@Goldzone directed me to this very insightful table of the 7 ways people view money: Money Attitude, Money Behavior and Net Worth.
Find out which zone you are in so that you can work out where you want to be.
Archive for the ‘Understanding Money’ Category
Financial Security Tip
Friday, May 22nd, 2009A true but sad story of a “sane” person succumbing to the “insane” herd mentality…
Financial Security Mistakes he fell for:
- Thinking the house that they lived in is an investment
- Spending more than the income you generate
- Making plans expecting things to turn out 100% (i.e. nothing goes wrong)
- Trusting your financial future based on some one else’s advise
Stretching yourself financial is never a wise idea, especially if you do not have a financial reserve large enough to sustain your outgoings for at least 3-6 months, preferably more. (this is what many call the ’sleep at night factor’)
Things you can do to avoid falling into this trap and ensure your Financial Security
- Never spend more than what you can afford
- Always have a financial reserve (aim for 6 months of expenses,
- preferably more)
- Never risk more than what you are comfortable in losing (i.e. don’t bite
- off more than you can chew)
- Always plan for the worse and hope for the best
- Eliminate unnecessary expenses
Remember, Cash Flow is King!
Make sure you have more cash coming into your back pocket (income) compared to cash leaving your back pocket (expenses)
The Budget 2009-2010 Summary
Thursday, May 14th, 2009Here’s a very high level summary of how the budget is going affect you… looking at it, it will affect everybody in their own little way but nothing dramatic so that any one group is severely advantaged or disadvantaged (I think)
Below are just summary with not much details (except the bits that I think is more interesting). If you want more details please visit The Federal Budget
For the Retiring…
- Reduction of concessional contribution cap from 1 July 2009
- Temporary reduction of the Government co-contribution from 1 July 2009 to 30 June 2014
- Extension of 50% minimum pension draw down relief from 1 July 2009
- New Zealand retirement savings portability scheme
- Age pension age to increase to age 67 from 1 July 2017
- Increase in government support pension amount from 20 September 2009
- New pension supplement from 20 September 2009
- Pension Bonus Scheme closed to new entrants from 20 September 2009
For the Working Class People
The tax rates has changed slightly
Income Threshold Tax rate
- $0 - $6,000 0%
- $6,001 - $35,000 15%
- $35,001 - $80,000 30%
- $80,001 - $180,000 38%
- $180,000+ 45%
the threshold for 30% tax rate has been increased from $34,000 to $35,000 and the 40% tax rate has been reduced to 38%.
Other Changes include:
- Changes to income tax exemption for income earned by Australians working overseas from 1 July 2009
- Private Health Insurance Rebate from 1 July 2010
- Paid Parental Leave from 1 January 2011
- Reform of family payments from 1 July 2009
For Low Income Earners
The Government will increase the Medicare levy low income threshold to $17,794 for individuals and $30,025 for individuals in families. The additional amount of threshold for
each dependent child or student will also increase to $2,757.
The Medicare levy threshold for pensioners below age pension age will also be increased to $25,299. This is to ensure that pensioners below age pension age will not have a Medicare liability where they don’t have an income tax liability.
For the First Home Owners
- 1 July 2009 - 30 September 2009: $14,000 for established homes or $21,000 for new homes
- 1 October 2009 - 31 December 2009: $10,500 for established homes or $14,000 for new homes
- After 1 January 2009: $7,000 for established homes or $7,000 for new homes
For Small Businesses
- Additional small business and general business tax break from 13 December 2008
- Modified Pay As You Go (PAYG) instalments relief for small business from 1 July 2009
- Tightening access to non-commercial business losses from 1 July 2009
- Small business CGT concessions
That’s it from me, but keep an eye out for the May Success Tips Newsletter… I’ll be going into a bit more detail about the First Home Owner Grant and just the stock market in general - as I write the US Market is just about to open, the S&P500 has fallen from a high of around 929 to 884 (about 5% from the high of 929) which is the first decent correction since early March 2009
Interest Rate Trap
Saturday, May 9th, 2009With the Global Financial Crisis and interest rates falling to all time low for many countries all over the world it is obvious that certain investments that were not viable during a high interest environment is now possible with cost of funding (i.e. interest rates halving or more)
With low interest rates many people are also opting for variable loans instead of fixed loans, especially since fixed rates are sometimes quite a bit more higher than the variable rates. The combination of low interest rates and investors taking advantage of the low interest environment can lead to a financial disaster if not planned properly…
Why you might ask? well it’s very simple, if interest rates increase the repayment amount would obviously increase except it will hurt the investor a lot more at low interest rates (lower base).
For example,
- When interest rates were around 7% and interest rates increased by 0.5% to 7.5%, the investor would have to pay 7.143% (7.5%/7%) more in interest expense.
- However if interest rates are around 4% and interest rates increased by 0.5% to 4.5%, the investor would have to pay 12.5% (4.5%/4%) more in interest expense!
Hopefully you can see that it’s over 3 times (12.5%/7.143%) the increase in interest expense!
Currently, Australia’s cash rate is 3% with the cash rate traditionally being around 5-6% it would not be a surprise if the cash rate increase over the next few years back to the average of around 5-6% (i.e doubling in interest rates, meaning doubling in interest repayments!)
Graph Courtesy of Forex Blog
So don’t fall for the interest rate trap! Think about the potential increase in interest rates before making any investments especially if you are not able to financially sustain future interest rate rises!
Million Billion Trillion - How Much is a Trillion Dollars?
Wednesday, March 18th, 2009Million, Billion, Trillion - How much does all it really look like?
I came across this email in my inbox recently and thought it was very good at visualising how much a million, a billion and a trillion dollars actually look like. I’m not sure who exactly spent the time to actually create those pictures so all I can say is Thanks!
So remember, as you’re looking through this just imagine the amount of money that the World is pumping into the economy to get us out of the financial crisis. Also the amount of money that’s actually been lost by companies etc.
Enjoy…
What does one TRILLION dollars look like?
All this talk about “stimulus packages” and “bailouts”…
A billion dollars … A hundred billion dollars … Eight hundred billion
dollars … One TRILLION dollars …
What does that look like? I mean, these various numbers are tossed around like so many doggie treats, so I thought I’d take Google Sketchup out for a test drive and try to get a sense of what exactly a trillion dollars looks like.
We’ll start with a $100 dollar bill. Currently the largest U.S. denomination in general circulation. Most everyone has seen them, slighty fewer have owned them. Guaranteed to make friends wherever they go.
A packet of one hundred $100 bills is less than 1/2″ thick and contains $10,000. Fits in your pocket easily and is more than enough for week or two of shamefully decadent fun.
Believe it or not, this next little pile is $1 Million Dollars (100 packets of $10,000). You could stuff that into a grocery bag and walk around with it.
While a measly $1 Million looked a little unimpressive, $100 Million is a little more respectable. It fits neatly on a standard pallet…
And $1 BILLION Dollars… now we’re really getting somewhere…
Next we’ll look at ONE TRILLION dollars. This is that number we’ve been hearing about so much. What is a trillion dollars? Well, it’s a million million. It’s a thousand billion. It’s a one followed by 12 zeros.
You ready for this?
It’s pretty surprising.
Go ahead…
Scroll down…
… I give you $1 Trillion Dollars …
(And notice those pallets are double stacked .)
So the next time you hear someone toss around the phrase “trillion dollars”… that’s what they’re talking about
Hopefully you know what a Million, Billion and Trillion looks like now… Interestingly, this is also how the power of compounding works in your favour!
What Is Money?
Thursday, January 29th, 2009Q: What is Money?
A: Money is a unit of measurement. Money is used to measure the value of goods and services.
Imagine a world where there are only 2 people, An apple farmer and an orange farmer.
- The apple farmer grows 30 apples
- The orange farmer grows 30 oranges
Assuming that both the apple farmer and the orange farmer wanted equal numbers of apples and oranges (ie. 15 apples and 15 oranges each), then the apple farmer would trade 15 apples for 15 oranges vice versa. This simple trade is effectively a form of bartering.
In the above example, 1 apple equals to 1 orange. Now let’s introduce a carpenter who makes 1 ladder and assume 1 ladder equals to 30 apples. If the carpenter wanted 15 apples, the carpenter would be unable give 1/2 of his ladder for the 15 apples.
Money was introduced to allow the flow of goods and services between two people/parties. If the apple farmer, the orange farmer and carpenter decide to introduce a form of money, and each of them starts with 30 stones and each stone can buy 1 apple (i.e. the economy has 90 stones to allow goods and services to flow).
The stones (the money), is effectively a measurement of value. Think of it as an I owe you.
Now we have the following scenario:
| Apple Farmer | 30 apples + 30 stones | = $60 worth of value |
| Orange Farmer | 30 oranges + 30 stones | = $60 worth of value |
| Carpenter | 1 ladder + 30 stones | = $60 worth of value |
Say:
- The apple farmer wants 1 ladder
- The orange farmer want 10 apples
- The carpenter wants 5 apples and 5 oranges
Then we would end up with:
| Apple Farmer | 15 apples + 1 ladder + 15 stones | = $60 worth of value |
| Orange Farmer | 10 apples + 25 oranges + 25 stones | = $60 worth of value |
| Carpenter | 5 apples + 5 oranges + 50 stones | = $60 worth of value |
We can see in this example that everybody still has the same “value” (networth), the only difference is that they are now in possession of the items that they want.
So to re-iterate what is money, hopefully you can start to understand that money is merely a unit of measurement.
Think about it, which would you rather have?
- the stones, or
- the apples, oranges or ladder