Jonathan Cattana
Direct investing
If you have a lump sum and are considering a tailored direct share portfolio, you will need between 15 and 25 stocks, seeking advice would be strongly recommended. There is a lot to consider and learn.
Where possible, invest any additional cash from work, such as bonuses or an inheritance, straight into the savings plan. Ensure that the income from the investment is being reinvested so that it’s compounding and the franking credits are returned back to the plan so that the income stream is added to the overall saved amount.
If you require a savings calculator see www.infochoice.com.au and look under the banking section. Please note, this calculator gives an indication only. An exact figure requires advice from a financial adviser.
It’s amazing how easy this strategy is, but how many people have not yet this plan into action.
Let’s look at a case study.
Case study 1
Names Mary and Phil Evans live in Melbourne
Number of children They have one daughter, Theresa, who will begin school in 2011
Age Theresa turns 2 at the end of 2007
Total family income per annum $110,000
Employment Phil has his own business and seven employees at his manufacturing plant. Mary is an architect and works from home part-time.
Education strategy The goal is to send her to a private school from kindergarten to Year 12.
Strategy choice Simple savings plan
Current savings set aside for schooling $20,000
Figures supplied by MLC Limited
Step 1
Identify the school
Mary and Phil have chosen a Catholic private school in the suburbs of Melbourne and wants to send herim there from kindergarten, all the way through to Year 12.
Step 2
Calculate the cost of tuition and extras
Theresa’s date of birth is 31 November 2005 and she will start kindergarten when she is five years old in January 2011. Theresa will finish Year 12 in 2023.
From the research they’ve done, Mary and Phil have found out that currently the tuition fees for the school are $24,500 a year and they have worked out that the total fees will be $328,000 .
Step 3*
Choose the asset class
Because Mary and Phil have already saved $20,000 for Theresa’s tuition fees, they have chosen to make adopt a regular savings plan and invest in industrial shares, which have a growth rate of 5%, will provide income of 5% and a franking credit rebate on their portfolio of industrial shares of 80%.
Based on these assumptions, the amount that is required to save every month is $870 .
Note: If this is the only child for Mary and Phil, they may wish to consider to stop saving in year 2023 and then sell the down their investment portfolio.
However, by then, Mary and Phil may decide to continue on with the savings plan for Theresa’s university fees or other needs.
How do I pay for private school fees?
Now that you have an idea of how much it will cost you to send your child to the private school of your choice, the next step is coming up with a plan to finance them. As we have seen in the previous chapter, private school fees increase over time. So, to be able to pay for them, you will need to ensure that your investments are working very hard for you to keep up with, if not overtake this increase. At the very least, returns from your investments need to be doubling the current rate of inflation of around 3%.
To create a game plan for paying for private school fees, you first need to understand investing. The first step in understanding the different ways of investing and the structures you can use, is understanding the four asset classes.
It sounds simple enough, but most people don’t realise what they are investing in. This chapter aims to explain as simply as possible what asset classes are and how they interact with each other and the best ones to invest in to reach your goal of paying for private school fees.
Once we understand these asset classes, we can then apply them to the different types of financial strategies to save for private school fees. We look at those strategies in the next chapter.
Capital or capital base The amount of money you originally invest in an asset.
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.
Estate planning
This is an important area of wealth preservation for current and future generations. The length at which I could discuss this area is tremendous and obviously outside the scope of this book, but it certainly deserves an overview.
Estate planning and wills are often overlooked by many professional groups, including solicitors. In simple terms a will is a document which legalises your estate plan. Understanding who gets what and when once you have passed on is critical. Really, it should be where you start with your planning and then work backwards, not the other way around.
Receive advice on what needs to go into an estate plan. If a parent was to sadly pass away, how soon can the family be certain that his or her children will receive the best care in their lives?
When building an estate plan with a financial adviser, ensure you cover off the area of a testamentary trust. A well-drafted testamentary trust provides you with peace of mind that will work through possible unanswered questions for my children’s future should you or your wife die prematurely. Make certain that there are enough assets and, as we mentioned above, make sure you have enough life insurance in place to pay for your children’s education right through to university if that was your plan.
Creating an estate plan is not hard, however you will require a competent adviser to organise your estate plan. Then you will require a solicitor to draw up the wills.
As you can see, estate planning is not just about a will or ensuring your estate keeps paying for school fees, it is the welfare of your family. If you have assets and need to ensure that they land in the right hands at the appropriate time, then draw up an estate plan and will. Make sure you get your will done professionally.
Good advice
Advice is something you pay for a good friend once told me. And you get what you pay for.
You can receive advice from a number of financial services providers, such as stockbrokers, financial planners, and possibly accountants. However, any business or person that offers or advises you about financial products is required by law to have an Australian Financial Services Licence (AFSL) or be an authorised representative of a such a licensee.. These are a few of the professionals you will be dealing with.
Accountant – Typically provide tax advice and also financial advice if they are an authorised representative of an AFS.
Stockbroker – can provide advice on gearing and direct investments, however, it is unlikely that a stockbroker will look at the complete picture and ensure that a strategy is the right one for you.
Financial advisor – again they must hold an AFSLor be an authorised representative of a holder of an AFSLAFS. An educated and experienced financial planner will be able to look at your total wealth picture and be in a strong position to provide financial advice. Financial planners are heavily regulated to ensure the advice you receive is in your best interest. As a consumer you are also protected by law. Later, I will explain the role ASIC plays in overseeing the financial planning industry.
Debt Recycling – 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!
This strategy can continue to be used for wealth creation long after the school fees and other things like university fees have been paid for. As you can see, I have only touched on the concept here, you will need to work through the calculations of funding as well as the mechanics of adding to the investment portfolio on a regular basis.
Shares
Shares are very much misunderstood and are not as complicated or scary as they seem.
But if you are a avid reader of email share tips, the business section of the Sunday newspapers, buy and sell recommendations, numerous magazines of the ‘must have shares for 2006’ you may be confused with how you approach the market.
What is a share?
There are many different types of shares, but the type of share I will be referring to in this book is called an ‘ordinary’ share. By owning one ordinary share of a company, you become a shareholder and participate in the fortunes of that company.
As a shareholder of a well-managed company, you will be rewarded with a share of the company’s profits, or a dividend, normally twice a year—an interim dividend and a final dividend. The value of the share should increase in value as well. This is a capital gain.
The overall return from this asset class also gets better. A majority of blue-chip industrial shares can have a great tax advantage called dividend imputation, otherwise referred to as franking credits.
What are franking credits?
In 1987 dividend imputation was introduced. Previously, companies were taxed on their income and then paid you a dividend from the company’s net profit. This dividend would be added to the shareholder’s income which they would then pay tax on—so essentially this money was being taxed twice.
Now you receive a tax credit on the dividend equal to the amount of tax the company has already paid. Franking credits are displayed on your dividend statement, don’t forget to tell your accountant about these at the end of your tax year, you can claim the them. After all, it’s your money.
Buying shares is a simple exercise. You can buy shares in an Australian company through a stockbroker or an online stockbroker. The stockbroker or an online provider can set up with an account at no charge. A great resource to gain further information can be found on www.asx.com.au, the Australian Stock Exchange website.
The important extras
We have looked at average tuition fees, which were significant. But that’s not it! There are additional costs throughout the year for what I will refer to as ‘extras’. This is simply where you add to your cost of private schooling the necessary basics for a child to attend one of these schools. The cost of extras increase as your child heads towards Year 12.
These additional costs include things like:
• School uniform – winter, summer and sport, including hats and blazers
• Musical instruments
• Sports equipment
• IT – some schools require students to have a laptop to use in class, home computer, internet account, software and software protection on home computers (firewalls, spam protection, site bans) etc.
• Extra curricula activities such as drama, piano, voice, singing, choir
• Cadets
• Excursions for school projects or for class or year groups
• School camps
As mentioned previously some schools are also facing a crisis with regard to ‘yard space’ as well as building age from wear and tear. Government funding is going some way to assist schools in maintaining its infrastructure however it is nowhere near the amount required by schools. So in some instances you may also be asked to contribute to the building fund for the school.
jonathan cattana
jonathan cattana
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Jonathan Cattana : Estate Planning
Jonathan Cattana : Estate Planning
Estate planning
This is an important area of wealth preservation for current and future generations. The length at which I could discuss this area is tremendous and obviously outside the scope of this book, but it certainly deserves an overview.
Estate planning and wills are often overlooked by many professional groups, including solicitors. In simple terms a will is a document which legalises your estate plan. Understanding who gets what and when once you have passed on is critical. Really, it should be where you start with your planning and then work backwards, not the other way around.
Receive advice on what needs to go into an estate plan. If a parent was to sadly pass away, how soon can the family be certain that his or her children will receive the best care in their lives?
When building an estate plan with a financial adviser, ensure you cover off the area of a testamentary trust. A well-drafted testamentary trust provides you with peace of mind that will work through possible unanswered questions for my children’s future should you or your wife die prematurely. Make certain that there are enough assets and, as we mentioned above, make sure you have enough life insurance in place to pay for your children’s education right through to university if that was your plan.
Creating an estate plan is not hard, however you will require a competent adviser to organise your estate plan. Then you will require a solicitor to draw up the wills.
As you can see, estate planning is not just about a will or ensuring your estate keeps paying for school fees, it is the welfare of your family. If you have assets and need to ensure that they land in the right hands at the appropriate time, then draw up an estate plan and will. Make sure you get your will done professionally.
Good advice
Advice is something you pay for a good friend once told me. And you get what you pay for.
You can receive advice from a number of financial services providers, such as stockbrokers, financial planners, and possibly accountants. However, any business or person that offers or advises you about financial products is required by law to have an Australian Financial Services Licence (AFSL) or be an authorised representative of a such a licensee. These are a few of the professionals you will be dealing with.
Accountant – Typically provide tax advice and also financial advice if they are an authorised representative of an AFS.
Stockbroker – can provide advice on gearing and direct investments, however, it is unlikely that a stockbroker will look at the complete picture and ensure that a strategy is the right one for you.
Financial advisor – again they must hold an AFSLor be an authorised representative of a holder of an AFSL. An educated and experienced financial planner will be able to look at your total wealth picture and be in a strong position to provide financial advice. Financial planners are heavily regulated to ensure the advice you receive is in your best interest. As a consumer you are also protected by law. Later, I will explain the role ASIC plays in overseeing the financial planning industry.
Financial planning
Financial planning today is a profession. It has certainly matured and, as an industry, has come a long way over the past 10 years.
The primary aim of a financial planner is to understand the financial objectives you want to achieve. In some instances the adviser may become a close associate of the family or the individual they are dealing with.
To help ‘you’, the adviser needs to know everything about your current situation. So if you are not prepared to share with the adviser everything financial about your life, then simply don’t go and see one. Be prepared to be asked about everything.
Once your financial information is gathered the adviser will then be able to deliver a number of options to you. That is, how can they help you achieve your lifestyle and financial goals.
Of course, the adviser’s job will also be to point out what is not possible. If you are being unrealistic, then you will need to either reduce your expected level of lifestyle, or possibly raise the level of investment risk so that you can afford the lifestyle you are seeking.
A planner, in a way, takes on the role of coach and mentor to you so that you can achieve your financial objectives. So choose your planner carefully. It will be a long journey ahead for all parties involved. I would highly recommend you interview at least three other financial planners to find out which person best suits you. It’s important that you can see yourself getting on with that person.
Jonathan Cattana : Financial Advisor Avestra
Jonathan Cattana : Financial Advisor Avestra
According to a new book, How to pay for private school fees (and still have money in the bank) by Jonathan Cattana, you could be spending $45,000 a year to send your child to a private school by 2017 — just 10 years away. Why so high? Over the past 15 years, school fees have increased at two-and-a-half times the inflation rate, largely to meet the higher building and technology costs.
Additionally:
Learning about money
Most people’s beliefs about money are formed when they are young. Every generation has a different set of money experiences which they apply to their own lives.
The kids of today typically buy food, clothes, entertainment and expensive electronic devices when they first come on the market. But, sadly, this new generation doesn’t have much sense when it comes to money — particularly how to manage it. The challenge for parents is to teach their children some money sense, most importantly about delaying self gratification.
Role of the parents
When kids are little, teaching them about money can be pretty straightforward. You buy them a money box and encourage them to save some of their pocket money or cash from odd jobs around the house or birthday and Christmas gifts.
One way to start them managing money is to give them some pocket money and encourage them to save part of it. Some parents go a step further and double their savings at the end of the year. Or if they are saving to buy a big item, they will meet them halfway.
There are some terrific kids’ savings accounts that have incentives of high bonus rates if children save regularly and don’t withdraw their savings. The BankWest Kids’ Bonus Saver for example, pays 10 percent if deposits are between $25 and $250 and no withdrawals are made each month.
For many kids today the money comes and then, more than likely, it goes. “The combination of a mass of products and services that are becoming the norm for our kids — such as MP3 players, mobile phones, ring tone downloads, SMS voting, designer clothes and sneakers — with more and more opportunities for credit, means that our teenagers are at greater risk of getting themselves into debt than ever before,” says David Liddy, managing director of the Bank of Queensland