Smart Money Weekly; Rate hikes, save $700/m on mortgage payments, super mistakes & crypto boom

Hey team,

Happy Sunday.?

The US Federal Reserve has raised interest rates by 25 basis points this week. This is the highest the states’ interest rate has been since the Global Financial Crisis back in 2008. The ninth consecutive rise from the Federal Reserve Bank was expected by roughly three quarters of economists but given the current situation facing the American banking system, some had hoped there would be no rise at all.?

Most crypto currencies suffered a bloodbath in 2022 that was only compounded by the collapse of FTX - the second largest crypto exchange in the world. However, With the banking sector in turmoil these past few weeks, we are witnessing the rebirth of crypto. Bitcoin (BTC) is currently up over 70% year to date and Etheriurm (ETH) is up over 50% year to date. Crypto definitely is an asset that keeps you guessing at times.?

Smart Money upside #110

Here we unpack the numbers from a recent client we helped, what they were doing with their money when they came to see us, what they chose to do as a result of going through the financial planning process, and the financial impact and upside we helped them achieve. To chat about how to get these sorts of results, you can book an intro chat with us here.

Numbers/Background

Couple, early and late 50’s; household income ~ $350k; total assets ~ $2.3m; saving ~ $20k annually.

Frustrations

Savings are building up in the bank with no strategy, lack of knowledge and no clear pathway forward.??

What they wanted from us / the advice process

Understand how to retire early, set the kids up for the future and ensure that their superannuation is on track?

What success looks like for them

Not having to work so hard, cut back work, own a new home on the beach, have multiple sources of income, retire comfortably, ensure that the kids are being looked after and be able? to take holidays when they want to.???

What money strategy they were following before we went through the planning process

Minimal additional super contributions and building surplus cash in the bank.?

What money strategy they chose to pursue from our planning work

Multiple additional super contributions, building a new share portfolio to accelerate future home purchase and a clear strategy for what to do with future cash surplus.?

Key benefits of going through the process

Clear advice and plan around future property purchase, an easy to follow banking structure that makes it easy to track and save, building a portfolio that will generate passive income in the future and switching to a new low cost superfund with access to a range of quality passive investment options.?

Value of advice after all advice fees year one: $25k

Year 20 upside after advice fees: $6m

If this story resonates you can book an intro call with us here.

Video of the week

Your superannuation fund is one of your biggest investments, but if you don't know how to set up your super the right way it's easy to make mistakes that can cost you. This week we discuss the biggest mistakes people make with their super. Check out the full video here.?

Client story of the week

If your savings and investments aren’t set up the right way, you’re probably not maximising your money and could be leaving thousands on the table. This week we discuss a client story regarding a couple in their early 30’s who wanted to grow their wealth. Check out the full video here.??

Podcast drop

Learn the tips, hacks, and strategies to help you level up your money game. Pods released last week:

??#303 Replace Your Salary by Investing - Tax

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#302 Money News: Tax Breaks & Property Market

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Upcoming events:

Free online money education to help you invest smarter and create a life not limited by money:

• How to create generational wealth - March 30, 2023, 12pm
• Financing 101 - April 5, 2023, 12pm
• How to save more money faster - April 19, 2023, 12pm
• How to adult with money - May 3, 2023, 12pm?
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• Get tax smart - June 21, 2023, 12pm

Blog of the week: How to prepare for rising interest rates

Off the back of ten consecutive interest rate rises that have seen mortgage repayments increase at the fastest pace in decades, many Aussie home owners are feeling the pinch and wondering how to keep up with their rising mortgage payments.?

Based on the average NSW loan size of $769,701, monthly mortgage repayments have increased by $1,465 in less than a year.?

That’s a big number to come to terms with, and coming along with the spike in cost of living and the fact our real (after inflation) wages are going backwards, the struggle to make ends meet is real.?

I unpack the tactics you can use to deal with a massive increase in your mortgage repayments.?

Move out of your home & rent

This is an option that doesn’t automatically come to mind for many property owners, but moving out of your home and converting it to a rental, then renting another property to live in often makes a big difference to how much your property costs you.?

For most homeowners this isn’t an ideal option, but running your property as an investment for most people will be cheaper than running it as your own home. I unpack the numbers around running a property as your own home vs as an investment property in the table below

You can see from the figures above, that you’re better off by over $700 per month by renting a property of exactly the same value as your own home. This uplift comes from the fact that when your property is an investment as opposed to your own home, mortgage interest costs and ongoing fees like rates and insurance become tax deductible.?

With this strategy, you then have flexibility around how much you want to spend to rent another property to live in. If things are really tight, you could find something really cheap, and in doing this boost your savings capacity in the short term until interest rates come back down to earth.?

Sell your property

Calling out the fact I don’t think this is a good option, but it is an option. If you sell your property, your mortgage payments will disappear and the wild ride will be over. From there you can regroup and confirm your best next steps, but do this without the pressure of dealing with mortgage repayments.?

There are two major downsides of this option, being the cost of selling your property and the ultimately repurchasing another property, and secondly the fact you’ll be out of the property market once you sell.?

Selling a property comes with costs of real estate agents, advertising and legals - these costs typically come in at around 2.5% of the value of your property. Based on the average property price in Australia of $848,706, the average sale costs will be $21,218, which is a serious chunk of change.?

Then, when you ultimately get back into the property market in the future, you’ll need to again pay stamp duty and other costs, generally equating to around 5% of the value of your property. That means the total cost to you will come in at around 7.5% of the value of your property.?

Further, if you sell your property it’s fairly safe to assume you’ll be out of the property market for a while. If property values rise over this time, it will mean you have to pay more for the same property in the future, or you can pay the same and get less property.?

This option comes with significant costs and downsides, and for that reason in my opinion should only be taken as a last resort.?

Change to an interest only mortgage

When you take out a mortgage you have a choice of whether to structure it as a regular ‘principal and interest’ (P&I) loan, or ‘interest only’.?

With a P&I loan, each month part of your mortgage payment covers your interest costs, and part reduces the ‘principal’ amount of money you owe. With an interest only loan, as the name suggests you only pay interest costs, meaning the amount you owe doesn’t reduce over time.?

Having an interest only mortgage generally isn’t a great long term strategy, because you’re never actually reducing your debt. But the advantage of interest only mortgages is that the monthly payments are significantly lower because you’re not having to make the extra principal repayments.?

It’s important you’re careful if you go down this path, but given we’re at a point in time where interest rates are close to multi-decade highs, having your loan set up on interest only for the next year/s can give you some breathing room.

Cut your spending

This is the simplest of the options - but it’s probably also the most uncomfortable. Finding ways to cut back on your spending in other areas will give you the money to afford your higher mortgage payments.?

There are a heap of resources online about frugality hacks you can use to cut your spending, which can in turn give you extra money to fund your higher mortgage repayments.?

Keep in mind that the current high interest rates are temporary, and will come back down - it’s just a matter of time - so your discomfort here should be short lived. I’m generally not a big fan of this tactic, but in the current environment it can help you get through until things get back to a more normal position.?

The wrap

It’s tough out there for property owners today, but there are things you can do to make things easier. As much as it seems like things will never change, they will - so you just need a solution to get you through the short term.?

Understand your options and consider their impact, both on the short and long term. There is no one right answer for everyone, but there is one right answer for you.?

To your success,?

Ben

PS: Pivot Wealth exists to help people invest smarter to create a life not limited by money. If you want help to make your next steps easier, you can book a 10 minute, no BS chat with us here.?

Disclaimer:

I know you’re smarter than someone that would need me to write the words that come next, but our compliance peeps are real hard-asses so here we go... This information is not personal advice, poetry, or a map of where Jimmy Hoffa is buried. It may only be regarded as general advice, and definitely shouldn’t be considered something worthy of inclusion for Donna Hay’s next cookbook or the Archibald prize. This is actually just an email communication that has been sent to a bunch of people and doesn’t even have your name on it. Your personal objectives, needs or financial situation have not been considered when preparing this email, but I want you to know that I have spent a lot of time thinking about the Venn diagram intersection of poetry, landscaping, and essential oils - if you’re fascinated by this same phenomenon please reply so we can compare notes. You should consider the appropriateness of any general advice we have given you, having regard to your own objectives, financial situation and needs, and if necessary, seek advice before acting on it. You should also consider other people when getting on and off public transport, smiling more, eating healthy, and listening to your mum when she tells you that you’ve been working too hard. Where the information relates to a financial product, you should obtain and consider the relevant product disclosure statement before making any decision to purchase that financial product. Where the information relates to a hilarious joke I’ve made, you should consider belly laughing deeply. Worth noting also that past performance is not a reliable indicator of future performance when it comes to investments, and definitely not when it comes to the Wallabies. Financial services guide.