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Money Matters – Article 3 – May 2015


Money Matters 3

Dear Readers,

May 2015 is behind us; Was there anything significant that caught your attention this month?
We are following the Federal Government’s Annual Budget (on what, where and how they are going to spend our hard earned tax money).
In particular, we note Tax Incentives (discount in income tax to small business) and ‘Accelerated Depreciation’ Allowance (a ‘one off’ opportunity to spend upto $20,000 on business related capital expenditure, and avail immediate tax deduction).
What does it all mean?
How does it affect my business?
Why are they doing it?
To spend or not to spend?
Please contact us if it all means anything to you; We can discuss, debate and Assist you.

Now, moving to Money Matters:

This is Article 3, part of a series of monthly articles with the intention of discussing matters related to Money and Finance.

I am sure you have read our previous two articles with curiosity and interest.
We look forward to your active readership, participation, critique, feedback, comments and suggestions. Come, join with us, and let us explore this most important of subjects in detail.
We will be covering a wide range of issues – Income, Savings, Cash-flow, Debt, Finance, Property, Assets, Managed funds, Shares, Super, investments, and many more.
We plan to interact actively with you and will promptly respond to your queries and suggestions.

In our previous 2 articles we started a conversation on a fundamental question – What is Money?
Love it or Hate it, we know that Money is the other half of our lives, part of almost all transactions we conduct, big and small.

We discussed the Origin of money in our previous articles, as follows;
Hundreds of thousands of years ago we humans started to form a concept of ourselves as productive, purpose driven and objective beings; We started to observe, think, anticipate, react, understand and finally plan for our lives and future.
We started to live as families, then groups, then tribes, etc. We learnt to grow and cultivate crops and livestock.
We soon learnt that ‘some of us in the group are better at some things, and others are better at other things’. And we started to do more of ‘some activity’ and less of ‘other’.
(He is better at hunting, She is better at cultivating crops).

Today, we call this Specialisation.
We then started to be more productive, and we moved from survival mode to more comfort and security.

We started Producing Surplus and learnt to manage, store, and use these surpluses for a better life.
With more comfort and security came boldness and an adventurous spirit. We began to observe, think and explore; We began to form ideas and concepts.
We also began to travel and came more in contact with other groups, to interact with them, learn about (and from) them and exchange ideas.
We gradually evolved from being a ‘pack’ to a Civilisation.

We soon started to exchange surplus Goods and Services (grains, livestock, jobs, expertise) with others; ‘The Barter system’ had begun.

With more productivity, barter and trade came more prosperity. We soon started realising the limitations of ‘exchanging goods and services’.
Bartering now became more complex; Our potential to barter was very limited.
(“I have sheep, he has wheat, I need fish, and he needs salt”)
or, (“I have plenty of fish, need salt now, he needs grain now, but may have salt next year”).

How did we solve this problem?
We learnt to improvise, to nominate certain ‘Commodities’ (things which are less perishable, more in common, easier to store and transport, etc.) as the ‘Means of Exchange’.
These commodities started to be seen as more valuable; As a ‘Storage of Value’.

A lot of commodities, in various different places, across thousands of years were experimented with, for different reasons.
Metals in general, and Gold and Silver in particular, became more and more the choice.
Why? Gold is divisible, non-corrosive, exclusive, rare and desirable; A natural choice.
Gold became the natural storage of value, as means of exchange – As a CurrencyAs Money.

Now, our populations were getting bigger, we had started to form villages, towns, cities, kingdoms.
Specialisation had brought us surplus, leading to economic progress, leading to prosperity and power.
And one of the most important specialisation was to provide ‘safety, security, dispute resolution, administration; The ‘Rule of Law’; Religious and Political Power.
The Priest, Chief, King, Emperor; Government became more and more important, and powerful.
And rulers needed more and more money to maintain and increase political power …..
And Rulers, governments, do not produce anything (do not make things, or do jobs), or create economic value; Rulers Do Not Create Money; People, citizens Do.

As time passed even gold as the means of exchange became troublesome; storing it safely, carrying it over vast distances and keeping physical possession of it became dangerous; Theft, looting, confiscation, etc. became problematic.

An innovative Idea Of ‘offering to store (Banking) gold safely’ began to take shape.
(I have a secure place and armed men to guard your gold safely)
(You keep your gold with me. I will issue you ‘promissory note)(A piece of papyrus, silk, tree bark, stone or clay tablet, paper, etc. – A “NOTE” promising to safely hold your money in trust and storage, until you need it back).
(You will get back your gold, when you need it, on producing the ‘NOTE’ – For a small fee).
The Concept Of Banking and Notes had begun.
People soon realised that it was much easier to transport, carry, exchange and trade with these ‘Notes’ compared to the danger of carrying gold around.
(You steal my Gold (Money), I lose everything)………..
(You steal my notes (Currency only, NOT Money), it is worthless to you unless the banker accepts it and exchanges for Gold (Real Money).

The era of Banking And Notes as Currency had arrived.

And what was political power (Chiefs, Kings, Emperors, Government) doing in the meantime?????

We shall explore that in our next article.

Once again, we hope this article was of some value to you. We will continue with the story about the History of Money next month. We look forward to your active feedback, comments and suggestions.

Talk to you next month.

About the Author: Harish Narayana is a Sydney based Finance Professional and Adviser.
Contact: hari@harionmoney.com.au
Web: http://www.harionmoney.com.au

 
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Posted by on June 2, 2015 in Uncategorized

 

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Money Matters – Article 2 – April 2015


Money Matters – Article 2

Dear Readers,

This is article 2, part of a series of monthly articles with the intention of discussing matters related to Money and Finance.

We look forward to your active readership, participation, critique, feedback, comments and suggestions. Come, join with us, and let us explore this most important of subjects in detail.

We will be covering a wide range of issues; Income, Savings, Cash-flow, Debt, Finance, Property, Assets, Managed funds, Shares, Super, investments, and many more.
We plan to interact actively with you and will promptly respond to your queries and suggestions.

In our previous article we started a conversation on a fundamental question; What is Money?
Love it or Hate it, we know that Money is the other half of our lives, part of almost all transactions we conduct, big and small.

We discussed the origin of money; The Barter system
We discussed evolution of the concept of Money; From exchange of simple goods, to nomination of certain ‘commodities’ as preferred means of exchange, to the narrowing down of this ‘preferred means of exchange’ to certain metals, and finally, widespread acceptance of Gold and Silver as the preferred means of exchange.

The concept of producing excess goods and services (more than what is needed for minimum sustenance of a Family, Group, Village, Community, Town, City, Region, etc.) was a revolution.
People could now have a wider variety of goods and services by more trading and exchange.
They could ‘store’ some of it for longer periods of time, ‘specialise’ and become more ‘efficient’ in producing particular goods and services
They could now save time and effort, lead more healthy and fulfilling lives.
Looking at it another way – They could ‘save’ and ‘liberate’ their ‘Time’, ‘store’ it, and use it for things they ‘wanted’ to do.
In short – Gold became a Storage of Value. Gold became “Money”

Let us now move forward ……… Why was Gold and Silver the natural choice?
Many commodities were tried and experimented, no doubt, including Grains, Livestock, Salt, Hides, Beads, Feathers, etc. in ancient times.
Gold is rare, divisible, non-perishable, cannot be replicated (counterfeited), and most importantly has high aesthetic value. It was logical and natural choice to select gold as a means of exchange and storage of value.

Gold as Currency:
The next logical evolution was to use Gold as a ‘Currency’.
You could now produce anything, anywhere, trade it anywhere for a common store of value – a ‘Currency’ – Gold.
You could then transport Gold easily to anywhere, store it for any period of time, trade it for any other goods or service, anywhere and anytime of your choice.

There were wider effects; one of them political. Exchange and trade increased citizen’s wealth, and wealth increased their influence, leading to more knowledge and power.
The ruling establishment were not very happy with this.
They tried to regulate, control and manipulate the source of growing independence and power of their citizens by trying to manipulate the ‘Currency’.
There were various experiments, mostly by force & diktat, by various leaders, rulers, invaders, etc. to use other forms of ‘Currency’.
Peppercorns, Leather Coins, Tea leaves ……….. And Paper (ring a bell ????) were used at various times, by force, but Gold remained the most popular free-market choice of Currency.

There were a few problems as well, one of them being ‘Safety’ and ‘Security’.
Storing, handling, carrying gold all the time was not ideal.
There was a need to ‘own’ the currency but not having to have it physically all the time ………….. What was the solution?
We shall explore that in our next article.

Once again, we hope this article was of some value to you. We will continue with the story about the History of Money next month. We look forward to your active feedback, comments and suggestions.

Talk to you next month.

About the Author: Harish Narayana is a Sydney based Finance Professional and Adviser.
Contact: hari@harionmoney.com.au
Web: http://www.harionmoney.com.au

 
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Posted by on April 19, 2015 in Uncategorized

 

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Money Matters – Article 1 – March 2015


Money Matters – Article 1 – March 2015

Dear Readers,

We have started a series of monthly articles with the intention of discussing matters related to Money and Finance.
We look forward to your active readership, participation, critique, feedback, comments and suggestions. Come, join with us, and let us explore this most important of subjects in detail.
We will be covering a wide range of issues; Income, Savings, Cash-flow, Debt, Finance, Property, Assets, Managed funds, Shares, Super, investments, and many more.
We plan to interact actively with you and will promptly respond to your queries and suggestions.

Let us start with an interesting question What is Money?

There is an old saying “It’s only money ….. It can only lead to sorrow ………..
But is it? Money is the grease that makes our life run smoothly. Providence has provided us with Air, Water and Land ….. But everything else has to be provided for by ourselves in order to survive and thrive; And so we need Money.

But what is this Money? Where did it come from? Who decides its form (metal? Seashell? Barley? Paper?), denomination, name, value, availability?
Let us start with the standard dictionary definition: Money is “A medium of exchange, in the form of Notes and Coins”.
It is so simple and obvious ……… but is it?

Origin of Money: Barter system
Tens of thousands of years ago we humans moved on to a stage where we settled down, in little families or communities, and started to produce a little bit more than our daily minimum needs.
We soon discovered that one person, or family, or community was better at producing some ‘things’ but not other ‘things’.
Or we needed something which others had, and they probably needed things we had. We created a system of exchange of goods and services. We called it “Barter”.
The barter system was good, but not perfect.
Look at some of the dilemmas these groups and communities may have faced;
“I have sheep, he has wheat, I need fish, and he needs salt”
Or, “I have plenty of fish, need salt now, he needs grain now, but may have salt next year”.

Money as a concept of Value
AS time passed, and as more people and communities started interacting with each other, there grew a natural “Market” for goods and services.
Concepts of “Standard Weights & Measures”, of the “Relationship between Time, Effort and Output”, of “Quality and Quantity”, etc. started to be better understood and appreciated.
Some ‘things’ were easier to barter or ‘Trade’ compared to others.
Some things (staple commodities) stood out; They were most generally needed by all, they had longer shelf life (or even non-perishable), were easier to store and transport, etc.
In short, these ‘things’ were in higher demand, and so had more ‘Value’.

Money as storage of Value
Eventually, after a long period of time, commodities, generally, emerged as higher value items to generate (produce), stock and trade.
However, problems remained with direct barter of goods, whether between two parties or in common markets.
Over time, people came up with the concept of an ‘intermediary’, some ‘thing’ in common, that you could keep in store without losing value ………… and which, later in time, could be exchanged again for whatever goods or services needed in the future.

Gold as Storage of Value
Many commodities were tried and experimented in ancient times, no doubt, including Grains, Livestock, Salt, Hides, Beads, Feathers, etc.
But metals, especially rare metals, Gold and Silver in particular, were the natural choice in most communities, all over the world.
Gold is rare, divisible, non-perishable, cannot be replicated (counterfeited), and most importantly has high aesthetic value.

What happened next?
In our next article we shall concentrate more on a critical function of Money; As a store of Value.

Once again, We hope this article was of some value to you. We will continue with the story about the History of Money next month. We look forward to your active feedback, comments and suggestions.

Talk to you next month.

About the Author: Harish Narayana is a Sydney based Finance Professional and Adviser.
Contact: hari@harionmoney.com.au
Web: http://www.harionmoney.com.au

 
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Posted by on March 16, 2015 in Uncategorized

 

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February 2014 – To buy, or to rent?


What’s happening in our economy … How are financial markets doing … And a question from one of our readers; “To buy, or to rent?”

Dear Readers,

Thanks to all of you for accepting our invitation, for accessing our blog, and for your participation and feedback. Your positive feedback inspires me to explore new ideas and topics. We look forward to more of your active participation.

We have all been conditioned by now to the paradigm of assigning names to different generations, then treating them as some homogeneous group with little or no individuality amongst them, then imposing generalities on their outlook, behaviour, motivation, etc.
First there was the ‘pre-war’ generation (pre 1914, ‘first world war’ era)
Then what is called the ‘lost’ or ‘silent generation’ (between 1922 and 1942)
Then came the ‘greatest generation’ (the war period, between 1942 and 1946)
Then came the ‘baby boomers’ (post second world war boom in population; 1946 onwards)
Then supposedly the ‘generation jones’ or ‘joneses’ (kids growing up to adulthood around 1960’s)
Then came ‘generation X’ (people born between the 60’s and late 70’s)
Then supposedly the ‘XY cusp generation’ or ‘MTV’ generation (kids born in mid 70’s to late 80’s)
Then came the phenomena loosely indicated as the ‘boomerang generation’ or ‘why generation’ (people growing up in the 70’s and 80’s) – Remember them (or the ‘boomerang phenomena’ itself, we shall come back to them again later)
Then there is you (dear ‘young’ readers) – ‘Generation Y’ or the ‘millennium generation’ (born in the 90’s and beyond, closer to the millennium).
Then there is a grouping of the ‘iGeneration’, all of you fitness challenged, internet and gizmo obsessed ones (only joking); people growing up around the millennium and beyond (late 90’s to date).
And finally (but not the last), ‘generation Z’; the youngest of you all.

A whole school (several of them) of psychobabble have devoted lots of time and effort, over the past 100 years or more, with enormous outputs of literature, on this subject. Fortunately this is not our ‘subject of the month’.

We shall look at the “boomerang effect”, at “boomerangs” and ‘kippers”, at the property markets, prices, affordability, supply and demand perception, etc.; and think aloud on the dilemma of whether to buy your own home or to rent for the rest of your life ….. But first …..

The Big Picture

Global Overview: We have consistently maintained our views on the global challenges we face in term of a fundamentally flawed monetary system, and its effect, over the last 100 years or more, on all aspects of global economy and finance.
Pl take time to browse our ‘Global Overview’ section, in our previous 20 blogs (since April 2012) for more information and views.
In spite of enormous availability (some would say deluge) of ‘money’ in global financial markets, and continuation of creating (some would say ‘out of thin air’) even more ‘money’ by most central banks, the demonstrable positive effects of this ‘stimulus’ is hard to see.
It seems that a lot more (and ever increasing) ‘bang’ (stimulus, or money printing) is being needed to produce little or no ‘buck’ (meaningful, sustainable, productive growth in the economy).
People, businesses and even nations are either reluctant to borrow more, or do not have the capacity and rating to do so.
The ‘velocity effect’ is just not happening. Meanwhile gross distortions and bubbles in various asset markets are being seen; and savers, the most productive and prudent section of any prosperous economy, are being driven towards higher risks for lower and diminishing returns.

Local Impact: Please take time to browse our ‘Local Impact’ section in our previous blogs to get a consistent view of the local impact on our economy.
A stable federal government, with indications of responsible budgeting and governance is a positive sign of hope, at this point in time.

Topic of the Month:
I have recently been working with a lot of ‘youngsters’, what is loosely called ‘Gen Y’ clients, in relation to property and first home purchases. It has been a set of very lively and interesting conversations.
Several interesting points came up, which most of us may have not thought of, or connected together as a bigger picture.
I have attempted to do so in this month’s blog.

Of ‘kippers’ and their ‘boomerangs’: There used to be a golden time, when kids would be independent and leave home at the age of 18-21, find jobs, make (or buy) a home, and look after themselves ever after ……. At least in most cases.
The 70’s and 80’s came to be known for a growing trend; of kids leaving home in their late teens, seeing the world, doing their bit to change (or save) the world ….. And then return back to ‘the nest’, to the comfort of ‘mum and dad’.
Why? There are many theories and voluminous observations written and talked about, over 50 years or more, about this. Fortunately, this is not the subject of our discussion today.
But one aspect of this trend is relevant to our topic, the financial/economic angle.

The “It’s too hard” syndrome: For many reasons, and probably because these ‘golden children’ were brought up in ‘good times’;
With parents pandering (some would say overtly) to their whims and fancies;
With the economy not doing very well;
With inflation – and property markets being hard to enter;
With unemployment high and jobs not stable;
Some kids tended to ‘boomerang’ back to the parent’s home, as a comfort zone, a sanctuary.
And many of them reconciled to the concept of ‘renting’, rather than owning their home.
And this trend is felt acutely even today; The question “to rent or buy” is as much relevant today as it was 50 years ago, probably ever more so.

But there are some sobering, long term, financial questions to answer;
‘Where are we today’?
‘Where do we want to be in 15-20 years’ time’?
‘What if we just keep renting’?
‘What are the advantages of renting’?
‘What are the advantages of buying’?
‘What should we do’?
And a thousand more “what if’s”.

Well, bunkering down in ‘mum’s’ place is not a long term option.

We leave the forum open to you now.
What are your thoughts on all of this?
What is your experience?
Come, join the discussion, and share your ideas and experiences.
I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

Looking forward to hearing from you

Hari

 
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Posted by on March 5, 2014 in Uncategorized

 

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January 2014 – Further Education; How do you pay for it?


Welcome to the New Year …. and wishing you Healthy, eventful and prosperous times ….

What’s happening in our economy … How are financial markets doing … And a question from one of our readers; “How do I pay for my (or my kids) further education?”

Dear Readers,

Thanks to all of you for accepting our invitation, for accessing our blog, and for your participation and feedback.  Your positive feedback inspires me to explore new ideas and topics. We look forward to more of your active participation.

I am sure you had an interesting holiday break, lots of food and beverages, hectic shopping and swiping of credit cards, lots of travel, fun and frolic, and some interesting get-togethers with friends and family.

One such chat I had made me think of the subject of this month’s blog;
“Higher education is a must these days, or so they say”
“It could take anything between 3 to 10 years to complete University”
“How will I fund my education (or my kids, or grandkids, or family members)?”
“How much will it cost?”
“How do we pay for it?”
“When do we pay for it?”
“How do we decide?”

It was a lively and emotional chat, let me tell you. I have tried to address some aspects of it, but first …..

The Big Picture

Global Overview: We have detailed our views on global monetary situation, compounded by flawed fiscal and monetary ‘remedies’ (more like magic bullets) to ‘solve’ these problems. Please read our October blog, and previous ones, for details – http://tinyurl.com/l4hn9u4

We have reiterated, enough times, our view on the concept of ‘Money and Credit’, and the importance of gold as the basis of money (ultimately, we believe, gold is money). Pl read our August 2012 blog ‘What is Money?’ – http://tinyurl.com/lshbsjs

With the US FED becoming a gigantic ‘money printing enterprise’, and most other major central banks following this lead, attention has turned to the supply, availability, exchange rates, fluidity, etc. of currency and money between banks and institutions, within various economies, and between countries.

And a lot of attention is paid to Gold – The demand and supply situation for gold; It’s price and availability; How much of it is available? Where is it stored? Who does it actually belong to?
There has been talk of higher demand for ‘physical gold’ from some Asian countries, by the public, corporates and governments.
There has been talk of some governments putting restrictions on their citizen’s ability and ease to convert their paper money to gold, to trade in gold, to import and store gold, etc.
Seems a South American government recently repatriated significant amount of its physical gold holdings stored in US vaults, after much difficulty.
We hear recent news of some European government’s request for a substantial part of its physical gold holdings stored in US vaults to be returned back for ‘safe storage’ within their own place.
What is the significance of all this?
Is the unprecedented pace and volume of “money printing” by central banks; and the related inflationary pressure (bubbles) in various asset markets; the ‘competition between nations to devalue their currencies (currency wars), etc. hurting confidence in all “Paper Money” and “Fiat Money” systems, and the US Dollar in particular?
We would like your thoughts on this.

Local Impact: We briefly mentioned the disincentives of the global impact on our economy. Please read our October blog, and previous ones, for details – http://tinyurl.com/l4hn9u4
Our national debt figures are a worry; Unemployment, and the type of new jobs being created, is not rosy.
Asset price inflation (read property bubble – high prices for homes) – fuelled by record low interest rates, and desperate investors (both local and overseas – especially baby boomers) looking for a decent return on investment and safe parking space for their savings – is making it ever harder for first home buyers to enter into the market.
A newly elected government with indications of responsible budgeting and governance is a positive sign of hope.

Topic of the Month:
I had a stimulating conversation with a group of friends over the holiday break on university education expenses, in general, and how to best pay for it, in particular.
There were a wide variety of points, and opinion, made, such as;
“Is there a need for kids to go to university right after school?”
“What are the choices available?”
“Is there pressure – from parents, peers, fear of being left out?”
“How do we pay for it, and who pays for it?”

We could probably write a whole book trying to tackle all these issues, which is not our goal at this point in time.
I have limited this exercise to working out few possible ways of funding university fees and related (limited) expenses – Here we go;
Some assumptions;
We limit our costing to university student fees only, not living and travel expenses.
We assume that student is a citizen, permanent resident, and enrolling in an authorised institution.
We work on three amounts (total debt/cost incurred to complete a given course/degree) – $30,000, $60,000 and $120,000 respectively.
We assume (to keep things simple) that funds (loan amount) is withdrawn in full, at the day of drawdown, and will incur periodic monthly repayments (principle & interest) for a maximum period of the term of the loan. HECS debt is an exception (as detailed below).

Scenario 1:
You have enrolled into university and estimated your total fees and charges to be approx. 30k, by the time you have finished study. You have made other arrangements to cover your living expenses.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this using a credit card?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments for the first month would be approx. $600.
4. Your obligation would be limited to only paying ‘minimum payment due’ (calculated at 2-3 percent of monthly balance).
5. You could end up repaying upto 163k, over a period of 83 years, if you only repaid the minimum amount.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by taking a personal or consumer loan?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $700 per month (based on a fixed interest rate of 14% p.a. and 5 year term) for the next 5 years.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by ‘topping up’ your home/property loan (borrowing against equity in your home/property)?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $200 per month (based on a fixed interest rate of 7% p.a. and 30 year term) for the next 30 years, or until the debt is paid off.
What If; you applied for HECS loan (A federal Government initiative)?
1. The Government (Taxpayer) will fund your education to the limit of 30k.
2. You do not sign a loan contract, only an obligation to repay in the future.
3. Your loan repayments do not start until you find gainful employment within Australia, and your income/salary does not reach a ‘satisfactory’ level (approx. 50k per year, as per current ceiling – is indexed/increased annually).
“Is there any time limit as to when I need to start working?” = No
“What if I choose not to work at all?” = That’s your choice
“What if my income never crosses 51.3k (or the indexed amount, in the future)?” = No repayments
“What if I live/work overseas?” = No obligation to repay
“Is this a loan?” = It is an obligation to repay based on conditions
“Will I be charged interest?” = No, but your HECS balance is ‘indexed’ (will go up by 2-3% p.a.) to consumer inflation figures as per RBI/Government index (roughly 2 to 3% per year).
“How much will I have to pay back per month?” = Assume your ‘calculable income’ for 2014 is 52k; your HECS ‘repayment rate’ is 4%, per year, of your income; this works out as 4% of 52k, which is approx. $2080 per year, or approx. $174 per month.
Your repayments do not depend on your initial loan amount, or what date you choose to start work, or what date you reach the minimum income threshold (to qualify for repayment deductions from your income); If and when you reach the ‘threshold’, and based on your ‘income band’, you repay a set amount (a percentage of your income divided by 12) per month.

Scenario 2:
You have enrolled into university and estimated your total fees and charges to be approx. 60k, by the time you have finished study. You have made other arrangements to cover your living expenses.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this using a credit card?
1. A huge amount to put on you plastic, but if you are willing, and the bank too …..
2. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
3. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
4. Your minimum monthly repayments for the first month would be approx. $1200 or more.
5. Your obligation would be limited to only paying ‘minimum payment due’ (calculated at 2-3 percent of monthly balance).
6. You could end up repaying upto 320k, over a period of 102 years, if you only repaid the minimum amount.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by taking a personal or consumer loan?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $1400 per month (based on a fixed interest rate of 14% p.a. and 5 year term) for the next 5 years.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by ‘topping up’ your home/property loan (borrowing against equity in your home/property)?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $400 per month (based on a fixed interest rate of 7% p.a. and 30 year term) for the next 30 years, or until the debt is paid off.
What If; you applied for HECS loan (A federal Government initiative)?
1. The Government (Taxpayer) will fund your education to the limit of 60k.
2. You do not sign a loan contract, only an obligation to repay in the future.
3. Your loan repayments do not start until you find gainful employment within Australia, and your income/salary does not reach a ‘satisfactory’ level (approx. 51k per year, as per current ceiling – is indexed/increased annually).
“Is there any time limit as to when I need to start working?” = No
“What if I choose not to work at all?” = That’s your choice
“What if my income never crosses 51.3k (or the indexed amount, in the future)?” = No repayments
“What if I live/work overseas?” = No obligation to repay
“Is this a loan?” = It is an obligation to repay based on conditions
“Will I be charged interest?” = No, but your HECS balance is ‘indexed’ (will go up by 2-3% p.a.) to consumer inflation figures as per RBI/Government index (roughly 2 to 3% per year).
“How much will I have to pay back per month?” = Assume your ‘calculable income’ for 2014 is 65k (let us assume you got a better paying job for the 60k you spent on your degree); your HECS ‘repayment rate’ is 5%, per year, of your income; this works out as 5% of 65k, which is approx. $3250 per year, or approx. $271 per month.
Your repayments do not depend on your initial loan amount, or what date you choose to start work, or what date you reach the minimum income threshold (to qualify for repayment deductions from your income); If and when you reach the ‘threshold’, and based on your ‘income band’, you repay a set amount (a percentage of your income divided by 12) per month.

Scenario 3:
You have enrolled into university and estimated your total fees and charges to be approx. 120k, by the time you have finished study. You have made other arrangements to cover your living expenses.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this using a credit card?
Forget it, very unlikely and not practical.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by taking a personal or consumer loan?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $2800 per month (based on a fixed interest rate of 14% p.a. and 5 year term) for the next 5 years.
What If; you (or your parent/s, or grandparent/s, or family member/s) funded this by ‘topping up’ your home/property loan (borrowing against equity in your home/property)?
1. The debt/liability is a personal debt, will register on your ‘credit file’, will limit your ‘borrowing capacity’ in future when you apply for other credit/loans (reduces your borrowing capacity).
2. Repayment obligation will start immediately, first payment due one month after funds are withdrawn.
3. Your minimum monthly repayments will be approx. $800 per month (based on a fixed interest rate of 7% p.a. and 30 year term) for the next 30 years, or until the debt is paid off.
What If; you applied for HECS loan (A federal Government initiative)?
1. The Government (Taxpayer) will fund your education to the limit of 120k.
2. You do not sign a loan contract, only an obligation to repay in the future.
3. Your loan repayments do not start until you find gainful employment within Australia, and your income/salary does not reach a ‘satisfactory’ level (approx. 51k per year, as per current ceiling – is indexed/increased annually).
“Is there any time limit as to when I need to start working?” = No
“What if I choose not to work at all?” = That’s your choice
“What if my income never crosses 51.3k (or the indexed amount, in the future)?” = No repayments
“What if I live/work overseas?” = No obligation to repay
“Is this a loan?” = It is an obligation to repay based on conditions
“Will I be charged interest?” = No, but your HECS balance is ‘indexed’ (will go up by 2-3% p.a.) to consumer inflation figures as per RBI/Government index (roughly 2 to 3% per year).
“How much will I have to pay back per month?” = Assume your ‘calculable income’ for 2014 is 100k (let us assume you got a better paying job for the 120k you spent on your degree); your HECS ‘repayment rate’ is 8%, per year, of your income; this works out as 8% of 100k, which is approx. $8000 per year, or approx. $667 per month.
Your repayments do not depend on your initial loan amount, or what date you choose to start work, or what date you reach the minimum income threshold (to qualify for repayment deductions from your income); If and when you reach the ‘threshold’, and based on your ‘income band’, you repay a set amount (a percentage of your income divided by 12) per month.

Now, dear readers, you tell me ….. which one would you chose and why?

I will leave the forum open to you now.
What are your thoughts on all of this?
What is your experience?
Come, join the discussion, and share your ideas and experiences.
I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

Looking forward to hearing from you

Hari

 
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Posted by on February 7, 2014 in Uncategorized

 

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October 2013 – Points to Ponder


What is happening in our economy … How are financial markets doing … And a question from one of our readers; “How do I know if I have made or lost money on my property?”

Dear Readers,

Thanks to all of you for accepting our invitation, for accessing our blog, and for your participation and feedback. Your positive feedback inspires me to explore new ideas and topics. We look forward to more of your active participation.

You have read our discussion on the most important asset we are likely to buy in our lifetime – “Our Home” – And some thoughts on how to go about decision making – July 2012 Blog; “Is it the right time to buy property?”http://tinyurl.com/n9x3yqq
You have noted our thoughts on the subtle difference between “Price and Value” of any asset, especially your family home – November 2012 Blog; “What is the Value of My Property?”http://tinyurl.com/lxu33n8
You are now familiar with the young couple Shaun & Sarah, who share and benefit from our stories and thoughts – December 2012 Bloghttp://tinyurl.com/ljl4lke
You have read our thoughts on ‘what to look for’ when buying a property – August 2013 Blog; “True costs of owning your home”http://tinyurl.com/l7v6ckn

This month’s blog is a response to conversations I am had with readers in response to our September blog. But first ….

The Big Picture

Global Overview: We do not see any substantive positive change from our September 2013 outlook.
The mega drama that went on re; “Debt Ceiling” in the US, the absurd theatre performed by US lawmakers of both parties, and the repeated broadcast of this epic all over the world, has not changed a fundamental fact;
The US government is deeply, some would say fatally, in debt to the tune of around 17 trillion USD (how many zero’s in a trillion ….. anyone?).
Some go as far to say it is closer to 60 trillion, if you take into account all the “unfunded liabilities / promises” that the US government has to fund (The ‘cradle to grave’ welfare and other programs).
So the battle has been postponed for a few months (‘the can kicked further down the road’); and the business of “over-spending money that they do not have” (created out of thin air) continues.

Local Impact: A mind boggling USD 85 Billion is being printed by the US ‘FED’, every month, and is flooding (and distorting) global financial markets; creating asset bubbles, mal-investment, risk-return-distortions, etc.
It is harming the most productive and prudent section of any prosperous economy – The people who produce (earn) surpluses, who plan long term, who save for the future (these ‘savings’ being the vital capital needed to build and sustain our economy, in the long term).
Please read our July 2013 Blog – http://tinyurl.com/m3z736t – for details on this subject.

Topic of the Month:
I had a stimulating conversation with one of our readers based on our September blog, and the question was; “How do we know if we have made or lost money on our property?”
Good question.
How many times have we not heard, (on most social occasions when the conversation eventually turns to ‘property and prices’);
Did you hear … seems xyz bought property five years ago for 500k … recently sold it for 650k … that’s a cool 150k in the pocket, right? …

Let us stop right there and consider a scenario; Say a couple (typical family) bought investment property 5 years ago; they paid 500k purchase price; it cost them approx. 25k to purchase; total outlay 525k.
Say they (as usually happens) borrowed 525k to fund this purchase (they had equity in their home and used it to borrow the full amount);
Property was rented out through an agent; rental yield (income) was reasonable and steady.
Now fast forward 5 years … let us say they sold the property recently for 656k …
Well, there it is … 156k profit … right?
Wrong …
Let us consider costs of buying property (purchase costs), of keeping it (debt servicing and maintenance costs), and of disposal (selling costs).
It works out about 156k.
What do you mean? We have not made any money over the last 5 years”? You may ask.
You are right; this is break even (before tax – remember capital gains tax), no actual profit made.

One important NOTE: We have deliberately not considered ‘negative gearing’ aspect (or what we call “getting some of our tax money back” …)
But you may say; “why not … We do get some tax benefits … silly to ignore this fact” …

There is a reason why I play devil’s advocate here. Some sobering facts for us to consider;
70 – 80% of investment property owners have, on an average, total family income of less than 100k.
A typical working family may have one full time and one part time income.
A majority of investment property owners seem to not use their ‘negative gearing’ benefits for future investment (savings and wealth-creation) purposes; it is more likely to be used for discretionary spending (‘a reward or treat for the family’).

So, let us assume this couple are an exception; say the couple have annual income of 60k and 30k each (total 90k).
Let us take full ‘negative gearing benefits’ into consideration.
They bought for 500k five years ago, borrowed 525k, sold for 656k recently.
Total cost (costs of buying + costs of keeping + costs of disposal) = Approx 127k.
Actual profit made = 29k (before tax – remember capital gains tax).

All above calculations are based on sound/practical assumptions. Your individual circumstances are different, and calculation will vary based on your particular circumstances.

We are more than happy to work out numbers and discuss your particular needs, wants and goals.

I will leave the forum open to you now.
What are your thoughts on all of this?
What is your experience?
Come, join the discussion, and share your ideas and experiences.
I look forward to your opinion, counter argument, response, constructive criticism, feedback, etc.

Looking forward to hearing from you

Hari

 
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Posted by on October 31, 2013 in Uncategorized

 

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