Net Worth Update: September 2009

Another very positive month, with my net worth increasing 4.72% during September, pushed higher by the continued rally in the Australian and global share markets (although the rally seems to have lost momentum towards the end of the month). By 30 September my net worth had increased to $788,688 (up $35,552). Since the bottoming out in early March at $554,783 (the lowest since August 2003) my net worth has increased by $233,905 (42%) in just six months! Unfortunately that is only 1/3 of the way back to my peak net worth achieved in 2007.

My retirement account (SMSF) gained $12,820 (+4.15%) to $321,452. The gain was entirely due to the stock market rise, with our small geared stock investment (7 ASX200 index CFDs, code: IQ) boosting the return. The were no employer superannuation contributions banked during September - I expect the quarterly employer contribution to be deposited sometime during October (around $6,000). I'll then transfer the $8,000 cash currently sitting in the SMSF bank account into our Vanguard "High Growth" index fund investment.

The estimated valuations for my half of our real estate assets (house and investment property) were up only slightly $2,545 (+0.33%) to $783,934 in September, but the latest monthly sales data suggests a larger rise (around $10,000) will be recorded for end of October figures. The Sydney real estate market appears to be in an up-trend at the moment, but that may be affected by the reduction in the First Home Owners grant from this month, and likely rises in official interest rates towards the end of this year. On the other hand, record immigration levels mean that demand continues to exceed supply of new housing, which might lead to another housing bubble/boom. October will see my share of our total mortgage debt increase by about $1,000 due to having to make a redraw to meet our loan interest payments while the rental property remained vacant. Fortunately our agent found new tenants that moved in last Friday. They are 'community housing' tenants, which means they are on the waiting list for Public Housing and only pay 25% of their income to Garrigal Community Housing as 'rent'. We get paid the full 'market' rent amount directly by Garrigal Housing, with the difference being funded by the state government (ie. NSW Housing Department). Hopefully this will mean we get paid the rent in full and on time - I've previously had bad experiences with tenants not paying rent on time despite getting a large rent subsidy from Centrelink. I believe the lease will be for one year with an option to renew for a second year. If we're lucky Garrigal Housing may continue to renew the lease annually and just move new tenants in as needed. The rent amount ($495 per week) is less than we had originally expected, but is OK provided we don't get too many requests for petty repair and maintenance issues (eg. wanting an electrician to replace a light bulb or a plumber to fix a dripping faucet), and if the lease gets renewed for several years.

My stock portfolio gained $21,139 to $47,136 net equity during September (due to the high gearing levels), despite my large holding in IPE continuing to underperform the overall market. That may change if the market consolidates it's gains, company profits recover, and more companies have successful IPOs. Unfortunately my share portfolio value won't return to it's previous 2007 high even if the stock market fully recovers, due to my having had to sell off some of my portfolio to reduce my level of gearing and avoid getting margin calls last March. I don't want to increase my debt by re-gearing as the market recovers, as my previous 'conservative' gearing proved to be too agressive when the market experienced a worse bear market than 'normal'. And there's always the chance that the recent sharp recovery was a "bear trap" or "dead cat bounce".

My current plan is to slowly reduce my margin loan debt over the coming decades, and instead invest any extra savings within my SMSF. Now that SMSF are allowed to invest in Contracts for Difference (CFDs) I can still apply some gearing when investing within the tax-advantaged SMSF environment. Currently investing within the SMSF also has a lower tax rate on capital gains, and the potential to pay 0% capital gains tax if the investments are not sold until my SMSF has shifted into pension mode after I reach retirement age. However, the tax rules applying to superannuation may well change (again) as a result of the Henry Tax Review.

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Coin counting machine at CommBank

When DS1 and I went into a local branch of the Commonwealth Bank last week we noticed a shiny new coin counting machine had been installed. You pour you collection of coins into a tray, press a button and Hey! Presto! the coins are swept into the guts of the machine and a docket is printed out showing how much your coins were worth (you have to assume the machine never makes mistakes!). If you're a CommBank customer and use the docket to deposit the funds into your CommBank account there's no charge. But if you're not a CommBank customer you'll be hit with a massive 10% "service fee". We also found out that you have to use the docket to deposit the money that day (I suppose there's some sort of checking done when the docket is processed to verify the amount matches what the machine has taken - the docket would probably be easy to forge).

As the branch is open on Saturday afternoon when DS1 does his busking, I'll put a note with his account details into his busking bag so he can have his earnings counted and deposited into his account as soon as he finished busking. Currently we have to lug his bag of coins home, manually sort and bag them, and later make a trip to the bank to have the bagged coins deposited.

It will be interesting to see how the coin counting machine reacts if there are some foreign coins mixed in with the Australian coins - DS1 often gets some NZ, Chinese or Malaysian coins thrown into his busking collection box.

We'll probably just use the CommBank coin counting machine for counting and depositing the 'silver' (<$1) coins, and still take the 'gold' ($1 and $2) coins to put in his money boxes. DS1 usually gives a dollar or two of his earnings to his younger brother, and deposits the bulk of his income into his St George account so it can be transferred easily into the higher interest "online" savings account.

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Children's Superannuation: Retirement Savings Account (RSA) Comparison - AMP vs CommBank

I opened two retirement savings accounts for DS1 several years ago, one when he was born, and the the second when he started earning money doing a paper round.

The first retirement account was a 'Child Super' account that allowed parents or grandparents to contribute up to $1,000 each year into a superannuation account for their child. These accounts were never very popular as there was no tax deduction for the amounts contributed, so the only real benefit of a 'Child Super' account is to avoid the incredibly high tax rates (around 60%) applied to children's unearned income (eg. interest on bank savings accounts where the money came from gifts or pocket money) once it exceeded a threshold (of around $2,000 pa after applying the low income tax rebate). Earning within a 'Child Super' account are taxed at the usual concessional superannuation tax rate of 15%. I opened the 'Child Super' account with Macquarie, and at least it offers a good choice of investment options (eg. Australian and Overseas share funds). Once DS1 reaches 18 years of age this account will transition to a normal "personal" superannuation account (I may add him as a member of our SMSF when he turns 18. Under 18 it's harder for children to be members of SMSFs as they can't be a Trustee).

Once DS1 started having 'earned income' (from his paper round - deposited into a separate savings account to keep it separate from his pocket money and any money gifts) I opened a second "personal" superannuation account for him, so he could benefit from the 1.5:1 government co-contribution on personal, undeducted superannuation contributions (ie. when he deposited $1000 into super each year he received a $1,500 "co-contribution" from the ATO). Finding a suitable superannuation account was a bit difficult - Child Super' accounts aren't eligible for the co-contribution (as they don't accept contributions from the child themselves), and most "personal" superannuation accounts required the applicant to be over 18 years of age. At the time, the only account I could find for DS1 that didn't require applicants to be over 18 years old was the AMP Retirement Savings Account (RSA) (at the time they didn't require DOB information on the application form, although they later did apply an incorrect "default" DOB and I had to send in a copy of his birth certificate to get the data fixed). This worked well, with DS1 received the co-contribution "match" for FY04/05 and FY05/06 (that year the budget even gave a second "bonus" co-contribution of $1,500). DS1 didn't receive the co-contribution for FY 06/07 (once he had stopped his paper round), as the Superannuation co-contribution rules at that time required having income from an employer to be eligible (ie. the rules excluded the self-employed). The rules were change the following year so that any income earner (including self-employed) under the age of 75 who makes an undeducted superannuation contribution is now entitled to receive the co-contribution (although it's been reduced to $1,000 this financial year). DS1 received the $1500 co-contribution in DEc 08 for the FY07/08 tax return he lodged in July 08, and I expect he'll receive the $1,000 co-contribution for FY08/09 later this year...


However, since I opened his AMP RSA account interest rates have dropped considerably, and the rates on offer from the AMP are now very low:

AMP RSA:
Balance________________ Int Rate
<$1,000________________ 0.00%
$1,000 - $2,500________ 0.15%
$2,500 - $10,000_______ 1.15%
$10,000 - $50,000______ 1.40%
>$50,000_______________ 1.60%

The 0% rate is obviously set to allow for the Superannuation rules that prohibit charging any fees on Superannuation account balances below $1,000, and all the rates are net of MER (estimated at 1.9%).

I recently received a PDS (Product Disclosure Statement) for a new RSA on offer from Commonwealth Bank. It looks pretty good for anyone looking to setup a superannuation for a child or teen wanting to save something towards their retirement (and possibly get help from the government co-contribution, although the next Labor government budget may change that). There is a flat annual admin fee of $25, but only when the account balance is over $1,000. And the interest rates on offer are much better than the AMP rates, especially for balances under $2,500:

Commbank RSA:
Balance________________ Int Rate
<$1,000________________ 1.90%
$1,000 - $5,000________ 2.00%
$5,000 - $10,000_______ 2.15%
$10,000 - $50,000______ 2.30%
>$50,000_______________ 2.60%

On DS1's current RSA balance of around $12,000 he would earn an extra $83pa in interest with the Commbank RSA.

The Commbank RSA also offers a second investment option within the RSA account - fixed rate term deposits for amounts over $5,000:

Commbank RSA term deposits (min $5,000):
Term___________________ Int Rate
1 year_________________ 2.40%
2 years________________ 3.40%
3 years________________ 4.50%
4 years________________ 4.95%
5 years________________ 5.20%

Although variable interest rates are likely to start rising in 2010, and may go up considerably if inflation takes hold post-GFC, the term deposit rates look attractive for a government-guaranteed investment sitting in a low-tax (15%) environment.

As the minimum amount to open a CommBank RSA is just $1, I'm going to open an account for DS1 in preparation for rolling over his AMP RSA account as soon as this year's co-contribution has been processed.

This graph highlights the difference in net interest rate on offer from AMP and CommBank:

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Cub Scouting and Vacation Costs

DS1 enjoyed his second and third Cub Scout's meetings as a "new chum" and was keen to join up and start working towards some of the achievement badges during the upcoming school vacation. So I decided to go ahead and buy the required cub scout uniform (peaked cap, buttoned shirt and belt) from our local Snowgum store (the Scout product distributor in NSW). The clothing cost $64.85 from Snowgum, which is the same price as listed by the Scout shop. In addition, for new customers buying Scouts equipment Snowgum waives the usual $11 fee to join their loyalty scheme - so each May we will be sent a refund voucher worth 10% of the amount spent at Snowgum stores. I'm sure the refund will come in handy to buy some badges or camping gear. The Snowgum store didn't have any of the "official" Scout uniform trousers in the right size for DS1, so instead of paying $39.95 for a pair of tan-coloured cargo pants with zip-off legs we visited Target and bought a suitable pair of tan-coloured shorts for just $10. The "official" Scout uniform shirt and belt is made in China (the cap label doesn't mention where that came from), and the cheaper Target shorts come from Bangladesh. The label says to wash to shorts before wear, which I assume is to remove dyes and chemical residues (and possibly pins etc). As DS1 has eczema we will definitely wash the clothing twice before use. After the 10% discount the total cost of the basic Cub Scouts uniform came to $68.37. If the uniform doesn't get worn out too quickly, DS1 will use it until he moves on to Scouts in 18 months time, and we'll then keep it until DS2 is old enough the start Cubs three years later.

I handed in the membership application paperwork at the second meeting, along with the "[I'm not a] prohibited person" declaration that is required from any parent that wants to help out at Cub meetings. As a pro-rata fee amount due is calculated from the number of quarters remaining before the 31 March "year end", I listed 1 October as the joining date and post-dated the cheque.

For the school vacation period I have booked DS1 into a 4-day sailing course (cost $320) the first week of the holidays, and a 2-day art class the following week ($120). Hopefully DS1 enjoys the classes enough to make them worthwhile. We have a small catamaran sail-boat stored at my parent's lake-side farm, so sailing would be an affordable activity for DS1 if he enjoys it.

DS1 may also spend some time in the vacation learning JAVA programming - he worked his way through a couple of kid's programming tutorials last year using QBasic, so I bought a colourful introductory book on programming in Java that will help introduce him to object-oriented programming concepts and revise his previous work on variables, arrays, loops, i/o and so forth. Last week I registered him with the online training site http://orac.amt.edu.au/aioc/) used by students preparing for the Australian Informatics Olympiad programme. The site is really meant for high-school students (years 7-12) that are participating in the Australian Informatics Competition (AIC) or the Australian Informatics Olympiad (AIO), but the online exercises will provide many programing exercises for me to work through with him. When he submits his solution code to the site it will be automatically run using a suite a test data files and given an overall score based on program output correctness and run time. Cool. DS1 is only in year 4, so he can't enter the informatics competitions yet, which is a pity since he got a high distinction in the ICAS computer skills test this year (top 2%) and is interesting in programming and robotics. But if starts programming now for fun, he may do well in the competitions when he is in Year 7.

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