by Jodie | May 24, 2016 | Economy, Finances, Investments, Money, Savings, Wealth
Bonds are one of the four major assets classes, but they’re probably the least understood. Here’s why they’re an important part of many portfolios.
What are bonds?
Bonds are essentially loan arrangements that governments and large companies use to raise money.
These loans generally have a fixed term and a fixed interest rate, with the interest either paid in full at the end of the term (i.e. at the ‘maturity date’) or in instalments along the way.
How do you invest in bonds?
A simple way to invest in bonds is through managed funds or Exchange Traded Funds (ETFs). This generally means your money is pooled with other investors in a diversified bond portfolio, which reduces the risk that any one borrower will default on the loan.
You can also invest in bonds through your super – bearing in mind that a typical ‘Balanced’ investment option allocates around 30% of its assets to bonds (also referred to as ‘fixed income’) and cash.
Why invest in bonds?
1. They provide a reliable source of income
Investing in bonds with high-quality borrowers (e.g. governments and blue-chip corporates) can give you a steady and reliable source of income over a set time period. This often makes bonds a good option for retirees or investors who want to generate ongoing income.
2. They offer higher potential returns than cash
Bonds typically pay a higher rate of interest than cash and term deposits, compensating investors for the additional risk associated with lending money.
Unlike cash investments, bonds also offer the potential for capital appreciation – which tends to happen when interest rates fall. This is because new bonds are typically issued with lower interest rates than older bonds, making the older bonds more valuable when traded.
This feature of bonds makes them a good hedge against dwindling returns from cash investments in a falling interest rate environment. The flipside is that bonds may lose value when interest rates rise.
3. They can be a good hedge against share market volatility
Bonds provide diversification benefits for investors because they tend to behave very differently to shares.
The table below shows the performance of Australian shares, Australian bonds and cash over the last 10 financial years, plus the average return over the last 30 years.
As you can see, some of the strongest years for bonds are when shares are in negative territory.
by Jodie | May 17, 2016 | Advisers, Australian Economy, Budget, Budgeting, Finances, Money, Savings, Women
Tracking where your money actually goes can make revealing reading.
ASIC’s 2012 consumer-spending figures show the average household spends $69,000 a year: Australians splash $78.4 billion a year on their cars, compared to just $2.2 billion on public transport; almost twice as much on gadgets as on fashion; and four times as much on beauty products and services as education.
To budget successfully it’s important to make your budget and spending limits realistic. MoneySmart has a range of suggestions for reducing outgoings without driving yourself to the point where you get fed up with the whole thing – a danger that’s highlighted in its advice and tips.
When you set out your budget and savings plan, think about what saving that money will achieve – list your goals.
The key to any successful budget management is to also work out your goals and plans. It’s much easier to trim spending or be more determined re-negotiating insurances or even your mortgage when you know what those savings will achieve. Tying your savings to a goal makes sense. If you know the savings will reduce your Mortgage or see you heading off on that holiday sooner, you’re more likely to stay on task.
RMIT’s women and money survey found that providing for family was most women’s main financial priority, but women’s incomes are most likely to be reduced when they start a family. There’s also caring for ageing parents thrown into the mix that can impact on income, savings and finances.
The best way to stay in control of your finances, is to build savings and investments as early as possible. Part of your monthly budget should include a regular savings amount.
Around 10 per cent if often given as a ‘rule of thumb,’ paid through a direct debit or regular BPay into a separate savings account. However, as everyone’s circumstances are different, it may be worth seeking your own independent financial advice.
Five steps to successful budgeting
- Do your own financial health check, listing all your income and expenses, using a tool such as a budget planner
- Decide your immediate and longer term financial goals, and consider getting some financial advice to help you do this
- Look at how you can trim spending to save more
- Set a weekly or monthly budget with spending limits in key areas. Use a diary or the MoneySmart TrackMySpend app to help you stick to these
- Set up a direct debit to put your savings into a separate account
by Jodie | May 13, 2016 | In The Media
o you have a strategy for when things don’t go according to plan?
How fantastic would it be if life just rolled along in accordance with our Plan A and nothing ever went wrong?
Unfortunately, you’ve probably experienced the need for a Plan B at some stage in your life, or even wondered if all those other letters in the alphabet might get a run as well. As a business owner, what can you do when things don’t go quite according to plan?
You’ve likely heard of contingency planning, but most aren’t really sure what it is or how it could apply in their business.
What Is a Contingency Plan?
Basically, it’s a course of action designed to help you respond effectively to a future event or situation that might (or might not) occur – your very own Plan B. These risks can appear at any time and managing (and minimising) risk is an essential part of business planning.
This document will become your own personal ‘risk register’ to record potential problems, identify how serious they could be, what costs may be required, who will fix them and how.
How Do I Create the Plan?
- Develop the policy statement
- Conduct a business-impact analysis
- Identify pre-emptive measures
- Create alternate strategies
- Develop detailed guidance and procedures
- Ensure it will work
- Maintain the plan
The policy statement begins the formal process of planning. It provides the guidance needed throughout your plan. This will evaluate the true level of risk to your business so you are able to properly manage it.
Next, identify which systems are critical to supporting your business function. Is the risk of a major or minor impact, and is it preventable? As an example, it may be a simple as: if there’s a situation with no electricity, what can you do?
Then come up with measures to reduce the effect of disruptions and minimise the costs. Can you be in an area or building where power supply is regular and mostly guaranteed? Is a generator something that could assist with power outages? And if so, is it a financially sound investment?
What are some contingencies for when things go wrong? Basically, what will you do if the worst does happen? Come up with some thorough strategies to ensure you can recover quickly after a disturbance. Will you shut up shop and go home if there’s no power? Can you manually take payments to process later? Will you need additional security? What will work best for your business? Your plan needs to detail exact procedures for what needs to happen and guidance to minimise the impact of interruptions.
Testing the plan can highlight gaps and better prepare your business for recovery. Test the plan’s effectiveness and assist your organisation to be ready for any contingency.
Finally, ensure the plan is reviewed regularly to remain relevant and reflect changes as your business grows. This is a living, breathing document that needs to be frequently reviewed and updated.
Other considerations highlighted on the Australian government’s business website under risk management include:
- Interest rate changes
- Delays or shortages in inventory
- Workplace injuries
- Skilled staff leaving the business
- Natural disasters
- New competitors
- Your product becoming obsolete due to new technology
- Customers can switch to a competitor or lose interest in your products
When compiling your register, seek help from those who also have an interest in your business such as your professional business advisor, accountant or bookkeeper, financial advisor or solicitor. They likely have insights into situations you might not have considered, ideas to minimise risk via insurance strategies and helpful tips to include in your plan.
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by Jodie | May 13, 2016 | In The Media
Wouldn’t it be great if fairytales were true? A fairy godmother would wait in the wings for our big moment and then make all our startup dreams come true.
More often than not, when we finally have that light-bulb moment with a great idea that we just know will work, it becomes apparent that we’re not quite sure how to fund it.
Here are five ways entrepreneurs are able to fund startups:
- Self-funding
- Pitch to friends and family
- Venture capitalists
- Grants
- Crowdfunding
Self-funding
Self-funding is the most common method. We take a bet on ourselves and go from there. If you have a good credit history, you may be able to use the equity in your home via a bank loan, a line of credit or even a credit card to get the ball rolling.
If you do go down the self-funding path, it only affects you. This also means that if things go brilliantly, the profits are all yours! Remember, however, that you really have to believe in yourself and be willing to risk your assets and future earnings to cover costs.
Pitch to Friends and Family
If the phrase “beg, borrow or steal” is starting to haunt your dreams as you struggle to get your startup off the ground, friends and family may be your next port of call. Before you go to the professionals, it’s a good idea to seek out those who already believe in you.
But be warned: mixing friends, family and money can be a recipe for disaster! Be very clear about expectations on both sides, repayment time frames and any agreed-upon interest to be paid, as well as profit sharing. And get everything in writing.
Venture Capitalists
Soliciting venture capitalists is another way to help get your startup off the ground. These professional investors put up institutional money (or their own.) You will need a proven business model, a great plan and be ready to scale. They often look for big opportunities that need serious money. Ask around for a warm introduction to have this method work and be sure to do your homework before pitching.
Grants
The government has an allocation of funds set aside to support small businesses, often for new technologies and important causes. Check out the Australia Business Financing Centre to see if your idea is eligible. Grant money can be used to buy equipment, pay for training, fund advertising and more. Chances are they’ll offer unbiased advice to help eligible entrepreneurs in their funding pursuits.
Crowdfunding
Crowdfunding is the newest source of funding where anyone can participate. If you’d like to see how it works, visit Kickstarter. Anyone can make an online pledge to fund your startup during your campaign. They can pre-purchase your product, give donations or qualify for free rewards down the track, such as a t-shirt.
Whichever course you take – and it may be a combination of many – it requires hard work, dedication and commitment on your part. There is no fairy godmother or magic bullet in business. Whatever you decide is likely to be a trade-off between your immediate needs, long-term costs and paybacks, while still considering the levels of ownership and control you’d like.
With so many options out there, isn’t it time you started living the dream?
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by Jodie | May 10, 2016 | Budget, Budgeting, Finances, Savings, Wealth, Women
The average household spends more than $69,000 a year. Neal Vaughan explores the best ways to manage that.
Wondering why you spend almost everything you earn, living from payday to payday and hardly saving? It could be you’re too busy to keep track of your money.
Or you’re refusing the challenge of taking control: the 2014 ANZ Survey of Adult Financial Literacy in Australia, found women aged 28 to 59 years had lower scores than men on financial control, though they were better than men in keeping track of finances.
Women of this age were more likely to have missed a loan or credit card repayment and also more likely to have been unable to save money in most weeks. Greater discomfort with comparable levels of debt appeared to contribute to women’s lower scores on this index,” stated the survey.
In the same year, a study into women and money conducted by RMIT University’s Roslyn Russell and La Trobe University’s Amalia Di lorio found almost 50 per cent of women say they sometimes run out of money completely during the year.
That’s something that financial adviser Amanda Cassar has often seen in her career.
Cassar says “it is a fact that even very successful women generally end up with lower savings than their male counterparts, and with less than half the super savings” according to the 2013 Australian Bureau of Statistics’ gender indicators report of median super balances for women aged 45 to 55.
A financial health check-up with your adviser, and creating a monthly budget will help you save more when you’re earning well.
Get budgeting
So what is the best way to go about setting up your own budget? The first thing to do is to put some time aside to write down all your expenses and incomes.
You may find that with a little extra care you can trim back your outgoings and save more than you thought, so you can start putting your money to work for tomorrow, not just today.
Primary school teacher Sofija Egic considers herself reasonably careful with money. However, she was surprised how easily having a simple budget with set spending limits, plus a regular direct debit to a separate savings account, helped her put a sizeable amount aside each month.
She has just purchased her first investment property with her partner Sam.
“To be honest, we used to spend without thinking. When you’re both flat-out working, it all seems essential until you actually list it down. We spent a Sunday morning working out a formal budget – a set amount for groceries, a limit on what we spent going out, getting a bus instead of a cab home – that sort of thing.”
It may seem a bit dull, but if you go to the Australian Securities and Investments Commission’s MoneySmart budget calculator, you can liven things up by downloading the TrackMySpend app.
You can use this app to track your day-to-day spending, which can alert you when you overspend (based on your pre-set budget limits on certain types of purchases).
ANZ’s budget planner is a detailed helpful tool for you to figure out your income and expenses and in the long term what you can achieve with your savings.
ANZ’s MoneyMinded hub can take you through the budgeting process, using the MoneySmart tools, to help you feel less stressed about the future.
