Net Worth Update: Sep 2008

What can I say? Arghhhh! or perhaps, D'Oh! (wish I managed to roll over my index put options last December!)

My net worth as at 30 September decreased by another -$55,428 (-5.77%) during the month to $904,990 (AUD), due to the large losses in my geared equity investments (especially the 5% drop on the last day of the month!) and a drop in the valuations of our real estate investments and retirement account. The estimated valuation of my share of our real estate assets decreased by -$17,359 (-2.05%). The balance of my half of the mortgage increased by -$1,455 to -$366,839 as we continue to redraw some of our advance payments to cover the interest payments while DW is working part-time (until DS2 starts school in a couple of years). The recent cut in official interest rate by the RBA hasn't flowed on to a reduction in existing variable home loan interest rates. There is widespread speculation that the RBA may cut rates by another 0.5% at their next monthly meeting [since I wrote this post on 1 Oct the RBA has cut rates by 1%], but this probably won't be passed on in full by the banks due to the spike in overnight interbank cash rates due to the ongoing "credit crunch". Fortunately we have around half of our property loans at a fixed rate for the next 3-4 years, so we've avoided the full impact of increased home loan rates. But a cut in the interest rate on the variable component of our home loans would make life easier.

I've avoided any margin calls on my leveraged stock accounts so far during this bear market, but my margin utilisation is now over 90%. Continued market declines would force me to sell off some stocks and park the proceeds in a cash management account. Although I have a small amount of cash available at call, I can't reduce my margin loan balances at this time as I have fixed and prepaid the interest for this financial year.

The balance of my retirement account also decreased substantially this month, by -$8,293 (-2.81%) to $286,507, as it's now invested about 98% in the Vanguard Lifestages "High Growth" fund which is allocated mostly to domestic and international equities. I've now finished re contributing (via salary sacrifice) the $34,000 of undeducted, non-preserved contributions that I had withdrawn last year, so my ongoing salary sacrifice will start to boost my retirement account balance from now on.

The employer contributions of my salary sacrifice amounts for Feb, May and June were only processed in the last week of June, and therefore didn't appear as a deposit in our SMSF bank account until the start of the new financial year (July). I finally managed to get advice on this timing issue from the tax office (they had mislaid the private ruling application I had lodged on 30 June), and the news wasn't good. The delay in the processing of my employer's (tax-deducted) contributions means that my total "concessional" contribution for the 2007-8 financial year was well below the $50,000 cap, and the remainder will be counted this financial year (based on the date the deposits appeared in our SMSF bank account). As I've already made arrangements for close to the maximum $50K in concessional contributions to be made this financial year (SGL and salary sacrifice), I could easily exceed the "cap" if my employer processed all the contributions in a timely manner this year - resulting in an extra tax liability of 30% on the "excess" contributions! As I'm only saving around 15% in marginal tax rate via salary sacrifice this is very bad - not only am I tying up the sacrificed salary in my superannuation account for 15 years (until retirement), I could end up paying MORE tax! The possible "solutions" to this timing issue are all rather unpleasant:
1. Hope for the best, and if my employer contributions are processed on time this financial year I could end up owing a 30% tax penalty on around $8,000 of "excess" contributions = potential cost of $2,400.
2. Reduce my salary sacrifice for the remainder of 2008-9 so that the total "concessional" contributions can't exceed the $50,000 cap. This would increase my taxable income by around $8,000 and also impact family tax benefit calculations = potential cost of approx. $1,200+
3. Ask the payroll department to make sure the last 3 months worth of salary sacrifice aren't processed until the last week of June 2009, so they don't hit our SMSF bank account until next financial year. This will avoid any tax penalties, but will only defer the problem for another 12 months. I would have to continue finessing the timing of employer contributions indefinitely (until the concessional contribution cap is increased, or I decide to reduce my salary sacrifice in future). There is also the risk that despite making arrangements regarding the timing of employer contributions, they might be deposited before the end of the financial year.

At the moment I'm going with option #3, and will probably then reduce my salary sacrifice arrangements for the following financial year - changes to the way family tax benefit treats sacrificed salary (ie. will include it in "assessable" income calculations, even though it isn't part of "taxable" income) will lessen the cost of doing so in 2009-10. (Assuming the tax rules don't change before then!).

Subscribe to Enough Wealth. Copyright 2006-2008

Cut! Cut! Cut!

I think everybody (except those on the board of the Reserve Bank) were surprised when the RBA announced a massive 1.0% cut in the official interest rate. Nearly everyone in the media had been predicting that the RBA would follow up last month's 0.25% cut with another cut, but they were expecting the RBA would perhaps double their usual adjustment by making a 0.5% cut. The decision to cut by a massive 1.0% suggests a couple of things:
1. That the RBA, having only stopped INCREASING rates with last month's cut, was scrambling to "get ahead of the curve" now that the world economy looked like going pear-shaped in a hurry
2. That with the recent plunge in oil and commodity prices they are no longer worried about the inflation rate staying above the target 2%-3% band for long. There had always been a few that the RBA shouldn't have been too concerned about the part of the inflation surge that was purely extrinsic (caused by commodity and oil price spikes) as it was a one-off (like the introduction of the GST). Now it looks as if at least part of that inflation component will be unwound as commodity prices drop back to sustainable levels.
3. That they have started to worry about just how robust the Australian economy can be when the EU and USA are falling into recession. The view that the Australian economy would continue to grow due to the expansion of the Chinese economy assumes that the Chinese economy will continue to grow strongly even if the EU and USA are in a prolonged recession, due to domestic demand. However, domestic Chinese demand will surely slow as exports drop off and inventory starts to accumulate.

The big banks appear to be passing on around 0.75% of the interest cut, which will benefit our cash flow. We have around half of our property loans at a fixed rate for a few more years, but the half that is at variable rate will benefit from the rate cut. 0.75% interest rate cut will trim our interest payments by around $230 each month.

Subscribe to Enough Wealth. Copyright 2006-2008

Online businesses need more time than money

My annual domain name registration for a couple of my online business ideas fell due yesterday - FreeHeraldry.org and PickingBabyNames.com

I think both of them are worth keeping, so I stumped up the $13 or so renewal fee for each (Dotster is not the cheapest registration option around, but I can't be bothered trying to transfer them to another service). I've been getting a few hits on freeheraldry.org even though there is no content there as yet, so I think it has potential for generating some AdSense revenue if I load up the site with useful content. But the fact that I still haven't got around to doing anything with the site twelve months after I first registered the domain shows that it won't be easy to convert a good idea into a money spinner. At least I did take a lot of great digital photos of heraldy in various churches and castles while I was on holiday, so I now have some original content to upload! Now I just need to find the time to work on articles and artwork for the site...

Subscribe to Enough Wealth. Copyright 2006-2008

Dive! Dive! Dive!

It's a public holiday here in NSW, so I'm sitting at home getting my SMSF tax documentation organised and trying to ignore the jungle that replaced our garden while we were on holiday overseas. It's not a national holiday, so the stock market was still trading today, managing to post the lowest close for almost three years. The Aussie dollar has also plunged to a two year low (against the greenback!), and most commentators expect the Reserve Bank to cut the official interest rate tomorrow - possibly by 0.5% rather than the normal 0.25% move. With inflation still running well above the RBA's target of 2%-3% "on average", the RBA normally wouldn't be looking at cutting rates yet, but, despite the latest figures showing the economy is still growing and unemployment remains close to 20-year lows, the global financial situation gives the impression of Wiley Coyote running off a cliff. His legs are still running and his eyes are on the Road Runner, but the ground has dropped out from beneath his feet. The Aussie dollar had been strong on the back of the commodity boom, but commodity prices have started to come off the boil in the past couple of months. The Australian economy would be relatively unscathed by a recession in the US and the Eurozone, but, it would suffer from a slow-down in the Chinese economy. And since a US and Euro recession would impact the Chinese economy, the Australian economy will be affected by recent events in the US and Europe - it's just a question of lag.

Overall, the global financial crisis feels a bit like one of those submarine movies where something has gone disastrously wrong and the sub is plunging rapidly towards the abyss. All the ballast has been blown, and yet the submarine is still going down, maybe just a little bit slower. We're all sitting on the edge of our seats, wondering if things will level out before the financial system implodes.

Subscribe to Enough Wealth. Copyright 2006-2008