now think about your own financial situation and cast your mind back to last July when you were given your group certificate. There are two numbers on each group certificate that usually stir up the emotions – the amount we earned (wherever did it go!) and the amount of tax we paid (surely there must be a way to reduce it!). Unfortunately there is little most of us can do to reduce our tax; salary sacrifice into superannuation is restricted by both the age based limits and the surcharge, while negative gearing saves little tax in a low interest rate environment. For example, if you borrowed the whole cost of an investment house worth $200,000, you would be pushed to save $1,500 a year in tax.
But, instead of thinking about ways to save tax, let’s focus on the simple truth that Pat’s story and the group certificate demonstrate. At the end of the financial year most people received a salary, less PAYE tax, from which they paid their bills, spent the balance and saved nothing. If the PAYE tax would have been 10% greater or 20% less, they would still finish up with nothing saved for the year. The only reason their tax has been paid is that it came out automatically.
This is why the newspapers in June are full of advertisements offering ways that high-income people can reduce their tax. In most cases the participants in these “investments” are not PAYE earners and tax has not been set aside.
Now cast your mind back to 1980. Then, everybody paid their home loans monthly. That was until I stirred up the banks by going on national TV and telling people they could save a fortune in interest if they made their payments weekly or fortnightly instead of monthly. All the banks scoffed at the idea, they claimed that, because the interest was charged monthly, paying weekly or fortnightly made no difference.
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Think about a couple paying back $640 a month on a $70,000 housing loan over 30 years. They will almost certainly go through the following process; they will get paid, put aside the money for the loan repayments, spend the rest and arrive at next pay day broke. Look at what happens when they move to fortnightly payments. They still get paid, put aside the money for the loan repayments, spend the rest and arrive at next pay day broke.
Nothing has changed, or has it?
Now they are paying $320 fortnight instead of $640 a month. However, there are 26 fortnights in a year and only 12 months. Annual payments have risen from $7,680 (12 x $640) to $8,320 (26 x $320) with the result that the loan terms have dropped by 10 years and they have saved over $60,000 in non deductible interest.
What is different? Nothing, except that by using a smart strategy, they were compelled to pay an extra $12 a week off their home loan. Did they find the extra payments a burden? Not a bit! Did it make a difference to their financial well being? A massive difference, $60,000 in interest saved and the loan paid off 10 years earlier.
The home loan repayments strategy, the group certificate example and Pat’s story are at the core of what I call the guaranteed secret of wealth. "You don't miss what you don't get". Who ever heard of PAYE taxpayers having trouble paying their tax at the end of the financial year? Of course they don't, because it is deducted from their pay automatically.
The guaranteed secret of wealth is based on the principle that we tend to pay our commitments and spend what’s left over. By making investing a commitment, we ensure it gets priority. This puts an automatic investment program in place. Making extra home repayments, practising dividend re-investment and taking part in a regular savings plan are all ways to put my guaranteed secret of wealth to work for you. There is one more “secret” – most people never get around to starting. If you wish to be wealthy you will have to muster the courage to start and the discipline to stick with it. The good news is that once you put the process in place by direct debit, you can virtually forget about it.
by Noel Whittaker
For further information or to contact Noel directly; www.noelwhittaker.com.au.
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