There are a number of good reasons why sorting out personal finances this holiday season is particularly timely, says Jonathan Philpot, wealth management partner at HLB Mann Judd Sydney.
“Most people will have a bit more time during January to reflect on their financial situation and check whether their current budget, plans and arrangements are still the most appropriate for them.
“Everyone expects the 2016 Federal Budget will contain changes that will affect personal tax or tweak superannuation.
“One benefit of reviewing, and possibly changing, personal finance arrangements now is that what is in place at the time of the budget is likely to be grandfathered.
“Although superannuation changes are mooted as being on the cards, these changes are usually grandfathered, so that existing arrangements are less impacted.”
1. Prevent internet fraud
Mr Philpot said regardless of anything else, the first thing everyone should do in January is to prevent identity theft by changing all passwords to bank accounts and other financial institutions.
“The incidence of on-line fraud is rising dramatically and everyone should be on guard and protect their assets by simple steps such as password control and change, and not opening emails with suspicious attachments.”
2. Check super arrangements
Changes to the superannuation system are made regularly and this is likely to continue in 2016.
Mr Philpot says that he is encouraging clients to check out super arrangements during January.
“Investors should take the time to look at how much they are contributing to super and check both that it is within the $25,000 or $35,000 concessional contribution limit, and if so, whether they can contribute more.
Making additional contributions to super now can have a big impact in the long run and should be considered wherever possible. Investors should be careful, however, that when making additional contributions they don’t go over the contribution caps, Mr Philpot said.
“Now is also a good opportunity to see whether other super strategies, such as co-contribution if taxable income is below $35,453, might be worthwhile.”
3. Alternative retirement strategies
Making the maximum superannuation contribution allowed may not be enough for a comfortable retirement. Those who can afford to contribute more should consider alternative retirement savings strategies such as the use of Family Trusts. The advantage of the Family Trust is the flexibility with income distributions to lower earning family members and the ability to access your money before retirement.
4. Update investments
“With interest rates at historic lows and unlikely to change for a while, investors should consider moving away from the comfort of term deposits and rebalance back into other asset classes which have a higher potential for growth,” Mr Philpot said.
“It is a particularly good time to rebalance investment portfolios to consolidate any gains and also to maintain diversification,” he said.
“Investors who have bought into residential property should also look at their total investment position and see how they can rebalance.
“Property investors in for the long haul can feel confident of residential property values but over the short term the ongoing rise in property prices is not sustainable and residential property prices may fall.”
5. Check insurance
Most people in superannuation funds will automatically have a life insurance policy through their funds. However, Mr Philpot suggests looking more broadly at all types of insurance.
“Very few people have really appropriate insurance and the majority of us are either over-insured, under-insured or have no insurance at all.
“Household income is one of the main assets a family has, and certainly one of the most important, so a family should consider what would happen if the breadwinner has a long sickness or accident.
“Income protection insurance and trauma and personal disability insurance should also be considered, particularly for anyone with young children.”
6. Pay down the mortgage
Mortgage debt on a home is non-deductible for tax purposes, so Mr Philpot suggests paying down the mortgage should be a priority.
“It makes sense to pay the mortgage down as soon as possible so attention can then be turned to other areas such as building investment wealth and retirement savings.
“Investors should take a holistic approach. With low interest rates a good strategy is to put pay increases into the mortgage so that you are paying above the minimum repayments, which also acts as good protection for when interest rates inevitably rise.”
7. Estate plan
Having an estate plan, not just a Will, should be something all investors should consider in 2016, says Mr Philpot.
“Every working Australian has an estate, be it property, shares or a bank account. Interestingly, superannuation is not included in your estate and must have its own death benefit nomination with the superannuation fund.
“Existing Wills and estate plans should be reviewed to take into account any changed circumstances in family circumstances, such as births, deaths, marriage or divorce.
“An estate plan, unlike a Will, takes into account all financial and personal matters in the event of death. This is essential for anyone with young children who may need to have a guardian appointed and an income provided to them.
“Also consider appointing a power of attorney and enduring guardianship to look after any legal, financial or medical needs in the event of incapacity,” he says.
8. Check super nomination
As mentioned above, Mr Philpot advises clients that every year they should check whether the person nominated as the beneficiary of their superannuation is still the right person.
“They should also check whether the nomination is still valid as, with some funds, it automatically expires after three years.
“Members should also keep in mind that divorce does not automatically cancel a nomination,” Mr Philpot says.
9. Make a budget
If you are struggling to repay the credit card each month this is usually a sign that you are not in control of your personal cashflow. A budget shows exactly where money goes and where savings are possible, says Mr Philpot.
“People who don’t have a budget are often surprised when they learn how much money they fritter away each month.
“A monthly budget is usually best, but make sure to include quarterly or annual expenditure items, such as car insurance or council rates.”
10. Seek professional help
With increasingly complex superannuation and ever-changing tax rules and regulation, Mr Philpot believes everyone needs some form of financial advice.
“Financial advice doesn’t necessarily mean investment advice but, more importantly, it should be advice on the full financial situation. This includes tax considerations, retirement planning and superannuation as well as estate planning and family assistance or insurance,” he says.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.
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Phone: 02 9020 4196