Tuesday, April 28, 2009

Disposable Income - What the...????

We all have money. Whether you're on the dole/benefits or earning the big bucks, we all have some amount of money to live with. I can vouch for being on one end of this equation, I lived on youth/education benefits for quite some time. Right now, I am heading towards making more money, but I'm still along way away from the big bucks. 

You might find it surprising, but how much you make is not really important to achieving financial independence (ie. living comfortably and being able to buy KFC when you want). The secret is understanding what amount you have "spare", what I like to call disposable income.

Disposable income is a funny thing. For some people, disposable income is what they spend on alcohol every week, or buy smokes with for the week, for others their disposable income pays for holidays, while some people find a happy balance between saving some of their cash and spending the rest on "benefits".

So, how much disposable income do you have? In a future instalment I will explain further how you can calculate this magical number, but in the purest sense, disposable income the amount of cash you have left after paying for the "essentials". After paying bills, mortgage repayments, buying Kentucky Fried and paying for fuel, we all have a buffer amount that is left. Disposable income is the amount that YOU ARE HAPPY WITH and NEED to spend on yourself, whether that's paying for your WOW account, or buying smokes or drugs, or for drinkies down the pub on Friday. (editor note: WOW = World of Warcraft computer game). For some people this amount is much much larger, especially if they have expensive tastes. 

Throughout my life, my disposable income has changed. It was at one stage (back in my early 20s) no more than $40/week, but now I am more comfortable to be left with $200 to spend on whatever I wish. Why is this amount important to work out? I'll let you in on a secret. Very quietly now...: You should invest the rest into cash flow positive or capital producing asset classes. 

Working out your disposable income is, in a way, a way to identify how much cash you have to do something constructive with. For some of you, this amount will be $0, and I would suggest you are leading a very happy and fulfilled life (for now). For some of you, you will be surprised on how little you can get by and for others, you will notice that you have a whole heap of cash left that is "disappearing" week to week. 

In my next post, I will attempt to explain a bit more in depth how you can work out your disposable income by doing the unthinkable - creating a budget overview! SHOCK HORROR! Oh, my EYES!!!!

Thursday, April 23, 2009

What accounts the major banks are offering...

What the banks are currently offering. Rates as of 23rd of April 09:

link here
Access Advantage was the account I used to have. Great product for unlimited transactions.
Online saver: 3.75%

The Choice account seem like good value...
Online eSaver: 4.3%

NAB (National)
Nice website if you're after account information. Many products and they offer the "minimum balance trap" for no account fees. If you have a bit of money to keep in there, this is not a bad option. 
Online iSaver: 4.25%

CBA (Commonwealth)
Some good accounts there, but virtually the same run-of-the-mill. Not much on offer really to persuade me to go with these accounts. 
Online Netbank Saver: 2.75%

I like the look of the everyday basics account. Only $2.50/month fees. Also, I just found a great product which looks like a term deposit and an online saver in one!
Online eOptions Saver: 3.5% with "term deposit like" options to 4.5%

So much choice! The major five are quite competitive and it will be hard for anyone to choose. I like the NAB "balance trap" accounts, and, apart from the superior Suncorp "term deposit in an online saver disguise" product, has the second highest online saver rate. 

Which one do I recommend? Don't be silly now, I am not going to recommend any of them, I'll just say go through a satanic ritual where you throw all their pamphlets on a bonfire and the one that survives the longest should be the one you go for.

Good luck...don't get burned. 

Sunday, April 19, 2009

What are "Guaranteed" cash flow sources???

One day, I am planning to live off my cash flow producing asset classes, so that I can quit work and feed my never ending need for doing sweet f@#$ all. Seriously, don't we all just want to have our "own time" where we can do whatever we want, without worrying about where money is coming in from? 

For me, the motivator is travel. While the thought of sitting on my arse all day and do nothing but play WOW (World of Warcraft) and eat pizza till I can no longer use my fingers from the inevitable osteoporosis that would result sounds tempting, I want to go and see the world, meet interesting people and fulfil my life long ambition of buying McDonald's from every country in the world that has them. 

So how will this be possible? No asset class is bulletproof. None. Zilch. Period. BUT, some come very close. Shares are risky, real estate can be a very long road, art is a bit of a gamble and if you are going to buy trees, sheep, cattle or any other weird asset class, you may as well throw your money into a piranha infested pool. They would probably eat it. ANYWAY, lets look at these "almost bulletproof" sources, online savers and term deposits with the major banks. 

Online Savers

I'm going to assume you are not a greedy person, because if you are, building cash flow is going to be difficult using this process. If you are inpatient, perhaps this will not sound very tempting either. 

Online savers offer "reasonable" interest rates for your cash. Unless the bank closes, your money is safe and access is soooo easy.  Currently, my bank is giving me 2.75%, but that is quite low and is the result of our (Australia's) dropping interest rates of recent. I was receiving 6% a few months ago before the slippery slide got a work out. I know that some other banks at the moment are offering much better rates then mine, but I get fee free banking with my mortgage, so I'm staying put. So what sort of cash flow does this equate to?

For a modest $10,000 balance, you get the equivalent of 76.2c/day...not bad for just having some money in the bank. 

For something more serious like $150,000, that becomes $11.45/day, which could pay for your food bill, unless you like McDonalds, or like me, KFC.

At $1.7million, this equate to $128.08/day, or roughly $46,000 per year. This could be the start of being financially independent. 

If I look at the good times when online savers were around 6%, this becomes $102,000/year. Definitely enough for me....I'm not greedy :)

Remember, this money is "guaranteed".  

From my point of view, the easy access makes this a bit more attractive over term deposits. Also, the rates are variable....

Term Deposits

Term deposits as far as I'm concerned are becoming less fashionable with the introduction of the above, but still, better short term value. 

Term deposits tend to offer higher rates than online savers, but they should as the product is not as user friendly. From 1 month to three years, term deposits currently range between 3.5% to 5% but this changes day to day, depending on which side of the bed the bank woke up on that particular morning. 

The penalty for getting this higher rate is that you are virtually cut off from using the money, until you receive your payouts, which could be monthly, quarterly, or annually. Not too bad of a compromise, but that's how it is and you can not touch your money for the entire period, or they WILL charge you. Term deposit rates are also "locked in", meaning they won't change throughout the period, so, if throughout a three year term, the bank starts offering higher rates in the second year, tough bickies, you are stuck with the initial rate. MMMWWHAAAA (evil laugh), I can hear the bank already.

Term deposits are also "guaranteed", so once again, a very stable cash flow producing asset with very low risk. 

As I have said this before in another post, these should always be part of your overall strategy, don't put all your eggs in the one basket. But do put eggs in your basket. But not all in the one, but different baskets, and different eggs. OH, you know what I mean. You have to be in it to win it. Well that's not entirely what I was trying to say, OK I stop now. 

Look forward to the next episode, when I share the true secret of making cash flow - stealing!!!

(You know I'm kidding...don't you?) Yeah you do...


Saturday, April 18, 2009

Being Frugal - is it for you?

I just stumbled across a site that gives some simple easy to follow ideas on frugal living. As I was reading this I was reminded of my university days. Yes, they were fun, not a lot of money was spent, but seriously, who wants to spend all their time watching every single little electricity usage in a house? Who, especially in Queensland, want's to be REALLY selective about using air con? Who really wants to make sure the floor stays clean for ages, so you don't have to use the vacuum cleaner? So take this with a pinch of salt. Yes, you can reduce your costs and even feel good about yourself for reducing your "carbon footprint", but some of life's little luxuries shouldn't be forgone, like messing up your floors. 

Still, some great ideas for reducing your costs. I suppose thinking rationally, if you don't have to spend as much money on these sorts of things, your cash flow doesn't have to be as large to maintain a certain standard of living... 

Fight night!!! Which bank will win???

Banks are an unusual breed. They love their food (read:money), grow up very quickly and then often bite the hand of the ones that feed them. Yet, somehow mysteriously, the bitten return once again, they get bitten again and so on and so on, until the relationship breaks down and someone loses an eye.

Banking has come a long way, but unfortunately, so has the weird and wonderful tactics they come up with to get you to part with your cash. Application fees, account keeping fees, fees charged to administer a fee, and finally, who can forget the fee that was created so that you can have a fee free account. The news isn't all bad though and I must admit, sometimes it seems like the banks are ACTUALLY trying to help you make money, but this is rare...

So what can you do to get yours back? What can you do to bite them (a little anyway)?

Luckily for us, there are many banks out there. In Australia, we are especially lucky, because we have the very stable Major 5 (ANZ, Westpac, Suncorp, NAB, CBA) and some secondary options as well (Bank of QLD, Bendigo and RAMS to name a few). Here is where the fun begins. All of these guys have wonderful products and for a long time, I stuck with ANZ with their "$5 account fee for not having any other fees" account, which was working well for me, especially because in my snobby little mind, I was too lazy to search for ANZ ATMs and wanted fee free access to all ATMs. While this was working fine, it was still $60/year they were pulling from me. Before this, I had multiple bank account with different banks and union societies. Why? Who the hell knows, but it seemed right at the time!

Now that I have realised I want to make cash flow positive income decisions, I have made a few decisions about how I structure my accounts to pay virtually no fees. 

So what can you do?

If you have a mortgage, easy, most offer fee free banking for you. If you are one of the unlucky ones that does not have a mortgage, sometimes the Major 5 have what I call "minimum balance bait" accounts, where you don't pay account fees if you have lets say $5000 sitting in there. These are quite OK, but once again, only if you are using this to disperse the additional cash into other cash flow producing online savers. 

Shop around, let the banks "fight" for your business. Don't be happy with a 0.01% interest on an account just because you wanted a blue card from ANZ, make decisions that start putting money into your pockets, not the bank's. Sometimes in their wisdom, banks lure you in with additional little bonuses, like a wonderful pocket to put your cards into, filled with useless, tree wasting pamphlets, but stay away....glossy equals money.

Also keep in mind how you use your money. A while ago, I made sure I had an overdraft facility, because my then cash flow dictated the need and indeed the one fee I paid for this, paid itself off numerous times when I had to access the facility. Not all fees are bad (dare I say it), the key is the overall net cash flow position that you will be in.  

I am not going to say go for this account, or go with that bank, but what I will say is go to ALL of them and let them earn your business. They make trillions, they can give something back...

Finally, products change. Banks decide to get rid of certain accounts, or shock horror, something better is invented by one of the other banks. Keep vigilant, keep updated.    

Friday, April 17, 2009

Opps Australia!

It seems we haven't learned our lesson yet....credit card (read: the evil shiny one) debt  is still on the increase . Why is this? I thought people were spending less? I thought the day of buying KFC or Hungry Jacks for dinner every night was over? Perhaps I was miss-informed about us as a population finally removing ourselves from the couch when we couldn't afford pay TV? It appears I was wrong. Perhaps once again, the media has glorified this economic downturn, instead of focusing on facts and figures. Oh well, if it makes the news....

Something you may not have known about the banks!!!

The other month, my bank manager got a shock when I refinanced and took all my business away from the money hungry, paperwork losing, miss-communicating bank. Unfortunately I ended up with another money hungry, paperwork losing, miss-communicating bank, which begs the question, are all middle managers and loan account personnel in major banks idiots?

While I let you ponder over that question, I did bring up this topic for a reason. The banker called me, that's right, personally called me and asked why I hadn't spoken to him. So I proceeded to tell him, using very simple language just to make sure he understood, that my broker found a better deal. What happened next surprised me. He said, "You know I could have matched that rate?" 

This blew me away. Is it possible that I can haggle and bargain my way to better deals with the banks? Is it possible that all those published rates are a crock of shit and I am actually able to "shop around" until I get to the lowest rate? 

He actually informed me that yes, he is able to offer better rates to keep my business and to continue to use the services of his money hungry, paperwork losing, miss-communicating bank (lets call it mhplmcb for short). 

Next time it comes time to refinance, I will put this to the test with my new mhplmcb. Maybe you should try it too...:)

Where does my money live???

Let me ask you a simple question. If one of your dollars was like one of your children, how would you treat it? Before you go all silly and suggest I'm a bit of a fruit loop (yummy), lets consider that notion.

You want the best for your kids. The best clothes, the best pram, the best school, etc. etc., but what about your money? Do you want the best for it? Most people wouldn't "dump" their kids into a crap school, yet most people dump their money into a "savings" account. I am sure many of you have pondered over throughout the millenn
ium, why these accounts are called "savings" accounts? I actually have the answer:

It "saves" the bank having to go and ask for loans from the reserve bank. It "saves" them interest. Are there any benefits to you? Well, yes, you get a fancy (debit) keycard and you can use it to buy panda bears and measuring tapes, but in reality, the benefits are minimal. You may even be one of the lucky ones that gets a 0.01% interest bonus per month! Hurrah!

Of course having a "savings account" (which many over 50s have caught on to and are wooing young lasses by suggesting they should be called "spending accounts" ha ha, bloody ha) is important and you must have one for instance if you need cash from an ATM and of course EFTPOS machines takes these cards as well. 

So you may now be asking, what the hell can I do to maximise my "passive" cash sitting in my savings account?

Fortunately, a number of special products have been created that actually help you earn more than 0.3c per month. Let's have a quick look at these:

Online Savers

Every one of the major banks, and even some savvy financial lenders have online savings accounts. These earn modest interest from anywhere between 1-3% less than the going mortgage rates. They have the added bonus of having no fees (if yours does, GET OUT NOW!) easy access via online banking (I'm assuming you have a computer if you are reading this :P) and monthly interest payments. 

XX days Interest Free Credit Cards

This is your best weapon to reduce the boredom that currently is having your money in a savings account. While credit cards are inherently evil, they can be utilised to provide a nice little cash flow management account. Typically, smart people use their credit cards to make purchases knowing that they have the cash in another account
 to pay off the purchase before the interest period kicks in. 

- You can keep your cash in a income producing account for longer.
- Most credit cards come with rewards, that may equate to you being able to buy a toaster with your 30,000 points. 
- You won't have to worry if you have the cash in your account (although you should know you can repay the purchase).
- Having a credit card makes you feel like you're invincible and you get to live the high life of Paris Hilton or Bad Pitt.

Not so good bits
- Credit cards make you spend and sometimes the balance can get out of control. You must be disciplined to use one.
- If you don't pay off during the interest free period, you may have to eventually sell a kidney.
- Usually, credit cards have annual and monthly fees. If used accordingly, the rewards often offset this charge and some cards even allow you to pay your fees with  the required points (like mine from the CBA).

Offset Accounts

If you are one of the lucky ones that has a mortgage in Australia and are paying off principal and interest, you can probably link an offset account to this mortgage. Any spare cash you have sitting in this type of account, virtually makes you the equivalent cash at the interest rate of your mortgage, since you are paying down the principal. This can be a happy little bonus in the long term, but may seem like a waste of time when you realise that for every $1000 you are offsetting, you make back $1.50/week in interest savings. Still, $1.50 is useful if you want to buy second hand jeans from Vinnies

So how does all this work?

By setting up your cash flow structures differently, you can be like me and have only a small amount of cash sitting in your "savings account", while having your cash work for you in other accounts. For example, my online saver is producing steady income (albeit not huge income) that I will be using to top up my savings and further compound the interest I earn. The credit card ensures I can easily make purchases without having cash in the savings account and can control my cash flow by utilising online banking to transfer funds as required.

As of now I do not have an offset account, but my latest mortgage is P+I, so I will have to investigate the possibility of this occurring

Moral of the story: Even though its only a small amount of income, the right structure of bank accounts and credit cards can reap some financial rewards. 

Welcome to Blog Version 2.0!!!

Welcome to Making Money, a blog that tries to answer, amongst other things, the question "How the hell can I buy that firetruck if I have no cash?"

This is a follow up blog to Property Investing in Australia, which, I have to say, has been as successful as a wombat trying to stay awake for 5 minutes, but now that I am more "learnned", I hope to spread the knowledge that is in my head for all readers to benefit. Do not be afraid, I come with SOME credentials, I do manage the budget of a small government institution and hence have had first hand experience at fiscal spending to maximise operational requirements. In other words, I have learned and am continuing to learn how to be a tight arse. 

Please visit again and again if you are interested in my ramblings and, probably more importantly, are interested in making money. Not just pocket money for drinks at the pub on Friday, but real money that will allow you to retire within 10-15 years. 

Upcoming topics:

Savings accounts and you - how to spice up the relationship!
The Mortgage Monster - Don't fight it, let them fight amongst themselves, ninja style!
Term Deposits and Online Savers - the quiet assassins of your job!
Property - bloody property!