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Keeping it simple

Linda Drake
Med J Aust
Published online: 4 February 2013

Finding time to look after your investments can be difficult but with some easy steps it’s possible to streamline your financial affairs so your money works hard, and you don’t have to

De-cluttering and simplifying can be immensely satisfying. It’s no different with your investments and financial arrangements. Doctors are time poor, and many investments are complex, or require a great deal of ongoing monitoring or administrative involvement, which takes away time from your professional and private interests.

So, while most mainstream investment options are offering fairly lacklustre returns in this uncertain environment, it can be a good time to take stock, simplify and concentrate on those that are relatively straightforward. The goal is to ultimately free up time.

How many of us hate paperwork? There are very few people who relish sitting down to reconcile their bank statements and tax returns — most cheerfully hand them over to an accountant. A good accountant is a huge asset and it’s easy to see the value for money — and it helps that their fees are tax deductible. Ask among colleagues for recommendations, as many accountants specialise in handling doctors’ affairs.

Likewise, those who use a trusted and professional financial adviser are not only grateful for their expertise in dealing with increasingly complex tax and reporting requirements, but it also frees up time while reducing worry.

“Getting your investment mix right and keeping it right for your situation is an ongoing process requiring regular attention. By all means get involved in it yourself, but there are times, I’d suggest, particularly as you enter retirement and need to consider your super options, that getting assistance from a good financial adviser is a good move”, says Paul Clitheroe, chairman of the Australian Government Financial Literacy Board and qualified financial planner.

However, most people don’t rely solely on professionals and manage their own affairs to some degree. It’s important to take an interest. As the years go on, and your financial affairs become increasingly complex and needs evolve, it’s important to do regular reviews.

There are bound to be those shares that looked like a good idea at some point but now languish. The extra bank accounts and credit cards, often with fees attached, that are unused. The odd bits of super in accounts from student years when you worked part-time. It’s important not to overlook insurance too. These can be good places to start simplifying.

Consolidate bank accounts

Banks know most people won’t change their day-to-day bank for either personal or business banking, even if there is a better arrangement available. But often a credit card or home loan with another bank will lead to another bank account, and then monthly fees kick in, eroding any small positive balances. Cheque accounts, while useful for some, are becoming increasingly redundant, and often attract the highest fees. Do you still need one?

Many accounts pay next to no interest, so your money loses value over time, even before the fees kick in, which can further erode small balances if forgotten.

Mortgage v investments

Paying off a mortgage as fast as possible can be a great investment in your long-term financial future. If you have additional money to invest, but still have a mortgage, it can be hard to beat the return on early repayment as the money saved in interest is comparable or even better than the best-performing investment. This can be done by making extra payments on an ad-hoc basis, or an offset account, where excess funds can be parked. While there, it’s like an extra repayment on your mortgage. For example, if you have $20,000 in an offset account, and $200,000 outstanding on a mortgage, your interest will be calculated on just $180,000.

It’s the equivalent of receiving a risk-free return that is more than twice the interest rate on a mortgage. For example, if you pay 5% interest on your mortgage, you need to earn about 11% from investment income to do better than simply making extra payments — if you’re in the 46.5% tax bracket, as many doctors working full-time in clinical practice are likely to be.

The other benefit is the sheer transparency of the investment. You know exactly what your return is. There is no complex paperwork. The lender does all the administration. There are very few situations where this does not make sense. However, financial advisers or banks won’t always fall over themselves to tell you this because they don’t make money out of it. Your saving is their loss.

Adviser bias

If you want to keep investments simple, uncomplicated and stress free, it’s extremely important to never invest in something you don’t fully understand. There are many complex financial products and investment offerings out there. Some claim to reduce your tax, some promise returns that are potentially huge.

What they always have in common is someone else makes money if you invest. That includes a commission or fees for advisers, and often additional performance fees for the manager behind the investment, or perhaps time-based fees for your accountant. Disclosure rules are being changed but unless you are comfortable with the fee structure, and it is clearly explained, then sometimes more straightforward investments can be a smarter move in this fairly static environment.

Property

Doctors often find property is a very attractive investment. You can see exactly what you have invested in. The tax deductions are good. The administration is not unduly onerous. Property, like all asset classes, goes in and out of fashion. When share markets are roaring ahead, it starts to look like the ugly duckling. But it’s also less volatile, and over time the returns are normally solid, provided you have chosen well. For doctors looking at ways to get ahead, it’s often a great first investment once your mortgage is well under control with good tax deductions available for depreciation, the cost of repairs, management fees and, of course, interest on the investment loan through negative gearing. It’s also quite possible to handle the management yourself if you wish.

For those seeking an extra edge, a property syndicate can sometimes work. Generally considered more suitable for high-earning specialists, perhaps with an interest in building their own facilities to a particular purpose, this can also work well provided suitable structures are in place for the investment vehicle. Accountants and lawyers are essential to ensure tax and funding considerations are dealt with correctly. Exit strategies are also crucial if someone wishes to pull out so they are aware of the implications in advance, particularly if it’s before the agreed time frame of the investment.

Self-managed super

If you want a simple life, then this is probably not for you. While doctors have many skills, specialist tax and money management skills are generally not among them. Unless you have a lot of time, a strong ongoing interest in the complexities of the tax system, and a taste for dealing with never ending legislative change, other forms of super will almost certainly be more suitable unless you are also willing to pay an accountant and adviser for their assistance. Those fees also mount up, so unless your balance is high, it’s very hard to get ahead with investment returns at the moment. Not for the faint-hearted or time poor.

Like bank accounts, it’s not uncommon to have several super funds. Most funds make it easy to transfer balances if you move between the public and private health systems during a career. Just keep an eye on fees; and think about ditching any account with a low balance.

Direct shares

It wasn’t so long ago that every second person had set themselves up as a day trader, buying and selling as markets surged onwards and upwards. But times have changed and now most direct share investment is undertaken with a long-term time frame. Online brokers remain popular for those who wish to do it themselves, and there are many sources of credible information, but it’s still time consuming to monitor. For bigger amounts, a full-service stockbroker can still be attractive because the administrative burden of trading is reduced considerably.

Shares offering reasonably high yields have been popular while interest rates have been low, but that has forced prices up and there is concern over value. Mining shares have had the wobbles while the world works out what is happening in China and industrialised countries throughout the world. It’s a time of great uncertainty. There is no doubt shares will perform well again but of course no one knows when. In the meantime, getting rid of those that have little prospect of turning around can be a useful step, and any capital losses can be taken into account when doing your tax return. Buying good-quality shares with good long-term prospects still makes sense if you are there for the long haul and take a slow and steady approach.

Save

It’s a bit of double-edged sword to say saving makes sense when financial markets are flat, as the interest you earn is so low, and then you are taxed for good measure on that interest earned. But it also means you are well prepared to make the most of opportunities when circumstances change. Building a nest egg is rarely a bad idea. And you can always use it to go skiing while the exchange rate stays strong.

Like medicine, the financial world is ever changing. Deep understanding isn’t necessary to make good decisions, but it helps if some fundamental concepts are well understood. These include the power of compounding interest, the nature of inflation, how the Reserve Bank functions and the impact it has on the economy. Keep an eye on financial publications, newspapers and online market information to stay in touch with the big picture.

Investor beware

There will always be opportunists out there wanting to take advantage of you. Clever schemes, promises of great returns, special offers to people who qualify for their selected criteria …

If you’re considering an investment in an agricultural scheme, or anything that uses complex financial derivatives to underpin performance, get a second opinion from someone independent to the product provider. Do not listen if you are pressured to commit immediately. If it sounds too good to be true, it probably is. Sound investments needn’t be complex.

The Australian Securities and Investments Commission has a wealth of information available on scams, along with excellent educational material on all forms of investment available through its Moneysmart website (www.moneysmart.gov.au). Doctors are certainly not immune from these problems, and are actually among those most commonly duped or misled about the nature of their ”investments”.

It is such a serious issue that the government has devoted considerable resources to boosting financial literacy to assist all people to make
better decisions.

  • Linda Drake


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