Paving the way for a smooth EOFY

As the end of the financial year draws closer, thoughts turn to tax. No doubt you can think of more enjoyable ways to spend your time than preparing for your annual tax return. So how can you streamline the process while ensuring you take advantage of all the claims that are possible?

First, you need to collect all your records of both your income and your expenditure throughout the year.

This includes:

• All your income whether it’s from your employer, your super or your pension

• All your bank statements including interest earned and charges paid

• Dividends and distributions from your investments

• Records of investment sales and purchases for capital gains/loss purposes

• Income from rental properties and associated expenses

• Foreign income

• Your private health insurance policy details.

Nowadays, there may also be income to report from your participation in the shared economy such as money earned from Uber or AirBnB.

Ideally all this documentation should be to hand. If it’s not, then seriously consider using an app to record all these transactions on a regular basis so when June 2020 comes around, you won’t spend hours hunting out all the documentation. The Australian Taxation Office, for instance, has a myDeductions app for individuals and sole traders.

Another way to help monitor your expenses is to establish a separate credit card or bank account for your work-related expenses so that they are easily identifiable.

What can you claim?

Once you have your documents to hand then you need to consider what you can claim as work-related expenses. But do make sure you only claim what you are entitled to, because the ATO has work-related expenses in its sites this year.

Basically there are three key criteria:

1. You must have spent the money yourself without having it reimbursed

2. The money must be directly related to earning income

3. You must have a record to prove it.

If your expenses meet these criteria, then there are a host of expenses you may be able to claim. These include vehicle and travel expenses; clothing, laundry and dry cleaning; gifts and donations; home office expenses; self-education; bank interest and account fees; and tools and equipment.

As an investment property owner, you can claim items such as land tax, rates, body corporate charges, insurance, repairs and maintenance, agent’s commission, gardening, pest control, costs associated with drawing up leases and advertising for new tenants.

If you have income protection insurance outside super, then tax time is a perfect opportunity to review your cover and maybe prepay your next 12 months of premiums. That way you can claim those premiums as a deduction in the current year and reduce your tax liability. Other types of life insurance are generally not tax deductible outside of super.

Check your super

Superannuation is another area for attention. If you have not reached your concessional contributions cap of $25,000 (which includes your employer’s contributions and salary sacrifice amounts) then consider putting the shortfall into your super. Any personal concessional contributions you make can be claimed as a tax deduction. But don’t wait until the 11th hour as your contribution may not be processed by the fund until after June 30. You will need to notify your fund of your intent to claim a deduction and there are applicable timing requirements for this notice.

Taking advantage of the government’s co-contribution can also be worthwhile for those who are eligible. If you earn less than $37,697 in 2018-19 and contribute $1,000 to your super as a personal contribution for which you don’t claim a tax deduction, the government will match it with a $500 co-contribution. That’s an effective 50 per cent return on your investment.i The co-contribution reduces progressively to nil once your income reaches $52,697. You must meet the eligibility criteria to qualify.

Changes for inactive super accounts

It is also worth noting that come July 1 your super fund will cancel your life insurance policy if no contributions or rollovers have been made to your account in the last 16 months. If you want to maintain insurance cover with such a fund, you need to contact your fund or make a contribution or rollover into that fund to keep your account active. Alternatively, you could speak to us about purchasing cover outside super.ii

How to spot a scam

Con artists make entertaining subjects for Hollywood scriptwriters (think The Wolf of Wall Street, Ocean’s Eleven and Catch Me If You Can), but there’s nothing enjoyable about being conned and fleeced in real life.

On the latest figures available, Australians lose over $10 million every month to scammers. There are plenty of rackets running at any one time involving pyramid schemes, identity theft, fake lottery wins and non-existent inheritances, but the unholy trinity of cons are:

1. Investment scams

2. Dating scams

3. Fake billing scams

Investment scams

The grift: According to the ACCC, investment scammers mainly target those in the 45-64 age group; people who are likely to have amassed some capital and wanting to set themselves up for retirement.

Investment scams usually involve traditional investment products, such as commodities, stocks and real estate. Nowadays, the investment often has something to do with cryptocurrency or binary options (i.e. betting on events, such as a company’s share price rising.)

The fraudster typically cold calls, texts or emails the victim. They pose as a knowledgeable insider (e.g. a stockbroker) who’s able to facilitate a low risk, high return investment. Often fraudsters will spend considerable time grooming victims and direct them to a professional-looking website or send them impressive-looking documents.

Red flags: Firstly, being called, texted or emailed out of the blue by someone offering an investment opportunity. Secondly, being assured the investment opportunity involves no or negligible risk while offering incredible returns. Visit the ASIC’s MoneySmart site to review the list of companies it’s identified as dodgy and we can provide advice on any investment opportunity you may be considering.

Dating scams

The grift: Almost all online daters are guilty of gilding the lily. But if an online match seems too good to be true and they start requesting financial assistance, you’re at high risk of losing your shirt (and not in a good way).

Romance scammers’ MO is as straightforward as it is heartless. They create a fake profile, ‘love bomb’ their marks and possibly encourage them to ‘sext’, so they have embarrassing images to use as blackmail.

Then they start asking for money, gifts or bank account details, claiming a family member needs a medical procedure, or they want to buy a plane ticket to meet in person, or they need to transfer money to another country.

Red flags: It’s rarely a good sign if there are puzzling inconsistencies (e.g. someone who claims to be an educated professional making basic spelling mistakes). Equally if the relationship escalates abruptly (e.g. professions of undying love after a few brief exchanges), or if your new paramour is cagey about revealing themselves or their personal details (e.g. they claim they are unable to Skype or won’t reveal their address).

Fake billing scams

The grift: Fake invoices are sent to a businessperson for things such as office supplies or a domain-name renewal. A common variant of this swindle is fake notifications from the ATO claiming a tax debt needs to be paid urgently to avoid dire legal consequences.

Red flags: Businesses do have expenses and individuals do need to pay taxes so it can be easy to be taken in by fake bills, especially if you don’t examine them carefully.

Two signs a charge is dubious are mistakes (e.g. the domain name you’re being asked to renew is misspelled on the bill) or odd conditions (e.g. the ATO saying it will accept gift cards or bitcoin as payment).

If you have any doubts, Google the business or government agency then ring its helpline to confirm your debt is real. (Don’t use any of the contact details supplied on the invoice.)

For information on the latest scams and who they are targeting, visit the government’s Scamwatch site. The ATO also regularly updates its scam alerts.

Swindlers seek to leverage powerful emotions – greed, love and fear – to encourage their victims to act impulsively. If you receive an approach or a request for money that doesn’t seem quite right, hang up or exit the website and do some background checks. If you’re unsure we can help you spot the scam and protect your financial future.

And remember… as the saying goes, if it seems too good to be true, it probably is.

i https://www.scamwatch.gov.au/about-scamwatch/scam-statistics?scamid=all&date=2019-03

Navigating love and money

Money makes the world go around. But when it comes to relationships, it can sometimes stop them in their tracks.

Navigating love and money can be tricky, but it’s simpler when you learn to communicate about finances in an open and transparent manner. Sometimes easier said than done, we know, but with a few simple tools you could end up reaching your mutual goals sooner and finding more fulfilment in your relationship.

Honesty – the best policy

We’re conditioned as children not to talk about money. It’s rude to ask someone’s salary, and unbecoming to whinge about finances. There’s often good reason for keeping mum around friends and acquaintances, but in intimate relationships, things are a little different. Being transparent about finances with your partner in general leads to better outcomes. Shaking habits we’ve learned as kids can be difficult, but getting used to communicating about money is well worth it in the long term.

So, with that said, let’s look at some ground rules:

1. Don’t keep financial secrets.

2. Consult on big purchases

3. Talk about how you were raised and what informs your attitudes towards money.

Chances are your relationship to money either mirrors your parents or is a rebellion against either their perceived thrift or carelessness.

Shared dreams/mutual enemies

Budgets, like new exercise regimes, work best when you have someone to hold you accountable. That said, when it all just becomes about numbers on a spreadsheet and saving every last penny, things can start to look a bit bleak.

Try instead to reframe the conversation. Chances are you and your partner are together because you share the same tastes and values. Logically then you might have similar dreams. Talk about your goals together and use them as your focus in money talks. It’s much more attractive than scrimping for scrimping’s sake.

Similarly, if you both have debt, you can make it a team effort to pay it down. There’s nothing so unifying as a mutual nemesis.

It’s never too early or too late

Money is an ever-present force in our lives and the sooner you have ‘the chat’ the better. Okay… so maybe not your first date. But in any relationship, there are a series of milestones which present an opportunity for the talk.

If it’s early days, the first joint holiday, moving in together, or opening a shared account are all good times to start the dialogue. Or, if you’re already well into your partnership, buying a house, saving for your children’s education and preparing for retirement might prompt a chat.

And it’s not a conversation you only have once and then forget. Endeavour to make time to touch base on a regular basis—once a month is a good starting point. This will allow you to check in regularly rather than only dealing with differences in approach at times of financial emergency.

Remember too that just because a particular savings method works for you doesn’t mean it will necessarily work for your partner. Empathise with what informs their approach towards money and use this knowledge to shape budget plans.

And don’t fret if you’re in a long-term relationship and you still haven’t quite got the money talk down pat. It’s a conversation that changes over a lifetime as your goals, expectations and circumstances change. However, if money is becoming a source of resentment in your relationship, remember it’s never too late to open up the dialogue.

At the end of the day, we will all experience conflict over money at some point in our life, but by making financial communication a regular and comfortable thing, you’ll likely deescalate these situations before they blow out of control.

Media curation in the digital age

Let’s be honest, the number of folks who still read their favourite broadsheet over a morning coffee and croissant is dwindling. Most of us these days engage with our financial news on some sort of touchscreen device, with the content often suggested to us by applications and online news feeds.

That’s right. The tech revolution has caused a watershed shift in the in the way media is delivered and how we consume it. Rather than editorial teams setting the day’s agenda, it is algorithms. And people have mixed feelings about it.

Those who advocate for algorithmic curation say it avoids human prejudice in what gets screen time. The result however has often been that click bait and sensationalist headlines are preferenced over detailed financial analysis.

Now no one is arguing against some sort of filtration in the content we receive. There is simply too much news for any online platform to show us everything that is posted. But there are some questions regarding how this is managed, and how we as consumers can ensure we’re still reading a variety of opinions.

Tale as old as time?

Even in the golden age of print media, newspapers always had either progressive or conservative biases. We took this as a given. By the same token we also expected editorial oversight to ensure some level of impartiality in the topics discussed.

Social media on the other hand doesn’t have this oversight. The algorithms that choose what we see, reflect the views of our tribe.

Now it is news to no one that most of us surround ourselves with people who share our values, online and offline. Problems arise however when these people become our sole source of information thereby creating a bubble, meaning we are not exposed to opinions that differ from our own.

These bubbles can evolve into echo chambers which reject alternative opinions. When this happens, respectful dialogue can turn nasty. We’ve all witnessed comment threads turned sour.

Change on the horizon

The tech giants have been responsive to these issues recently. In 2018 Facebook made landmark shifts in the shape of its algorithm to promote ‘meaningful’ connections over branded content and to reduce the impact of sensationalist, clickbait articles.i

Similarly, Apple News, recognising that algorithms sometimes lack subtlety in their curation, put a team of journalists in charge of curating their feed.ii

A foundation of trust

The question at the centre of this changing media landscape is who we trust. Algorithms? Experts? Our friends and family? The pack mentality we sometimes see on social media has led to many analysts commenting on an erosion of trust in both public institutions and subject matter experts.

But on a practical level we still put our trust in experts every day. We go to a doctor for our ailments, and a mechanic to fix our car. Much like a newsfeed simply couldn’t fit all of the news on one wall, we simply can’t know everything. As a result, we rely on others as sources of truth, or experts in their fields, all the time.

Where to from here

It’s up to you to find an approach towards consuming media that works for you. That might mean subscribing to a variety of publications you trust and doing further research to find out the whole story.

It also means having a sounding board you have faith in. The state of media is noisier than ever and the finance sector is not immune. The volume of opinions we’re exposed to can be daunting for even the savviest of investors.

That’s why we’re here to help. It always makes sense to have an expert in your corner to cut through the clickbait and make sense of financial news as it relates to your individual circumstances, while also thinking big picture and taking into account the natural ebb and flow of markets.

i https://chiefexecutive.net/zuckerberg-leading-facebook-back-roots/

ii https://www.nytimes.com/2018/10/25/technology/apple-news-humans-algorithms.html

Is food delivery eating into your budget?

The Australian food delivery industry is booming, with the ABS reporting an 18% increase in take-away spending over just three years, and delivery apps such as Uber Eats and Deliveroo turning over sales of around $2.6 billion annually.i

App culture has played a big part in this. Ordering food is simpler than ever before, and the quality and variety of what’s on offer continues to rise. It’s not just pizzas and fried rice anymore; these days you can practically order any cuisine imaginable if you live in a major city. But, while having these options at our fingertips is both exciting and convenient, it comes at a cost.

The cost of ordering in

We all know that ordering in costs more than cooking from scratch but the numbers may still surprise you. Once you’ve added delivery fees, on average it is five times more expensive to order food from a restaurant than it is to cook at home.ii And if you’re amongst the many Australians who are now doing it multiple times a week, those costs really start to add up.

It's easy to understand the appeal. We’ve all been in that position where after a long day of work the last thing you feel like doing is cooking. Or worse, having to leave the house again to do a last-minute supermarket run.

Our busy lives often mean we choose convenience over what’s best for our wallet. And like any budgeting measure, reducing how much you order in is going to take some planning. While this may sound challenging, the benefits are worth it.

Thinking ahead

We all have different reasons for ordering in, but one way to reduce its impact on your budget is to try to see it as a special treat rather than part of your daily routine. Getting into some good habits now regarding food planning could save you a bucket in the long run.

Here are some tips to get you started.

• Prepare a plan so that all your decisions regarding food for the week are made in advance—Sunday is ideal!—and not night by night.

• Master some simple recipes you love.

• Start shopping seasonally and at markets for some great bargains.

• Make cooking a shared task. It’s more fun with family or friends.

• Cook in bulk, and refrigerate or freeze your leftovers.

Track your spending

The first step to any budget is creating a clear picture of your current expenses. It might then be worth taking the time to review how much food is costing you and your family on a weekly basis. This includes all the times you’ve ordered in, all the cafés you’ve dropped into for a coffee and a cake, even the servos you’ve picked up some snacks from on the way home. There are many apps available to help make this task easy. As you get better at planning and cooking at home, continue to review your food spending, updating as necessary to reach your savings goals.

Waste and our waist-lines

There are also ethical considerations when it comes to ordering in. The environmental impact of all that packaging cannot be denied – a single burger is often wrapped, bagged and then rebagged, just to keep the heat in before being driven to your door.

Some also fear that the expansion of food delivery might be contributing to the obesity epidemic. Certainly, this cult of ordering in is but another symptom of our sedentary lives. And it’s not always simple to find out what ingredients have been used in the food you order. Shopping and cooking for yourself is healthier on two fronts: you control the quality of the produce and get a little exercise as a bonus.

We all need treats from time to time. And we are blessed in our booming multicultural cities to have such an array of culinary excellence just a click away. But watch those clicks as the growing trend towards ordering in is increasingly eating into our budgets.

i https://www.finder.com.au/australians-spend-1590-each-year-on-delivered-food

ii https://www.forbes.com/sites/priceonomics/2018/07/10/heres-how-much-money-do-you-save-by-cooking-at-home/#565669b335e5

Benefits of a super long engagement

Superannuation is a long-term financial relationship. It begins with our first job, grows during our working life and hopefully supports us through our old age.

Throughout your super journey you will experience the ups and downs of bull and bear markets so it’s important to keep your eye on the long term.

The earlier you get to know your super and nurture it with additional contributions along the way, the more secure your later years will be.

Like all relationships, the more effort you put into understanding what makes super tick, the more you will get out of it.

Check your account

The first step is to check how much money you have in super and whether you have accounts you’ve forgotten about.

You can search for lost super and consolidate all your money into one fund if you have multiple accounts by registering with the ATO’s online services. Having a single fund will avoid paying multiple sets of fees and insurance premiums.

The next step is to check what return you are earning on your money, how it is invested and how much you are paying in fees.

The difference between the best and worst performing funds could fund several overseas trips when you retire, so it’s worth checking how your fund’s returns and fees compare with others. You can switch funds if you are not happy, but it’s never wise to do so based on one year’s disappointing return.

State your preferences

Default options are designed for the average member, but you are not necessarily average. Younger people can generally afford to take a little more risk than people who are close to retirement because they have time to recover from market downturns. So think about your tolerance for risk, taking into account your age, and see what investment options your super fund offers.

As you grow in confidence and have more money to invest you may want the control and flexibility that come with running your own self-managed super fund.

Also check whether you have insurance in your super. A recent report by the Australian Securities and Investments Commission (ASIC) found that almost one quarter of fund members don’t know they have insurance cover, potentially missing out on payouts they are entitled to.ii

Insurances may include Total and Permanent Disability (TPD) and Income Protection which you can access if you are unable to work due to illness or injury, and Death cover which goes to your beneficiaries if you die.

Building your nest egg

Once you understand how super works you can take your relationship to the next level by adding more of your own money. Small amounts added now can make a big difference when you retire.

You can build your super in several ways:

• Pre-tax contributions of up to $25,000 a year (including SG amounts), either from a salary sacrifice arrangement with your employer or as a personal tax-deductible contribution. This is likely to be of benefit if your marginal tax rate is higher than the super tax rate of 15 per cent.

• After-tax contributions from your takehome pay. If you are a low-income earner the government may match 50c in every dollar you add to super up to a maximum of $500 a year.

• If you are 65 and considering downsizing your home, you may be able to contribute up to $300,000 of the proceeds into your super.

You could also share the love by adding to your partner’s super. This is a good way to reduce the long-term financial impact of one partner taking time out of the workforce to care for children. You can split up to 85 per cent of your pre-tax contributions with your partner. Or you can make an after-tax contribution and, if your partner earns less than $40,000, you may be eligible for a tax offset on the first $3,000 you put in their super.

Before you make additional contributions, adjust your insurance, or alter your investment strategy, it’s important to assess your overall financial situation, objectives and needs. Better still, make an appointment to discuss how you can build a positive long-term relationship with your super.

i https://download.asic.gov.au/media/4861682/rep591- published-7-september-2018.pdf

Fostering financially savvy young adults

From student debt to new technology and landing that first job, today’s young Australians are transitioning into adulthood in a world very different from the one their parents entered. While economies and societies might change, the principles of managing one’s personal finances stay the same.

Most parents try to instil good money habits in their children from an early age. Eventually they outgrow piggy banks and pocket money but the opportunities to help them navigate the world of personal finance don’t end with childhood.

Here are five lessons parents might consider passing on to their offspring as they make the transition to independent, financially savvy adults.

Lesson 1: Becoming independent requires work

Even if you can afford to fully support your young adult children while they are still students, encouraging them to take on a part-time job can teach them valuable financial and life lessons. Not only will the income allow them to save for goals such as gap-year travels, but they will also learn how to make a job application and the soft skills required in the workplace.

If they are eligible for employer-paid superannuation, you could show them how to check their account, consolidate accounts if they have had more than one job, and discuss the magic of compound interest.

Lesson 2: There are no free lunches

Today’s young adults have near-instant access to credit through high-tech offerings such as payday lender apps and buy now-pay later services such as Afterpay.

The self-discipline required to manage these new forms of instant credit is a big ask, especially when many of us still have problems with old-fashioned credit. A recent ASIC report found that Australians collectively had 14 million credit cards with an outstanding balance of $45 billion. Around half a million Australians were in arrears and almost a million were dealing with persistent debt.i

If you can’t convince your children to avoid the temptation posed by ‘frictionless’ credit, at least explain that easy money commonly involves high interest rates and charges. If your child is determined to take out a personal loan, help them review terms and conditions and encourage them to shop around.

Lesson 3: Good, tolerable and bad debt

Once your child is old enough to be targeted by credit providers, it’s time to have the conversation about different types of debt. Talk them through how good debt is used to purchase appreciating assets such as real estate. Acceptable debt covers things such as taking out a car loan, so you have the means to get to work or study and don’t need to rely on parents to chauffer you around. Bad debt is using other people’s money to splurge on travel, clothes or the latest gadget.

Lesson 4: Investing doesn’t need to be time-consuming and boring

The same technology that has made it so easy to get into debt has also made it easier to start the investing habit.

In recent years, micro-investing platforms such as Raiz and Spaceship have made it simple and attractive for techsavvy Millennials to start investing in equities. These platforms make delaying consumption near painless by, for instance, rounding up purchases to the nearest dollar then directing the ‘spare change’ into investments.

If your progeny is working and receiving super, you might also want to suggest they download their super fund’s app, so they can monitor their financial progress on the go.

Lesson 5: Setting goals to make dreams come true

When your young adult starts working after years of student thrift, the temptation to spend is understandable. While it’s important to have fun, you can point out that setting goals and sticking to a budget in the short to medium term means they can put themselves in a position to travel the world, buy a property and maybe even retire early.

Money isn’t everything but teaching your young adults how to manage it well increases the odds that they will lead the life they dream of. Even better, you won’t need to erode your retirement savings bailing them out of financial trouble.

i https://asic.gov.au/about-asic/news-centre/find-a-media-release/2018- releases/18-201mr-asic-s-review-of-credit-cards-reveals-more-than-onein- six-consumers-struggling-with-credit-card-debt/

Is your money personality set in stone?

Our upbringings hugely influence the attitudes we have towards money. Did you observe your parents working hard to put food on the table? Was money a cause of conflict in your household? Was it spent freely, or were budgets obeyed? 

The money attitudes you were exposed to as a child aren’t necessary the ones you’ve taken on though. Some people exhibit money habits very different to the ones they grew up seeing, perhaps in a reaction to those circumstances or as a reflection of their personality. Take a look at a family of siblings and you might notice very different money personalities. 

Here are four of the most common money personalities:

Avoider

As the name suggests, an avoider doesn’t want much to do with money. They don’t want to spend time thinking about it, which is why bills go unpaid and little attention is spent on investing and saving. There are many reasons why someone could be a money avoider, but two common ones are either feeling overwhelmed or confused around financial matters, or believing that money represents greed so it’s bad to focus on it.

Hoarder

This money personality type excels with saving but struggles to spend. This can lead to Scrooge-like tendencies, as the hoarder finds it difficult to part with their money. They’re anxious that money could be taken away from them and they must have substantial savings at all times. The hoarder doesn’t have fun with their money – the greatest enjoyment they get is knowing it’s untouched. 

Spender

The opposite to the hoarder, the spender enjoys buying things for themselves and loved ones, making them very generous but sometimes irresponsible if they spend more than they earn. They risk falling into debt and struggle to save enough money for substantial purchases such as a house deposit. Delayed gratification is foreign to the spender, who’d rather buy on impulse. 

Status seeker

Unlike the other money personality types, whose habits might go unnoticed at first, there’s no mistaking the status seeker. They’re the ones with the newest gadgets, flashiest cars, most fashionable clothes. The status seeker uses money to exalt their image. They have high standards and are deeply invested in how others see them. Like the spender, the status seeker risks going into debt if they can’t afford their lifestyle. 

Perhaps you identify strongly with one of these types, or can see yourself in several. None are inherently bad, but they all represent unbalanced attitudes to money. 

While many of these beliefs can be quite entrenched, it is possible to change your thinking and foster a more positive money mindset. 

Here are some tips to bring these beliefs into equilibrium:

Understand the emotions that drive your decisions

The money hoarder tends to be driven by anxiety, while for the status seeker it’s insecurity. Identify your emotions – this observation will make you more aware of how you view and use money. 

Create and maintain good money habits

A budget provides a clear picture of where money is going. They’re useful for everyone to have, but are especially helpful for the spender and avoider.

Stop comparing yourself to others

The status seeker is the worst offender, but many of us also buy things to impress others. Focus on what you want and don’t worry about keeping up with the Joneses. 

Communicate with your partner about money matters

It’s possible you and your partner are different money personality types. Ensure you’re on the same page about shared spending, saving and long term goals. 

Practice gratitude

Appreciating what you already have will cut down on any unnecessary spending and anxiety around your finances. 

Get assistance

Whatever your attitude to money, it’s always worthwhile having someone in your corner to assist you to make the most of your financial situation. We are here to help.

Tackling Financial Stress

You’ve probably heard of social stress – fear of fitting in, feeling anxious about meeting new people. Or you might have experienced stage fright – the stress of public speaking, performing, or presenting in front of people. But there’s another form of stress on the rise that’s potentially affecting Australians much more regularly and seriously than getting butterflies before giving a speech. It’s a different type of stress to… well… stress about. 

According to some researchers, close to one in three Australians suffers from significant financial stress. The consequences can be a lot worse than momentary embarrassment from tripping over your words. Alarmingly, nearly 35% of people experiencing financial stress have used drugs or alcohol to manage their negative feelings about money.i Chronic stress – something that’s experienced over a long time – can lead to physical symptoms, including sleep problems. 

What is financial stress?

The definition of stress is ‘mental/emotional strain/tension resulting from adverse or demanding circumstances’. Financial stress is when those circumstances have to do with money. As with other sources of stress, money problems can make people prone to withdrawing or lashing out at their loved ones. This in turn, detrimentally impacts family dynamics. 

One regular report series by an Aussie bank discusses a few types of financial stress that affect most of the population. The main one is housing payment stress, which is expected to worsen in the future. Then there’s bill stress; sadly, about 16% of households can’t always pay their power bill on time.ii Some families always have to work to make ends meet; they’re experiencing low level but constant financial stress, which can also be damaging. 

How to reduce financial stress

It’s all too tempting to say that the solution to financial stress is ‘more money’. In fact, many studies on financial stress talk about how participants pin the blame for their stress on other people. On partners not telling them about joint account activity, or kids needing things they can’t say no to. And therein lies an important clue on tackling financial stress. 

Sometimes (not always), arguments over financial matters – a cause of financial stress – are themselves caused by miscommunication. That said, talking about money is never particularly easy. Even when it’s with a partner or loved one. That’s why it can help to create parameters for these conversations. One common ‘rule’ that low-financial-stress couples have is that they agree to discuss purchases from the joint account over a certain amount. Some also like to set ‘free spending’ limits for each family member (taking the form of pocket money for kids) so everyone feels like they’ve got a bit of both accountability and freedom. This is basically a function of household budgeting. 

Some other simple ways you can reduce your financial stress levels as a household include: 

• Revise your budget regularly. Every time your income or expenses change, it’s time to review your discretionary spending.
• Thinking about large amounts of money and longer time spans can be overwhelming. If budgeting is stressful, try breaking it down to a daily or weekly calculation.
• Sometimes, anxiety can be caused by thinking about the same things over and over. Get it out of your head and write down the financial problems you’re worried about.
• Can’t keep up with which bills are due when? If you’re not already on direct debit (but could be), consider making the switch.
• See how long you can go without buying anything non-essential. Introduce a bit of friendly competition with your partner or older children.
• Approach each financial ‘problem’ as something that can, in fact, be solved. That’s the first step towards making an actionable plan.
• If you have several different debts, make a plan to not take on one more debt unless you’ve paid off at least two. We can also assist you to decide whether debt management or consolidation is appropriate for your circumstances.

If you or a loved one are experiencing financial stress, let us help. Make an appointment today to discuss how you can tackle the source of your hassles head on. 

i https://financialmindfulness.com.au/personal-financial-stress-devastating-australian-lives/ 

ii https://www.mebank.com.au/getmedia/ce8faccb-4301-4cf7-afd7-871f9c45305e/13th-ME-Household-Financial-Comfort-Report_Feb-2018-FINAL.pdf

Investing: An emotional business

Common sense may say that the time to invest is when markets are down, but the reality is that most investors wait until markets are running hot before they get on board.

Then, terrified of losing money, when the market starts to fall, they sell.

The psychology of an investor plays a significant role in what drives financial markets and explains in part why the prices of many assets, including property and shares, go through booms and busts.

Two common characteristics of human behaviour that tend to play havoc with many investors’ decision making and investment markets are fear and greed.

Fear may prevent you from buying something when it appears to be out of favour because of the possibility of losing money. Greed may encourage you to aggressively chase returns into investment opportunities beyond your normal comfort level.

There is another type of investor who may be less worried about the risk of losing money in the short term. They are more focussed on the possibility of long terms gains based on their view of the company and broader economic conditions. This person may invest regardless of what the market is doing.

The same investor might prudently rebalance their portfolio back to a desired asset allocation using an objective rationale. For example, they might want to maintain a balance of 60 per cent shares and 40 per cent fixed interest so will buy and sell investments to ensure that mix is maintained over time.

Rather than make decisions rationally based on available information, most investors left to their own accord are much more likely to let their emotions drive at least part of the process.

It is because of emotion that most investors sell when markets are close to their bottom and buy when markets are nearing their peak.
 

Loyalty doesn’t always pay

Feeling loyal towards an underperforming company just because you have held the shares for a long time is no reason to keep holding them. Nor is buying shares in a company just because you are envious of others having them.

There are numerous investor behaviours that may be hard to identify and control. It may be dwelling on what has happened in the past as an indication of what may happen in the future or getting carried away and making over-zealous decisions when markets are running hot.

Reactions such as these can be common, particularly when markets are going through periods of boom and bust, such as we saw in the lead up to and during the Global Financial Crisis.

It is important to understand that investment markets are driven by more than just fundamentals and that investor psychology plays a significant role.

Just by understanding that emotion rather than logic can play a significant role in the decision making process can go a long way in helping you make rational decisions and, hopefully, avoid bad ones.
 

Common biases

There are several common biases that have been identified by psychologists as influencing investor behaviour; once recognised these biases may be resolved:

Herding : Safety may well come in numbers, except when the numbers are only growing because others are there. The reality is that large numbers of people can be wrong and when they are, the damage can be a lot worse. By following the crowd, or herding, individuals are more likely to buy when markets are near their top and sell at the bottom.

Familiarity : Investing in a company or an area you are familiar with is understandable, but there may be consequences if part of your aim is to have a diversified portfolio. For example, buying shares in companies in only your own country, while ignoring opportunities in other countries, fails to recognise the benefits of diversifying against geographical risk.

Anchoring : Nobody likes to think they have made a bad investment decision, but it doesn’t always pay to get set on something like a share price or old information. A company whose shares suddenly drop from $20 to $10 isn’t necessarily going to get back to $20 just because it was there once.

Loss Aversion : If there is a good way to destroy investment returns, it is to hang onto loss making investments in the belief they will come good and to sell winners quickly just for the instant gain. We do this because we feel more pain from a loss than we feel happiness from a gain.

The highly successful US investor Warren Buffet turned the phrase “be fearful when others are greedy and greedy when others are fearful” knowing that investors don’t always act rationally and when money is involved, emotions can run high.