It can be challenging DIY’ing your own Financial Planning with endless amounts of often contradicting information online. Here, I have collated some of the more common and disastrous mistakes people make, so you can avoid them!
1. Buying the wrong investment property
Any Melbourne based adviser would have heard a client recount “I purchased an off the plan apartment in Docklands 10 years ago, and it hasn’t grown in value since”. Buying direct property is risky because you are only buying one individual asset (as opposed to managed funds and ETFs which come with diversification), and therefore if you make the wrong decision, it could be disastrous.
2. Setting up a SMSF (when you don’t need one)
This section could be another whole blog, however some of the common traps include:
People starting an SMSF and then leaving the funds sitting in low returning cash.
Starting an SMSF with a low balance, meaning the accounting and auditing costs disproportionally diminish the investment returns.
Purchasing a property via an SMSF with debt and being crippled by the high interest rates on SMSF lending (~8% or ~9% p.a.).
Not comparing against the opportunity cost of keeping their funds in their existing or another retail or industry fund.
3. Business Owner Mistakes
It is common for well-intentioned but inexperienced business owners to make several mistakes including:
Not creating a clear business plan before going into a business (noting that 50% of businesses fail in the first year).
Not setting aside regular money for tax and GST and then having to come up with big lump sums to pay the ATO.
Not paying yourself superannuation. This is disastrous as you lose out on both the regular tax benefits and compounding returns of superannuation.
4. Not having life insurances
If you could insure your biggest asset, what would it be? Most people would answer their house and rightly have home and contents insurance. However, your biggest asset is actually your ability to make your salary until retirement, and therefore the most important insurance is income protection insurance!
It’s common for advisers to hear people mention “ I have insurances in my super” however when you analyse the actual insurance you realise in most cases the amounts of cover they have wouldn’t even scratch the surface with regards to how much insurance you or your family actually need!
5. No cashflow strategy
Many clients we see initially have no cashflow strategy. They may put all their expenses on the credit card or use one joint bank account (rather than separating accounts for different expenses which make them easier to manage and track). Often, clients have no idea what they are spending each month or what their saving target is. This type of ambivalence is really dangerous as it can create tension in relationships and mean that goals are often not met. It is imperative that you create a regular cashflow surplus to pay off more than your minimum monthly repayments or begin investing. For each dollar you save, you are not only benefiting from that dollar but also either the potential extra interest saved (if you pay off debt) or the additional compounding returns (if you invest).
6. Loyalty to your home loan provider
It is ironic and surprising that banks often offer the best home loan rates to new customers and penalise those that have been loyal and stayed with them by giving them a higher interest rate. Therefore, it is imperative that you (or your mortgage broker) review and compare your interest rate at least every 12 months against other providers. If you don’t your interest rate will drift and after several years, you could easily be paying 1% over the competitive rates which could be thousands a year extra depending on your loan size!
7. Having too many assets in your personal name in retirement
Ok, I know this sounds like a good problem to have, but it’s not from a tax perspective.
Remember, each member of a couple can have $1.9m in a tax-free pension account when they convert their superannuation. Therefore, it makes sense to try and maximise those amounts first, and then if you still have extra assets, perhaps you have assets in your own name.
By contrast, occasionally we see clients who may have a distrust of superannuation or do not understand it, and instead they have multiple assets in their own name (often investment properties).
If you have $1.9m in a pension account generating a 6% income yield, you net $114,000 p.a. tax free.
By contrast, if you have $1.9m invested personally generating a 6% income yield, you only net $84,203 p.a. as you are paying $29,797 p.a. in income tax. You could be paying this extra $30k in tax for maybe another 30 years of your life – which is close to $1 million extra in tax due to not structuring things correctly!
If you have made any of these mistakes or need help avoiding these mistakes in the future, reach out today for an obligation free appointment time!
The purpose of this content is to provide general information only and is not personal financial advice. We strongly recommend that you consult a financial adviser prior to making any financial or investment decision.
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