Step 1 of our game plan to pay for private school fees is to determine the best asset class to invest in based on your circumstances and goals. This is step one in the two-step game plan that will help you bring the overall strategy together when we work through the next chapter.
You could well ask ‘just tell me straight off, what asset class and how do I use this asset to get to my end goal?’ But before making any investment decisions, it is always prudent to ask yourself: What am I investing in? What is the asset, and what returns can I reasonably expect? Therefore it is important to ensure you understand a bit more about what we are investing ‘in’.
First, let’s look how the asset class of cash performs.
Cash
Of all the asset classes this is the worst performing in terms of investment growth. There is virtually no growth with cash investments. Savings accounts offer minimal or no interest and any interest they do offer is outweighed by account fees. As we all know, cash is easily accessible, accepted everywhere and useful for purchasing goods, paying for services and to survive day-to-day.
However, as a saving vehicle, cash does not generate enough growth to provide future income for goals such as funding private school fees. In the Australian banking system, there is an excess of cash just sitting in the banks and cash management trust, most of them earning very little interest. If you leave your savings in cash, you better watch out for inflation.
For example, if you left $10,000 in cash in a bank account in 1995, inflation over the period 1995 to 2006 would itself wilhavel eroded your purchasing power to $7,831 within 10 years. (That’s a loss of 21.7%. So, unless you earn more than inflation, your wealth is essentially going backwards. You need to invest your cash that is not earmarked for short-term goals into other asset classes.
A financial adviser ensures that along the way towards saving for your life goals, nothing is left to chance. You have an end result and you simply work backwards and plan every last detail.
This does not mean that you, the client, needs to know all the strategies and legal and tax implication—that’s the planner’s job. However, the client needs to be aware of the disciplines of managing their own cash flow. Cash flow management is the main driver and the separator between success and failure in any financial objective.
A financial planner cannot guarantee returns (if one does then run the other way quickly). The role of a financial planner is to demonstrate the relativity of market returns between the asset classes you are looking to invest in.
An adviser should provide detailed advice around:
• General banking matters, debt management such personal, investment and home loans
• Wealth accumulation – various strategies and options
• Comprehensive advice on all investments including direct investments
• Cash flow management
• Debt reduction solutions.
• Retirement strategies
• Personal risk protection.
• Be able to identify a tax situation or consequence and then refer them to an accountant.
• Understand estate planning issues and discuss how to best deal with them.
Importantly, there must be mutual respect and liking between adviser and client. I have no interest in how much money someone has to invest if they don’t first adopt the attitude of listening to what my advice will be. If you think you can do it all yourself, then an adviser is not for you.
So, is it hard to find an adviser? What is a good test? The following are some key areas for you to consider when interviewing your financial adviser.
• Attend one of the many free seminars that are always offered by financial advisory firms.
• Ask for a referral from a friend
• Ask your accountant or another professional body.
• Visit the Financial Planning Association’s website (see the Resources section of this book).
This strategy takes one of the previous investment strategies and places it into another structure which you may not be familiar with—a trust.
Trusts are not uncommon and there are many types. There are two types of trusts, however, which are used more often than others. They are:
• discretionary trusts
• unit trusts.
However, for the context of this book, I will focus on one main type of trust and avoid going into too great a detail—discretionary trusts. There are many books that cover trusts and I suggest you get as much background information as possible before you take on this strategy.
So, who is involved in a trust and what are their roles?
There are a number of parties or people involved in a trust. They are:
Appointor The boss, the person with the most control. The appointor has the power to change the trustee and appoint a new one at any time
Trustee The person/s or company that controls the trust
Trust The structure that holds the investment assets
Beneficiaries Owners of the assets and entitled to the income of the trust
Financial Adviser Provides advice and manages the affairs
Solicitor Establishes the trust
Accountant To liaise with the adviser and prepare the regulatory requirements for the ATO
One point to always keep in the back of your mind with a trust; you (as the trustee) are the legal owner of the trust property although you are not the beneficial owner of the assets. The trustee has the responsibility to manage the trust assets and must act in the best interest of the beneficiaries.
Note: I may have already started to confuse you at this point. This area requires sound legal and accounting advice to ensure you have the right trust tailored for your situation. Don’t always assume the ‘off the shelf trust’ is right for you. You are far better to pay more for a tailored structured trust than a run-of-the-mill document.
A discretionary trust is called just that because the trustees (typically the parents in this context) can determine how much income may be paid to the beneficiaries of the trust. It is their discretion. The trustees can vary this amount from year to year.
A discretionary trust can achieve a number of objectives:
• It will take care of your family for the long term
• It has sound asset protection. That is your assets may be protected from creditors.
• A trust can be very flexible. It can assist in sharing the tax burden among your family and/or other members of the trust.
• It can trade in its own way but it is different from your personal tax structure and/or a company tax structure.
Once you have received advice and established the trust you must look at how you will invest and in what asset class. Use one of the strategies outlined in this chapter.
Now that you have a better understanding of what to invest in and where to go to start, get smart and start today. We are all responsible for our wellbeing and future prosperity. The good news is it’s never too late to start so get going.
Perceptions of an investor—your questions answered
Many people have questions about various types of asset classes and following is an attempt to answer the more common questions I receive.
Can I lose on cash? I thought it was the safest asset.
Cash needs to be invested in order for it to grow. Just leaving your funds in cash will not produce growth in your overall wealth. It needs to be invested or otherwise inflation will eat away at your wealth. Yes, in this sense, you certainly can lose by investing in cash.
Isn’t fixed interest a low risk strategy?
There have been many examples of investors losing money on their fixed interest investments—one example is debentures. Some debentures are backed by second mortgages and when a property markets turns sour or slows down, some property developers are unable to sell their properties and therefore cannot pay back the loan. If you buy a bond for more than its par value (its original issue price) and that bond falls in value, you will lose on that investment if you need to sell it before its maturity.
What advantages does property provide?
Good property is a sound investment if it’s your home. After all, the purchase of your home is also a lifestyle decision. There are tax advantages in owning your own home upon sale , but the home loan is a non-deductible debt. There are no tax advantages with having this type of debt. It’s bad debt.
Capital growth or capital gain The increase in value of your original investment or asset.
Income The dollar amount return you earn from investing in an asset.
Total return Income plus capital growth.
Yield The annual rate of income received expressed as a percentage of the original asset value
Direct investments You invest directly into that investment, not through an agent or broker. You have control of how your own money is invested. You decide when to sell, when to buy, and you receive all the income and possible tax benefits. You are also responsible for the taxation implications.
Managed funds A structure whereby investors give their money to be managed by one person or a one-fund manager. The fund manager (the controller) decides what to invest in, when to sell and when to buy.
Industrial shares The shares of companies that are involved in the production or sale of goods and services.
Compounding This is where the investment increases exponentially over time due to interest being paid not just on the original investment or capital, but on the previous interest earnedr as well. Essentially it’s interest on interest.
All Ordinaries index or All Ords A measure of the level of share prices at any given time from a sample of major companies listed on the ASX that measures the overall performance of the share market.
What are asset classes?
The following are investment basics. At the very minimum you should aim to understand the four asset classes and be able to explain them to someone else. The principles of asset classes are very important and will not only prepare you for your approach to saving for private school fees, but also for any other lifetime financial goals you may be aiming for.
There are only four asset classes and they are:
• cash
• fixed interest
• property
• shares.
To start with, it is important that we look at schooling in context of Australia today. To do this we will look at the education system in Australia; the critical factors you should be thinking about when deciding whether or not to place a child in private school, and historical and projected figures for private school fees.
Never before has a good education seemed so important. An increasingly global economy and competitive workforce means the foundations for success need to be set early. With this thought in mind, many parents look to the schooling system to deliver the best outcome for their child.
In Australia, there are two main types of schools:
Government – these schools are fully funded by both the federal government and state and territory governments. Under most state laws they must accept any student. Around 67% of students attend government schools .1
Non-government or private – these schools are governed independently. Many provide a religious or values based education and others promote a particular education philosophy. Around 33% of students attend non-government schools. The non-government schools sector includes:
• Catholic schools – about 60% of non-government schools 2
• Independent schools – about 40% of non-government schools.
Catholic schools are run by the Catholic church Church and generally they are less expensive than other independent schools. Overall, Catholic schools make up about 20 per cent of the Australian schooling system. 3
Independent schools are a diverse group and include: Anglican, Lutheran, Presbyterian, non-denominational Christian schools, Islamic schools, Jewish schools, Montessori schools, Rudolf Steiner schools and schools that specialise in meeting the needs of students with disabilities.
Family belief systems will strongly influence the type of school that you send your child to. The fact you have picked up this book means you are seriously considering the option of a private school education for your child.
Financial Advisor Avestra Private Wealth …
7 Jun 2010 … Jonathan Cattana : Avestra Private Wealth Advisor: How to put your children through private school without breaking the bank.
www.jonathancattana.net.au/ – Cached – Similar
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21 May 2011 … Jonathan Cattana. Don’t you hate it when a school changes their uniform just as the hand me downs start to come your way! …
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When should I start with this strategy?
You will be able to start this strategy as soon you as you have built up a reasonable equity buffer in your home and, hopefully, before the children are born. Advice is important. You will need to contact an adviser who will be able to assist you in this situation.
Make sure the adviser is a licensed adviser who is able to provide you with the right outcome for this strategy. You will also need to carry out the same steps as before with your adviser in terms of your investment plan. Again, as with any loan, don’t over extend yourself.
The cost
The funds you have borrowed against your equity should also receive a very competitive interest rate from your bank or financial institution. Consider an interest only loan, and there are plenty of banks and lending institutions that would welcome your business. I am certain the financial institution which has your current home loan would not want to miss out on lending more money to you.
Regular saving
Once again, ‘drip-feeding’ the regular purchasing of your investments into the market may be a smarter approach and is essentially dollar cost averaging. Discipline is essential as with all investments strategies. Again, any income derived from the franking credits needs to be paid back into the home loan and not into other places such as your wallet.
Over time, as the balance reduces on your home loan and hence more equity is created, you can keep adding this new equity to your investment portfolio. Can you see now the process working and how we are switching bad debt into good debt?
Be patient as this strategy becomes effective after a number of years as your income is increasing and the growth of your portfolio is also moving upwards. As you keep lowering the mortgage, you then continue to draw out more equity to invest in a portfolio of managed funds or shares. It is important to keep adding to your investment portfolio on an annual basis by the same amount you are paying down each year on your home loan.
This strategy requires careful planning and structure. Financial planning advice may be required to be certain of your calculations—they need to be exact. You need to clearly understand the concept of borrowing from your home and the placing of these funds into an investment portfolio. The calculations are very important. Every dollar counts!
• General banking matters, debt management such personal, investment and home loans
• Wealth accumulation – various strategies and options
• Comprehensive advice on all investments including direct investments
• Cash flow management
• Debt reduction solutions.
• Retirement strategies
• Personal risk protection.
• Be able to identify a tax situation or consequence and then refer them to an accountant.
• Understand estate planning issues and discuss how to best deal with them.
Importantly, there must be mutual respect and liking between adviser and client. I have no interest in how much money someone has to invest if they don’t first adopt the attitude of listening to what my advice will be. If you think you can do it all yourself, then an adviser is not for you.
So, is it hard to find an adviser? What is a good test? The following are some key areas for you to consider when interviewing your financial adviser.
• Attend one of the many free seminars that are always offered by financial advisory firms.
• Ask for a referral from a friend
• Ask your accountant or another professional body.
• Visit the Financial Planning Association’s website (see the Resources section of this book).
Things you should look for in a financial planner
Their client focus – Your adviser should be focused on doing the best for you, the client. Make sure the adviser is really trying to get to know you and your current situation. Find the adviser who will sit down with you for at least two or possibly even three meetings to make absolutely sure they understand your needs. A financial planner cannot expect to know all your financial fears, concerns and aspirations and whatever it is that drives you everyday of the week in just one meeting.
Jonathan Cattana: Now I’ll show you some growth assets.
From his book at: Jonathan Cattana’s New Book
Property
Property as an investment provides both income and growth. When holding direct property as an investment, it may provide reasonable capital returns over the long term through rent. Income is received when you rent the property out. Meanwhile, the property itself increases in value.
However, for income from this investment to be consistent month after month, you need to ensure that the investment property is always tenanted and maintained. And, if you stop pouring money into maintaining property, it literally falls down around you and hence loses value.
There are other forms of property you can buy. For example, a non-residential property asset within a vehicle called a listed property trust. Here, a fund manager will purchase a mixture of property assets in various sectors and place them into one portfolio such as commercial, industrial or even leisure properties. When you invest in a listed property fund you buy what is called a unit—a small portion of ownership in that property portfolio, you do not own the whole property. Australian fund mangers have been successful with industrial property in the past and are now looking to invest abroad – internationally. However, the same requirement applies to industrial and commercial property as residential property, the property needs to be securely tenanted and regularly maintained to be a good investment.
What about your own home you ask. Well, your home means shelter, but not income. However there is strategy in the next chapter that can turn around your home loan (a bad debt) into good debt.
There are certain limitations with property:
1. Bad tenants who damage the property, non-paying tenants and property un-tenanted for more than a few weeks.
2. Buying and selling property is expensive. You may need to outlay costs such as valuation fees, stamp duty, agents commission, costs of advertising and loan costs to name a few.
3. You need to do your research to know the value of what you are buying or selling.
4. Other potential land taxes.
5. Property is not liquid meaning that you may not be able to sell it quickly if you require money urgently. Settlement of a sale often takes six weeks (at least in New South Wales).
What is the real return on property?
Not many people actually go to the trouble of working out the true yield on their property investment. To do this they need to add in all the extra costs of maintenance, fees, rates and possibly months where there are no tenants paying you an income.
When you sell any asset, the net gain is:
Original investment + purchase cost + additional cost of maintenance (in this case, rates, taxes etc.) – income received + final sales cost (stamp duty, legals etc.).
Despite all this, property definitely has more growth than cash and fixed interest, but not as much as shares.
Shares are my preferred asset class for growth and a growing income return. My strategy to help you fund your private school fees is based on this asset class.