Horror budget?

Most commentators seem to think that the Australia Budget announced this evening was quite good. The Labor government has apparently delivered on it's election promises, has socked a large part of the surplus into various "Funds" ear-marked for future spending, and has moved to close some "tax loop-holes" and reducing benefits for the well-paid.

However, I found the budget to be more obscure than usual, and haven't as yet worked out what the impact will be on our finances and plans for next financial year. There were many announcements such as new income limits for Family tax benefit B and child care rebate eligibility that might, or might not, have a big impact on us. While at first glance it would seem that the income limits won't affect us (I've seen figures of $150,000 highest income earner limit for Family Tax Benefit B and $110,000 combined income limit for the 50% child care rebate), there were other changes that may apply. For example, there was mention that amounts salary sacrificed into superannuation will now be counted as part of your "income". This could mean that DW's "grossed up" income will be too high to be eligible for the Family Tax Benefit next financial year, even while she's only working a couple of days a week.

It would be nice to think that the increase in child care rebate from 30% to 50% may offset this by making it more worthwhile for DW to work an extra day each week. However, we were never able to claim the child care rebate for DS1 (even though it was costing $75 a day at the only centre close to our workplace that had a vacancy) because the child care was only "registered" and not "approved". Chances are that whatever Child Care centre we can find for DS2 to attend two days a week later this year (after we return from our holiday) will turn out to not be an "approved" centre either. Even if we can find an "approved" centre with a vacancy, the new $110,000 household income limit may preclude us from getting a rebate due to the new way of calculating "income" - apparently tax deductions against rental and dividend income won't be counted when working out "income". This will mean that even though we are negatively geared (overall) into property and shares (and therefore have LESS cashflow than our take-home pay would indicate), the gross value of rent, dividends and superannuation contributions would be included when working out our eligibility for the Child Care rebate.

This may be yet another reason for reducing my level of gearing in the new financial year (the main one is that the interest rate on my margin loans has increased so much in that past year that it's now doubtful that total ROI on the geared investment will exceed the borrowing cost). There's no point borrowing to increase my stock portfolio if it simply boosts my "income" to a level that costs us other benefits.

Overall, I shouldn't be surprised that a Labor budget that delivers a $21 billion surplus might well end up costing my "working family" several thousand dollars a year.

Subscribe to Enough Wealth. Copyright 2006-2008

Australian budget predictions

The Australian annual federal budget is due out on 13 May, and some "leaks" of the less popular announcements have started to trickle out. The tax cuts promised by both parties prior to last year's election look likely to be introduced without any changes. There had been talk of replacing straight tax rate changes with making government superannuation contributions (with an option to "opt-out" for those that want/need the extra cash in hand), but it appears that this won't happen. Perhaps the previously announced tax cut "intentions" for future years will be re framed as planned increases in superannuation funding. When the previous Labor government introduced compulsory superannuation the intention had been to ramp up towards 15% of salary, rather than the current 9%.

I'm guessing that there will be some extra funding for retirement savings - perhaps an increase in the government co-contribution. Last year the Liberal government made a "one off" doubling of the co-contribution (from $1,500 to $3,000, for those people who made a $1,000 undeducted contribution and had taxable income below the $28,000 threshold). Perhaps the maximum co-contribution amount will be raised to $3,000 and the threshold increased (from around $58,000). It would be nice if they also made the threshold calculation easier to understand (and printed it on your tax assessment notice).

The pre-budget leaks have mainly been regarding "means testing" of some government handouts. For example, the $5,000 "baby bonus" and the "family tax benefit (B)" will probably no longer be paid out where the family income is too high (a figure of $250,000 was mentioned). We wouldn't be affected by such a high cut-off threshold, but I'm not too impressed by the idea.

Although there's no need to provide government handouts to high-income individuals (or families), the cost of gathering and compiling the data required to means test ALL payments, just to eliminate a tiny fraction of the total number or recipients is often not cost-effective. In the worst-case it could end up like the family tax benefit (A) situation, where a family has to estimate it's assessable income (which is different to both total income and taxable income) for the next financial year, and is then penalised if the estimate proves to be inaccurate and they've been paid too much during the year.

There have already been announcements regarding increases in tax on alcohol and tobacco, and it will be interesting to see what current "middle class welfare" programs are cut in order to meet the government's target of a 1.5% of GDP surplus.

There will probably be some funding announcements relating to climate change initiatives - probably wind, solar, and tidal energy generating research and commercialisation funds (they need another catchy "future fund" hollow log to store future surpluses). Of course there's no chance of any funding or support for nuclear power generation in Australia from a Labor government.

Although Labor had railed against "bracket creep" while in opposition, they are now down-playing the idea of using future budget surpluses to reduce income tax rates. They have also gone very quiet about automatically indexing tax thresholds.

There will be more federal funding for education, such as the "one computer per student" program. The effectiveness of this will depend, as always, on how willing and able the state governments are to pay for the required infrastructure, support and training that such federal initiatives create.

Copyright Enough Wealth 2008

Budget Review

As I've previously posted, I don't normally budget these days as most things are running on "autopilot". Even our grocery shopping doesn't vary much from week-to-week. However, since I want to start tracking my expenses fully in Quicken, I've decided to do a rough budget in order to work out what categories I need to setup and use that will be meaningful to me.

This budget is somewhat unusual in that I only count "my half" of our rental property income and home and rental property loan expenses. The rental income almost covers the rental property expenses, and the difference (negative gearing) is counted as "investment" as it's tied to the eventual capital gain we expect to make on the rental property. I also ignore the interest costs of my margin loans, on the assumption that the dividend income from theses investments more-or-less covers this cost (any shortfall tends to come out of realised capital gains).

By excluding the investment income and expenses that net out to zero, my overall budget therefore corresponds to how my income is being allocated for everyday expenses:

 
housing_________________31.6%
retirement savings______22.8%
income tax_______________9.3%
food_____________________7.8%
transport________________6.3%
healthcare_______________5.4%
self-education___________4.4%
investments______________3.9%
children_________________3.9%
unallocated______________3.0%
entertainment____________1.5%
total__________________100.0%

It should also be noted that the "children" category only covers incidental expenses such as school fees, music lessons, and sports fees. The kid's clothes and food expenses are just absorbed within the general "food" category.

The housing cost is largely the repayments on our home loan, so some of this should really be allocated to the "investments" category.

I'll setup these eleven categories in Quicken and use them for my initial budget for tracking purposes. I'll setup another category ("portfolio") to lump together all the dividend income, capital gains/losses and margin loan interest expenses.

Copyright Enough Wealth 2007

Boredom based budgeting

Last century I used to use Quicken to track my expenses and income down to the cent, but I haven't done so for about ten years (although one of my goals for 2008 is to start doing it again, mainly to make my tax returns a bit easier to complete). That meant that I was able to get an accurate view of a year's income and expenses and make a pretty accurate budget for the following year. However, these days I manage without having any formal budget (at least I haven't written one down on paper for years) as everything is running more or less on autopilot, I have sufficient sources of funds available to manage any peaks and troughs in income or expenses, and I know my overall spending for the year will be won't throw out my savings plan.

How do I know that my spending will be in control, without using any budget? By living a very boring, predictable lifestyle (some would say, contented and stable). I have relatively fixed expenses on rates, utilities, travel etc. and we tend to eat the same things for breakfast and lunch (I bring lunch from home, although DW tends to eat out a bit more often), and randomly cycle through a selection of fairly simple home-cooked meals for dinner. For entertainment I generally watch free-to-air TV, browse the web, or read investment books from the local library (or while browsing in a book store). We also spend some time gardening, or travelling to the local parks and beaches, and I don't have a lot of free time anyhow since I'm busy with the kids and doing some part-time study by distance education. Of course this only works because we don't make any 'spur of the moment' purchases, and we don't spend anything on restaurants, movies etc. and don't do much (any) "entertaining" such as dinner parties. It also helps that I'd previously accumulated a whole lot of "toys" (camera, video, telescope, scuba gear, skis, mountain bike etc.) over many, many years, so that I now have a garage packed full of "stuff" to play with whenever the mood strikes (and I have any spare time!). Since I don't even have any room to store more "stuff" if I did buy it, it's quite easy to just go window shopping and ignore any pangs of temptation to buy a new shiny, plaything.

Copyright Enough Wealth 2007

Paying Bills

We all have bills to pay. Most are regular and some happen infrequently. The important thing is to have the money budgeted to pay them, and to pay them on time.

I don't use a precise budget - although many years ago I went through the process of recording all my regular expenses for a year and working out a detailed budget, these days I know what my normal total monthly spend will be, and get enough salary deposited into my credit union account to cover the expenses. The rest of my salary has been 'sacrificed' and gets paid into my retirement account as an additional employer contribution.

I used to pay nearly all my bills via phone or internet using my main credit card account in order to get rewards points which I redeemed for a credit onto my credit card account. As I always pay my credit card balance off in full each month, this was a better method of bill payment than cash or cheque. Unfortunately recent changes by the Australian competition authority meant that some bill payments made by credit card now attract an additional fee from the biller, making it not worthwhile paying those bill using a credit card. So, these days I now pay some bills using my credit card, but others now have to be paid directly from my credit union account using BPay.

I still get my bills sent via mail, as email isn't 100% reliable. I've also had many different email accounts over the years, some of which are no longer in use, so getting bills via email would be a nuisance when I change email accounts. (For this reason I also opt for getting dividend advice sent via mail rather than electronically). I cross as paid any bills setup from automatic payment (by direct debit) and file them away. Those that require payment are stored in my briefcase in order of due date, so I can flick through the bills once a week and pay them via phone or BPay during my lunch break.

If there is an occasional unexpected bill (such a for root canal dental work or a medical checkup) I can transfer some extra cash from my online savings account into my main credit union account to cover the extra amount that month. I don't maintain an 'emergency fund' as such, as I have a significant amount of cash invested online that was borrowed at 0% via a CC balance transfer offer, so I can always draw on that and repay it by liquidating some of my stock or mutual fund investments if needs be.

Copyright Enough Wealth 2007

Saving for a European Vacation

We would like to take an extended overseas holiday late next year - perhaps 6 weeks driving around Germany, England, Wales and Ireland staying at B&Bs or motels. We would like to arrive home before DS2 turns two next September, as this would allow him to get the cheaper "infants" airfare. DS1 will be 8 yo next year, so he should benefit from the experience and be able to remember the highlights (especially with the help of digital photos and video!). I'm just not sure whether to go for 6 weeks or just for 3-4 weeks (we can always go again in a few years time when DS2 is old enough to benefit as well). Also, With young kids six weeks away from home may end up too stressful for all of us. I've invited my parents to come along, as we can share the car hire costs and they can help with supervising the kids (and mum can provide some translation in Germany - mein Deutch ist sehr schelcht).

I've done a rough budget for the trip and figure I need to save $750 each fortnight into an ING online savings account to have enough funds put aside for a six week trip ready by next August. I'm not including this account in my monthly net worth updates as it will all be gone again once we've been on vacation, so it would just be a short term "blip". My rough budget for the holiday is:

Airfares - Aus/Europe return
 2 adults:                    $4,000.00
 1 child:                     $1,500.00
 1 infant:                    $  500.00
Car hire (7 seater van)
 40 days @ $70/day =          $2,800.00
Petrol
 40 x 100 km ~ 400L @ $2.00/L $  800.00
Motels/B&Bs
 40 x 2 rooms x $50/night   = $4,000.00
Entry Fees
 Heritage passes etc.         $1,000.00
Food & Beverages (mostly self-cater in motels)
 40 x 4 x $25/day             $4,000.00
TOTAL                        $18,600.00  
+ miscellaneous 10%           $1,860.00
Holiday budget               $20,500.00
Savings Plan $750 x 28 =     $21,000.00

I'll need to get more accurate figures later this year when we make a final decision on our itinerary and start making bookings. As everything except the airfares is proportional to the length of the holiday, a three week vacation would be roughly half the cost of doing a six-week "grand tour". If we do decide on the shorter holiday I'll leave the balance of the funds sitting in the ING account and use it to fund our next European vacation in a couple of years.

I also have to check into the need for travel insurance - I think we might be able to emergency hospital treatment in the UK under the NHS (under an agreement between the Australian and UK governments). And in any case my parents would have the biggest risk of needing medical care while travelling, and I don't think they can get affordable coverage as they are both in their 70's.

Copyright Enough Wealth 2007