Makes you wonder about all the mistakes they don't fix up

DS2 has a retirement (superannuation) account with ING that I opened on his behalf in November 2006. There haven't been any transactions on the account since the initial $1,200 deposit, and the value of the account had only increased slightly to $1,289.48 by 30 June 2008. It was therefore a bit of a surprise to get a letter from ING yesterday stating that a recent "review [of] our processes, controls and systems" had "identified an additional value" of $26.80 that will now be credited to the account as an adjustment. While I'm glad that they've apparently found a mistake and are rectifying it, it's a bit of a shock that the required "adjustment" is over 2% of the account balance! It makes you wonder how many mistakes by professional investment managers go undetected.

Subscribe to Enough Wealth. Copyright 2006-2008

Spend, spend, spend

Today I ended up spending a bit more than I planned. This afternoon we drove down to the music shop where we'd bought DS1's clarinet (second hand) a couple of years ago. He started learning the clarinet this year, and playing in the school's training band. He's pretty good at music (playing piano, recorder and now clarinet), but not so good as to make it into a career. He enjoys playing in the band, but, being only eight, the instrument takes a bit of a pounding - especially last week when he left it standing on the floor and DS2 toddled past and knocked it over. Fortunately I bought a second clarinet at Aldi last year, so I could play along with him and teach him to play (I learned bassoon in high school, so I can teach basic keyboard and woodwind instruments - very handy given the cost of professional music lessons!). So for the next two week's he'll be using my clarinet while his is in the shop being repaired. DS1 earn a bit of extra pocket money busking on the weekend after his piano lesson - so I've told him I'll take out 50% as a "tax" to pay for the repairs. Hopefully this will make him take a bit more care with his equipment.

We then visited Aldi to buy some nappies, and while we were there ended up buying some unplanned "extras". They had a convection oven for sale at $49, which seemed a good price. We already had an old convection oven we've used for everyday cooking for the past ten years (we haven't ever used the stove oven!), so I thought it was worth buying a new one before the old one died (the fan has been getting a but more noisy lately). They also had a self-inking stamp kit for $8, which I bought for DS1 to play with. It's definitely not something we need, but he's having fun type-setting his name and address and can use it to label all his school books, and the occasional letter to his relatives.

While we were at the shopping centre I dropped in to the Electronic Boutique shop to browse for computer games. Although I don't really have much spare time to play games, I enjoy the occasional RPG and would like to see what the modern MUD games are like to play. Now that my uni assignments for this term are out of the way, I may be able to squeeze in a couple of hours of game play. I bought "Vanguard:Saga of Heroes" which appears to be Vista compatible (a lot of my old PC games don't work under Vista), and only cost $20. The game only works online however, so I'll have to pay a monthly fee if I want to keep playing after the introductory 30 day game subscription expires.

All up, an extra $77 of discretionary spending. At least I didn't buy the $139 hedge trimmer while I was at Aldi!

Subscribe to Enough Wealth. Copyright 2006-2008

Boys Own Financial Plan

The boys (DS1 and DS2) net worth decreased slightly this month, taking hits on their small, undiversified stock portfolios. DS1 suffered the worst performance, with his investments in ANZ and QBE both doing badly. DS2 did slightly better, with CSL and CPU in his portfolio.

The long term financial plan for the boys aims for each of them to have a net worth somewhere north of $100K when they turn 18 - providing a sound base for them to save for a house and fund their retirement accounts without too much stress.

There actual and projected net worths are plotted against age below:



The projection is based on the following assumptions:
Savings accounts.....1.2% real return
RSA account..........4.7% real return
stock portfolio......8.8% real return
superannuation.......8.8% real return
(invested in stock/geared stock funds)

savings:

• $1,200 pa contribution each (by me) into their superannuation accounts
  
• $1,500 pa government co-contribution each into their superannuation accounts
  
• $50 per month saved from their odd jobs/busking/pocket money etc.
  

The recent dip in DS1's graph shows how unlikely it is that the actual outcomes will be anything like the smooth projection.

Copyright Enough Wealth 2007

Seven year old saves for his retirement

From his pocket money and money earned busking before Christmas, DS1 had saved up over $350 in his "Happy Dragon" bank account. Today I transferred in some additional money from his high interest online savings account (which holds the money he earned while doing a paper round) so that there was enough to make an online contribution of $600 into the retirement savings account (RSA) he has with AMP.

I'll transfer another $400 before the end of June so that he'll have made a total "after-tax" contribution of $1000 into his superannuation account this financial year. I'm not sure if he'll get the $1500 government co-contribution this tax year, but it's worth making the contribution just in case. Before last year's changes to the tax laws, only employees were entitled to the co-contribution, so he was only eligible while he was earning money from his paper round. However, under the new rules self-employed people are also eligible for the co-contribution, so he should be able to contribute some of the money he earns from busking and get the 150% co-contribution (up to $1500) from the government.

The RSA account only offers a fixed interest option, but the rates are quite good (similar to an online savings account) and there are very low fees. The main benefit of this account is that DS1 was able to open it on his own behalf, which enables him to make contributions that are eligible for the co-contribution. His other retirement account is a so-called "child super" account which I had to open on his behalf, and which is intended for contributions made for him by parents and grandparents. There is an annual limit on how much can be contributed into a child super account, but it has a full range of investment options available, so it's a good choice for his long term retirement savings. Once he reaches 18 it will convert to a standard superannuation account.

Copyright Enough Wealth 2007

The financial benefits of accelerated learning

DS1 started reading at a relatively early age, and so he started Kindergarten as early as possible rather than waiting another year before starting school. The reasoning was that although he was quite small for his age (and therefore the smallest boy in his class) he would have been bored staying in long day-care five days a week for another year (DW had returned to work full-time by then - at that time it was our company policy to return to full-time work within a couple of years of returning from maternity leave). He hasn't had trouble coping with school, and one benefit of being one of the youngest in his class is that it's practically the same having started a year later but then skipping a grade, but less disruptive.

There appears to be a certain amount of resistance among many parents and teachers against advancing a child, even though studies have shown it can be a good option for gifted students who can otherwise become bored with school.

Aside from the educational benefits of providing an appropriately challenging learning environment for such students, skipping a grade can also have long-term financial benefits for both the parents and child. Since educational costs are tending to increase at a faster rate than inflation, skipping a grade will not only mean that parents pay less in total for K-12 schooling (saving roughly 1/13th), but the costs for the more expensive high school years will be at the previous year's cost level compared to the situation if a grade hadn't been skipped.

The parents and child will both benefit from college costs being paid out one year earlier, hence at lower real price levels. Although this will also mean one less year to save up for college expenses from the time the child was born until commencing college.

Assuming the same rate of progress through college and into full-time employment, the child will benefit from starting to earn a full-time wage one year earlier, so will always benefit from having one extra year of salary rises via experience relative to their age. And whatever age they eventually retire at, they will have had one extra year of earning compared to the situation if they had commenced work a year later. Once you've started work and have a few years of experience, there are very few jobs where being one year younger would actually be a disadvantage!

I don't think that financial considerations should be a factor in deciding whether or not to accelerate a child through school, but it could help decide whether to start a child in Kindergarten as soon as they are ready, or 'keep them back' for another year before sending them off to school. It seems that more and more parents are choosing to start their kids at school as late as possible (here in NSW there is an 18 month age-range allowed for when a child starts school, so most parents can choose to delay the start of schooling for one year if they want), often for no better reason than the mother (or father) wants to child to stay home with them for another year.

It's too soon to tell if DS2 will even be ready and suited to starting school "early", and in his case it will be a more difficult choice as his birth date falls slightly less than one month short of the cut-off date. That will mean that he'll either be one of the older kids in his class if he starts Kindergarten at the standard age bracket, or else we'd have to ask the local school's headmaster to consider letting him commence school when he's one month younger than the standard age-limit.

While it's always possible to provide additional educational and developmental challenges to children without having them skip a grade, it's often more of a challenge to provide such extra-curricula opportunities in parallel to their standard school activities. Plus it can be hard to avoid the potential for boredom in their normal classes (despite all schools having policy around providing for gifted students, there still seems to be more effort and resources devoted to helping struggling students achieve normal proficiency levels than there are to helping the more able students achieve their maximum potential). Overall, I think it's less disruptive to a child to start school a year early (if it suits them) and then progress with the same cohort of students, compared to having them skip ahead a year at a later stage.

What do you think?

Copyright Enough Wealth 2007

Kids Stock Portfolio Update - Dec 2007

The boys are only seven (DS1) and one (DS2), so their portfolios are truly "long term". They are also very static - once I buy a stock for them it probably won't be sold unless there is a massive and unexpected change in the company's prospects for the long term. There also won't be any additions to the portfolios after the initial stock purchases, apart from small additions due to dividend reinvestment plans (DRPs) or bonus share plans (BSPs). The main difference between these two plans is that DRPs buy additional shares at current market price (sometimes sans a small discount eg. 5%) using the taxable dividend income, whereas BSPs issue "bonus" shares at no cost in lieu of any dividend. The value of the issues bonus shares is the same as the dividend would have been, but isn't taxable as income. However, as the bonus share had a zero cost base for CGT purposes, there will be a bigger capital gains tax hit when the bonus shares are eventually sold. However, over the very long term the cost base will most likely be a small fraction of the total sale price, so this will not have much effect on the amount of CGT paid. Another way to look at it is that the while the starting value of the shares will be eventually be taxable for bonus share issues, the tax isn't due until the shares are sold - by which time the real cost of the tax will be much reduced due to inflation. There's also the benefit of only paying CGT at half your normal marginal tax rate for long term capital gains (assets held more than 12 months before being sold).

Anyhow, here is the current valuation of the boys' stock holdings:



When I bought QBE for DS1 they were undervalued due to the temporary concerns around their exposure to claims arising from the twin towers destruction on 9/11. ANZ bank was also reasonably cheap at that time, with the outlook for bank stocks being rosy. Five year's later, when it was time to buy some stocks for DS2, the banks were still highly profitable in Australia, but, with the current credit concerns resulting from the US sub-prime loans problem and rising inflation and interest rates in Australia, they don't currently appear to be such a bargain. So, for DS2 I've gone with CSL which is likely to benefit from continued growth in the medical products field in the future, and CPU which as a provider of stock administration services globally is well placed to benefit from economic growth in developing countries and the increased investments of the baby boomers and subsequent generations to provide for their own retirement plans. That's the theory -- we'll see how they perform over the next 10-20 years.

Copyright Enough Wealth 2007

The Millionaire Baby Next Door

Consider baby "John Doe". John's father starts doing some overtime (or a second job) as soon as he finds out John is on the way. When John is born he manages to scrape together $12,000 to invest in a low-cost investment fund. If the fund's total return averages 11% pa, the child's investment returns are taxed at 25%, and inflation averages 2% pa, the real, after-tax, return of the investment would be 7% -- and the investment account will hold just over $1 million (in today's dollars) when baby John turns 65.

Of course very few expectant parents would have a "spare" $12,000 lying around when a baby arrives, few dads would go out and earn an extra $12,000 during the pregnancy, and, if they had the choice, most people would probably put the $12,000 towards baby expenses rather than invest it for 65 years -- but it does show what can be achieved with a fairly modest amount invested for a long period.

If a lump sum of $12,000 is beyond reach (after all, that would require putting aside $33 a day for a year), the same result can be achieved by investing $1,000 each year for ten years (ie. finding an extra $3 a day to invest for the child), provided the investment return is somewhat higher (13% instead of 11%) or if the money was invested in a tax-sheltered account (such as a child superannuation account).

If one did both - investing an initial lump sum of $12,000 and then adding a further $1,000 each year until John Doe turned ten, John's investment would reach $1 million (in today's money) by age 58.

Copyright Enough Wealth 2007

Christmas Ching-a-Ling

As Christmas rapidly approaches the shoppers come out in force and are in the mood to spend. DS1 spends half an hour or so busking with his recorder at the nearby Shopping Plaza every Sunday after his piano lesson. Most weeks he makes $15 or $20 in half an hour, which he's keen to save in his bank account (He's only seven, so he doesn't have any expenses yet). Well, in the past couple of weeks his busking has earned around $40 in half and hour, and, today, he made $73 in 45 minutes (we stayed a bit longer than usual since the weather was very pleasant and DS1 was in the mood to play the Christmas Carols he had learned last month). It would be nice to have another couple of sessions like this before Christmas, but the weather in Sydney can get very hot this time of year, in which case busking isn't much fun - we'll go straight home for a swim in the pool after piano instead ;)

My mum was impressed by how much DS1 had made today, but my dad simply said "What sort of lesson does that teach him?". I guess he feels that if DS1 earns money too easily he may get an "easy come, easy go" attitude towards money. Personally, I think it's good for him to see that good money can be earned IF you're in the right job, at the right time and right place. Anyhow, he saves all the money he earns, and is quite interested in the process of banking the cash, and even takes some interest in my explanations of his superannuation fund, stock investments and tax returns.

Copyright Enough Wealth 2007

Children's Stock Investments

Since the market was down again today I decided to go ahead and buy some stocks for DS2. I bought 80 CSL at $32.08 and 250 CPU at $9.95. Total cost was $5,113.80 ($5,053.90 + $59.90 brokerage). While the investment is long term, it was nice to see the market recover a bit after I placed the order, so that by the close DS2's "portfolio" was worth $5,125.80, a rise of 1.4% above the purchase price.

DS1's portfolio consists of 246 ANZ shares and 438 QBE shares. The initial purchase cost $4,134.01 and is now worth $20,292.06.

Hopefully these four stocks continue to perform well over the next 10-20 years and will form the core of a stock portfolio they can add to as they grow up. If nothing else buying stocks for the kids provides a good opportunity to explain the concepts of share ownership, dividends, and compound interest. Because the accounts list their names (as trustors) they take an interest dividend statements and so on arrive in the mail.

Copyright Enough Wealth 2007

Picking Stock for the Kids

I bought a couple of stocks for DS1 when he was one year old (six years ago), the idea being that they would be a good nest egg by the time he leaves home. At the time the banks looked set for continued growth (a lot less certain now) so I bought ANZ bank. There was also an opportunity to buy QBE when it was marked down due to concerns about insurance liabilities after 9/11. The other reason to pick these stocks was that they had bonus share plans, which means that dividends are foregone in exchange for bonus shares. This avoids income tax issues for the child, although there will be a higher rate of capital gains tax liability as the bonus shares have a zero cost base. Since then both stocks have done quite well, although ANZ has actually underperformed the broader market slightly.

DS2 has recently turned one, so the current market downturn is a good opportunity to buy a couple of stocks for him. I'm thinking of buying either Cochlear (COH), Commonwealth Serum Laboratories (CSL), or Computershare (CPU).

Copyright Enough Wealth 2007

Another Election Carrot

After several months of 'phoney election campaign', and three weeks of official campaigning, the Liberal Party had it's offiial campaign launch today and announced around $9 billion dollars worth of election promises. After Labour had announced a promise of a $750 tax rebate for the purchase of computers or other high tech equipment by parents for their high school kids, the Liberals today outdid this with a promise for a tax rebate of $800 for every secondary school student which could be used for any educational cost, such as uniforms or school fees, not just computers. Personally this is a better deal for me as the $400 rebate applies for preschool as well as primary school students, so we would be able to get this rebate for DS2's preschool year, not just $375 from when he starts primary school. The Liberal version of the educational tax rebate is promised not to be means tested, whereas the Labor version might be, which would probably mean we'd miss out on any benefit.

The other Liberal election promise regarding home affordability is also much better for us than the Labor version. The Libs scheme allows parents, grandparents and friends to contribute a total of $1000 a year into home savings accounts for children. The savings would be accessible to buy a first home once the account holder turns 18. This would be a good way for me to invest some money on behalf of DS1 and DS2 in a tax effective manner. I already invest a similar amount for each of them annually via a Child Superannuation account, but those funds won't be available to them until they reach retirement age!


Copyright Enough Wealth 2007

Kidsnames.com

I was surfing the blogosphere (is that a mixed metaphore?) when I read on Money Blue Book about reserving your kids domain names for future use. I thence surfed over to dotster and checked out the .com for DS1 and DS2's, which happened to be available. So I registered them both for 1 year ($14.95 each). It's a bit of a waste of money right now, as DS1 and DS2 aren't about to setup their own websites for many years (if ever), but if I waited till they might need these domain names they're likely to be taken (their names aren't all that unusual!). I charged the registrations to my Paypal account. Since the money in paypal has been earned from blogging it doesn't seem like real money ;)

If nothing else, when the kids leave school/uni and are job hunting they can use the websites for a glorified C.V. That's assuming that the web and C.V's are still in use in fifteen or twenty years time ;)

Copyright Enough Wealth 2007

Best Saving Account for Children

I'm always keeping and eye out for what savings and investments are best for DS1 and DS2. I recently learned that the BankWest Kid's Bonus Saver Account is paying 10% interest on the entire balance, provided they make a deposit in the month of between $25 and $250 and no withdrawals. The Kid's Bonus Saver Account has to be linked to a BankWest Children's Saving Account, but this account has no fees and no minimum balance. The account is designed for the specific benefit of the child but it must be opened and operated by an adult. These accounts are only available for children up to the age of 15 - when they reach 15 they'll be automatically converted to the Teen Scheme account. The Children's Saving Account provides online access, and you can make Direct Credits into the account. The interest rate on the Children's account is still a reasonable 3.25% on balances between $0 and $5000, but you'd want to keep most of the money in the kid's account and just accumulate enough in the Children's Saving Account to be able to make a $25 deposit in the linked Kid's Bonus Saver Account each month.

Copyright Enough Wealth 2007

The Early Bird Gets a Bigger Worm

You often see the example of "Dick" and "Jane", the model savers. Jane starts saving $1,000 each year (increasing the amount each year in line with inflation) from ages 21-30 and then stops. Her savings are invested where they achieve a "real"(after inflation) return of 6%. When Jane reaches age 65 she finds that the $10,000 she invested has grown to over $100,000 (ignoring any taxes) - the magic of compound interest over a long time.

By comparison, Dick doesn't start saving until he reaches 35, but keeps saving $1,000 each year until he hits 65. In total he pours $30,000 into his savings account, yet his final investment account balance is slightly less than $84,000 even though he saved more than Jane and earned the same rate of return. This is often used as an example of why it is important to start saving as early as possible for retirement...

What I find even more interesting is the case of Baby X, whose parents put $1,000 into an account for their baby at ages 1, 2 and 3. If this investment earns the same real return (6%) as Dick and Jane, it will have grown to $118,000 by the time X hits 65.

The numbers get really impressive if you look at investing $1,000 each year for a kid from ages 1-10. This is one of the reasons I'll keep driving my seven-year-old Ford Festiva for another five years rather than upgrading to a newer model - it makes more sense for me to put $1,000 each year into each child's superannuation account than moving to a newer model car that will lose that much each year in extra depreciation alone. If nothing else it will mean that they won't need to save extra for their retirement and will be in a better position to pay off a home loan.

It's also a good reason to encourage kids to earn some money and contribute into their own superannuation account - they'll get the $1,500 government co-contribution to help them get ahead. The other benefit of saving for kids via a superannuation account is that the earnings are only taxed at 15%, rather than the exhorbitant rates than can apply to kids "unearned income".

Just as an example, saving $1000 pa from ages 1-10, then $1000 plus $1500 co-contribution from ages 11-20, would result in an account balance of around $778,000 by age 65!

Copyright Enough Wealth 2007

Time to Buy Some Stocks?

With the 4% drop in the Australian stock market on Friday the "correction" is now about 8%. While there could be further drops in the coming weeks, even if this is just a correction rather than the start of a bear market, I think it may be time to start looking at stocks to buy for DS2's portfolio. DS2 turns 1 next month and I'd like to buy him a couple of stocks to establish an investment portfolio - perhaps some CSL or COH. I'm looking for stocks that over the long term should have good growth prospects but don't pay out large dividends - getting too much "unearned income" results in punitive childrens tax rates.

Copyright Enough Wealth 2007

Junior Judo

DS1 has been enjoying going to Judo training on Monday nights for the past three weeks, so tonight we formally signed him up. Membership of the State Judo association cost $60pa, his Judo-gi (uniform) cost $65 and the club fee for training is $45 per month. I think the class is quite good value for money. There are usually only three kids in the Junior class (a bigger class runs on Wednesday night at the Olympic Centre, but it's too far to travel unless DS1 gets very serious about his training) so he gets lots of attention from the instructor. He's the smallest in the class, but he's very enthusiastic and isn't put off by his larger training partners. Aside from being great exercise, Judo training is good for learning discipline and focus, and can provide some self-defence benefits (as long as you don't kid yourself that it's much use against an armed threat!). One advantage of this sport for DS1 is that competition is based on weight grades, so he can aspire to do well if he trains hard and has ability, even though he's quite small for his age.

Copyright Enough Wealth 2007

A Nice Opportunity for Beginning Investors

It's a pity that I already have several online savings accounts and mututal fund investments, because the new offering from rabobank looks very attractive. They offer an online savings account with no fees or minimum balance with an interest rate of 6.6%, and from this account you can invest in wholesale mutual funds for a low entry fee of only 0.75% (compared with up to 5% entry for retail funds going direct or via a planner, or 0% for a retail fund investment via a discount broker). They are offering 0% entry fee, but only until the end of July. But the 0.75% fee is still good value as it gives access to wholesale funds (which usually charge lower management fees than their retail fund equivalents) with a minimum investment of only $250.

I'd try out this account and fund investment option if I didn't already have more accounts than I know what to do with. They do offer the account for use with a DIY Superannuation account (SMSF), but I'll have to check carefully how their costs and range of available funds compares with accessing mutual fund investments via e*Trade (I already have an e*Trade account setup for use with our SMSF). One benefit of making out SMSF mutual fund investments via e*Trade is that eSuperFund (which administers our SMSF) has access to transaction data from our e*Trade account. If we invested for our SMSF via Raboplus we'd have to send copies of all the relevant financial info to eSuperFund each year.

I was also thinking about opening a Raboplus account for DS1 and/or DS2, but unfortunately you can't open a raboplus account if you're under 12, so the kids will have to make do with their St George bank accounts and Commonwealth Bank 'dollarmite' savings accounts. It's funny how some banks and Superannuation funds have no problem with opening accounts for a minor (with an adult having authority to operate the account), while others either don't handle accounts for minors at all, or insist on the account being opened in the name of the adult trustee(s).

Copyright Enough Wealth 2007

What's the Best Investment Asset Mix for a Baby's Retirement Fund?

I'm not sure, but the investment options I picked for the Personal Superannuation account I opened for DS2 on 10 Nov 2006 (DS2 was born last September) were:

                                                    Initial    Current
ING Global Emerging Markets - Entry Fee             10% 1.4382 1.52460
OptiMix Geared Australian Shares Entry Fee          30% 1.2060 1.38040
OptiMix Global Smaller Companies Shares - Entry Fee 10% 1.6289 1.73940
Vanguard Australian Shares Index - Entry Fee        20% 1.2370 1.38410
Vanguard International Shares Index - Entry Fee     20% 1.2491 1.25220
Vanguard Property Securities Index - Entry Fee      10% 1.2090 1.33700

The entry fee for the ING OneAnswer Personal Superannuation scheme is quite hefty (around 4%), but doesn't matter as I made the investment application via Count who rebate the upfront fee 100%.

Total initial investment was $1000, with quarterly additional investments scheduled to start from next July. The current value of the investment is $1,091.

When DS2 is older I'll help him find a casual job, such as delivering letter box junk mail on the weekends. Although it is quite easy for kids to earn some pocket money doing odd jobs, it's a much harder task finding a "real" casual job for the under-15s. The benefit of having such a job (apart from the life lessons around working, earning money etc.) is that if he earns more than 10% of his income working for an employer he can make an undeducted contribution of up to $1000 each year and get a government co-contribution of up to $1500 per annum.

I already did this for a couple of years with DS1 while he had a job doing a paper round. Boosting retirement savings at such an early age should have a huge impact on their final benefits, as they have 60 years for the magic of compounding to do it's thing.

Enough Wealth