Bottrell Financial Planning Newsletter – October 2022
It’s October and the footy finals are over, depending on which code you follow. In Canberra though, Treasurer Jim Chalmers is warming up for his first Budget on October 25 against a background of mounting economic pressures.
In September, persistently high inflation and aggressive rate hikes by the world’s central banks put global share and bond markets under pressure. The US Federal Reserve has lifted rates seven times this year, but US inflation remains at 8.3%. There is now growing fear that central banks may push the world into recession. In a surprise twist, the Bank of England (which has also lifted rates seven times this year) was forced to switch back to Quantitative Easing, buying government bonds to support the British pound which crashed to a record low in response to a stimulatory mini-Budget released by the new Conservative Party leadership. This led to a late relief rally on global sharemarkets and a fall in the US dollar and global bond yields. Even so, major global sharemarkets finished the month down 6% or more.
In Australia, the picture is a little brighter. Economic growth was up 3.6% in the year to June. Company profits are also strong, up 28.5% in the year to June, and unemployment remains low, at 3.5% in August. While inflation eased from 7% in July to 6.8% in August, due to falling petrol prices, it is still well above the Reserve Bank’s 2-3% target. Aussie consumers continue to spend at record levels, pushing up retail spending by 19.2% in the year to August, and petrol prices are set to increase by at least 22c a litre after the reinstatement of the fuel excise. Both will put upward pressure on inflation and interest rates.
The Aussie dollar fell more than 3c against the surging US dollar in September, to US65c.
Mortgage vs super
With interest rates on the rise and investment returns increasingly volatile, Australians with cash to spare may be wondering how to make the most of it. If you have a mortgage, should you make extra repayments or would you be better off in the long run boosting your super?
The answer is, it depends. Your personal circumstances, interest rates, tax and the investment outlook all need to be taken into consideration.
What to consider
Some of the things you need to weigh up before committing your hard-earned cash include:
Your age and years to retirement
The closer you are to retirement and the smaller your mortgage, the more sense it makes to prioritise super. Younger people with a big mortgage, dependent children, and decades until they can access their super have more incentive to pay down housing debt, perhaps building up investments outside super they can access if necessary.
Your mortgage interest rate
This will depend on whether you have a fixed or variable rate, but both are on the rise. As a guide, the average variable mortgage interest rate is currently around 4.5 per cent so any money directed to your mortgage earns an effective return of 4.5 per cent.
When interest rates were at historic lows, you could earn better returns from super and other investments; but with interest rates rising, the pendulum is swinging back towards repaying the mortgage. The earlier in the term of your loan you make extra repayments, the bigger the savings over the life of the loan. The question then is the amount you can save on your mortgage compared to your potential earnings if you invest in super.
Super fund returns
In the 10 years to 30 June 2022, super funds returned 8.1 per cent a year on average but fell 3.3 per cent in the final 12 months.ii In the short-term, financial markets can be volatile but the longer your investment horizon, the more time there is to ride out market fluctuations. As your money is locked away until you retire, the combination of time, compound interest and concessional tax rates make super an attractive investment for retirement savings.
Super is a concessionally taxed retirement savings vehicle, with tax on investment earnings of 15 per cent compared with tax at your marginal rate on investments outside super.
Contributions are taxed at 15 per cent going in, but this is likely to be less than your marginal tax rate if you salary sacrifice into super from your pre-tax income. You may even be able to claim a tax deduction for personal contributions you make up to your annual cap. Once you turn 60 and retire, income from super is generally tax free. By comparison, mortgage interest payments are not tax-deductible.
Personal sense of security
For many people there is an enormous sense of relief and security that comes with having a home fully paid for and being debt-free heading into retirement. As mortgage interest payments are not tax deductible for the family home (as opposed to investment properties), younger borrowers are often encouraged to pay off their mortgage as quickly as possible. But for those close to retirement, it may make sense to put extra savings into super and use their super to repay any outstanding mortgage debt after they retire.
These days, more people are entering retirement with mortgage debt. So whatever your age, your decision will also depend on the size of your outstanding home loan and your super balance. If your mortgage is a major burden, or you have other outstanding debts, then debt repayment is likely a priority.
All things considered
As you can see, working out how to get the most out of your savings is rarely simple and the calculations will be different for everyone. The best course of action will ultimately depend on your personal and financial goals.
Buying a home and saving for retirement are both long-term financial commitments that require regular review. If you would like to discuss your overall investment strategy, give us a call.
Getting the balance right in decision making
We all approach decision making in our own way, making a multitude of decisions every day: ‘Should I hit snooze again on the alarm?,’ ‘Do I take the train to work, or do I drive,’ ‘What should we have for dinner?’
In fact, researchers estimate that the average adult makes 35,000 decisions every day.i While most of these are fairly insignificant, we also constantly make complex decisions that may support us in many areas of our lives – from navigating a change of career, handling a new project at work, or even managing the complexities of interpersonal relationships.
Having some knowledge of the decision-making process can help you to be more self-aware when faced with those larger, more complex decisions.
The biology of thought
The human brain is an intricate organ. It contains about 100 billion neurons and 100 trillion connections, and controls our emotions, thoughts, and actions. Our brains appear wired to work in complex ways to enable us to make the best decisions possible with the information we’re given. In very simple terms the process is a little like a court trial. Our brains register sensory information like sights and sounds and then act as a jury to weigh each piece of ‘evidence’ to make a judgement or decision.
Thinking fast and slow
Nobel laureate Daniel Kahneman in his hugely successful book Thinking, Fast and Slow – suggests that there are two distinct and different ways the brain forms thoughts.ii
‘Fast thinking’ is automatic, intuitive, and used for most common decisions. It is our brain conserving energy by making the bulk of its decisions on some degree of autopilot. This style of thinking uses cognitive shortcuts to let us respond quickly and instinctively to a wide range of fast and ever-changing inputs, like discerning emotions from facial expressions, ducking when something is thrown at us, reading words on a billboard, or driving a car on an empty road.
On the other hand, ‘slow thinking’ is more thorough and logical but also takes more time and is resource intensive. It kicks in when you focus on a task or problem, monitor and control your behaviour, formulate an argument or do anything that causes your brain to exert itself.
Different thinking for different situations
Of course, both styles of thinking have their place. It’s important to be able to make fast decisions when required – in fact, fast thinking comes from the most primal part of our brain to help us make the kind of snap decisions integral to survival. However, there are times when you need to analyse and think through all the implications of a complex decision like whether to accept that new job offer interstate or buy that new car.
Amongst the multitude of small decisions we face every day, it can be hard to find the time and energy for the big ones. Steve Jobs famously explained that he wore the same outfit every day to have one less easy decision to make so that he could focus his energy on the more complex decisions he was dealing with.
If you find you rely heavily on fast thinking in your life, making choices based on gut instinct with little research or consideration, it may be time to consciously slow it down.
While that may not mean wearing the same outfit day in, day out, you might be able to have a few things in your life on autopilot, like putting together a weekly meal plan so thinking about what’s for dinner is one less decision to make in your busy day.
Slow thinking takes discipline and effort. It’s important to approach critical decisions in a measured way and give yourself the time and head space to think things through, rather than being swayed by emotion or the cognitive biases associated with fast thinking.
Good decision-making, either financial or otherwise also benefits from having a sounding board to talk things through with, and of course we are here to assist with any important financial decisions you may be faced with.
Secrets of success
‘If I have seen further that is by standing on the shoulders of giants’ – Isaac Newton
We all want to be the best that we can be but achieving your version of success takes effort. You can take a step in the right direction by learning from those who have gone before you and achieved success in their various fields.
Success is a concept that is different for every person. Whether it means having a great career, thriving business, loving family or achieving excellence on the sports field or in your personal endeavours, achieving your definition of success can provide a profound sense of accomplishment.
There is a lot we can learn from successful people. They tend to share common traits that contribute to their success in life and can help you on your journey to achieve your goals.
Dream big and follow your dream
Successful people have a vision and pursue that vision. Mary Barra, CEO of General Motors had a vision for the company which has seen them invest millions in electric and self-drive vehicles, and in ride share applications, anticipating future customer needs. She also pivoted production during the pandemic to help make critically needed ventilators.
To support that sort of visionary thinking, make sure you have some time in your life for introspection. It can help to be quite concrete about your ambitions and write down exactly what you want to achieve, then start to think about how you’ll go about realising your dreams.
Set short term realistic goals
Once you have identified what you want to achieve the end goal can seem a little daunting. A good way to work towards the success you dream of is to set short term, achievable, incremental goals.
Six-time Olympic track and field medallist Jackie Joyner-Kersee, in her memoir speaks of how setting incremental goals helped her. ‘So you want to jump 23 feet in a long jump but you only jump 20 feet right now. Why not go for 20 feet 5 inches? If I was running, I aimed to see myself improve a tenth of a second or half of an inch if I was jumping.’
Think about the steps you need to take to reach success and approach your goals one step at a time.
Move out of your comfort zone
While it may not feel like it at the time, a little bit of discomfort goes a long way in terms of nudging you along the path to success.
Jeff Bezos, former CEO of Amazon who also happens to be the world’s richest person, attributes much of his success to getting outside his comfort zone. He has even gone as far as to suggest to his employees that some level of discomfort can spur one on to greatness “I constantly remind our employees to be afraid, to wake up every morning terrified”.
Learn from losing and recover from failure
Success takes time and can also mean overcoming adversity and failure.
Walt Disney’s first film production company went bankrupt, but his legacy is as an extraordinarily successful creative whose visions as an animator, filmmaker and theme park developer resulted in one of the most successful and powerful entertainment companies in the world.
The critical thing that successful people do when they have experienced failure is to reframe the failure and think about not what they have lost, but what they learned from the experience. They then apply that hard-earned knowledge to their next venture.
Ask for help and get the best from others
You don’t have to go it alone on your path to success. Founder of Boost Juice, Janine Allis, asked other franchise operators for tips on how to set up and run a successful franchise. “If you surround yourself with the right people who bring out the best in you and have your back, not only will you enjoy the journey, but it also increases your chances of success,” says Janine.
And finally, one fundamental trait shared by all successful people is self-belief. Believe that you have the power to make your dreams come true.