It's a fact of life that, irrespective of their incomes, some people are good savers, while some people battle from payday to payday.
If you are in the unfortunate second category, let me share with you a financial principle that can change your life forever.
It is super simple: to create wealth for yourself, you have to make saving and investing a commitment, instead of something you try to do with anything left over.
This is the guaranteed secret of wealth. Money in your wallet gets frittered away, because it is normal to pay your commitments and spend the rest.
It explains why nobody has any trouble paying their PAYG tax, or GST - these taxes are taken automatically, before you have any choice in the matter.
Let me take you through some common, real-life experiences that demonstrate the principle.
Bill and Ben go out to dinner with five other couples. The bill comes to $1200, and Bill offers to put it on his credit card "for the reward points".
The other couples pay him $200 each before they say goodnight. So Bill is even and goes home with $1000 in his wallet. But six weeks later, when Bill's credit card statement arrives, he has no money to pay it. Where did it go?
Jack and Jill had been paying $1600 a month off their home loan for many years. Two years ago the debt was finally paid off. How much do you think they have saved since then? Correct! Not one cent. What happened to the $38,400 they would have paid over the last two years if they still had the loan? They don't know either.
Time and time again at seminars I ask all those who have paid off a loan to put their hands up; there's a sea of hands in the air.
But almost all their hands go down when I ask who invested the payments they didn't need to make any more. There's a lot of sheepish grins: they all meant to redirect those payments into investments, they just never got around to it.
Some years ago, Kerry asked me for advice about investing $6000. This is not unusual, except that Kerry then had few assets, and was living on a government benefit, through circumstances outside her control. I was impressed.
"How," I asked "did somebody in your situation manage to save up $6000?"
Kerry's answer was enlightening.
"I'm down now, but I have no intention of staying here. So, I never spend a five dollar note," she said. "When a fiver comes into my hands, I slip it straight into this compartment at the back of my wallet. When I get home, it goes into a sealed money box."
This is a classic example of the guaranteed secret of wealth. All we have to do to create wealth for ourselves is to start to make saving a commitment, instead of something we try to do with what's left over.
So how can you take a leaf out of Kerry's book, and make these principles work for you?
Given that most transactions are now electronic, set up a deduction that takes 10 per cent of your income and stashes it in your super, or in a separate account like Raiz.
Don't worry about how you will meet your commitments; you'll find that you still do. Just give it a go. Doing this could change your life forever.
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Noel answers your money questions
In 2006, on advice from a NAB financial advisor in Canberra, my wife and I purchased a term allocated pension (TAP) for $304,000 from MLC in her name.
We found out too late that we have no access to the principal until she is aged 99! We get an annual payment of $11,000 - the principal is now down to $180,000. The financial adviser told us that a TAP does not count as assets or income for Centrelink purposes. We are both aged 72 and intend to apply for a part aged pension. What is the Centrelink position?
As the TAP was purchased in 2006, it does have a 50 per cent asset test exemption which means only 50 per cent of the account balance is counted as an asset. It is also subject to the income test, under the "pension paid less non assessable portion" method, whereby the non-assessable portion is the purchase price divided by the term selected. Before you apply for the age pension, ask MLC to provide you with an income stream schedule to take to Centrelink.
For Centrelink purposes is a super fund counted as an asset? I am single and a non-homeowner.
Your superannuation fund is not assessed as an asset until you reach pensionable age, or until you start to draw a pension from it. This is why it's important to check the Centrelink position if you are under pensionable age and are considering starting a pension from your fund. The balance is also subject to deeming, but that is not relevant unless you are income tested.
We have 1200 NAB shares and I am unable to understand how the proposed buy back would affect us. Is the buy back compulsory? We are pensioners and don't wish to dispose of the shares.
There is no compulsion here. NAB has simply announced to the market that from August 13 until July 29 next year it will buy back $2.5 billion of its own shares on the market to reduce its capital. Shareholders who wish to take part can just sell their shares in the normal way.
When applying for the aged pension, how do we list interests we have in race horses. My husband and I have 5 to 10 per cent interest in several horses and have received prize money in the past year. On ownership papers we are listed as hobbyist.
Services Australia tell me that If you have an interest in a race horse you must declare that as an asset when you claim the Age Pension. There's no specific question about race horses in the claim, so you should declare this when asked if you have any assets not already declared.
You'll need to provide the current market value and your percentage of ownership. Any prize money you receive will need to be declared. Services Australia will determine the correct assessment of this income.
- Noel Whittaker is the author of Retirement Made Simple and numerous other books on personal finance. Email: firstname.lastname@example.org