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RESEARCH REPORT AYB250 – Personal Financial Planning

CHELSEY LANDFORD – n9987932 SEMESTER 1, 2021 WORD COUNT: 1,647

1.0 Introduction The following report critically analyses the financial position of Janice Hogarth, identifying potential areas for improvement and providing a monthly budget designed to achieve her personal savings goal. Additionally, it evaluates the advantages and disadvantages of two investment opportunities in property or managed funds, recommending the most appropriate avenue considering Janice’s lifestyle, goals and risk appetite.

2.0 Budgeting and Cash Flows Janice Hogarth has set a personal financial goal of saving $50,000 over a period of 12 months. Her existing savings of $12,000 means she requires an additional $38,000 to achieve this. Assuming the income and expenses identified in her personal cash flow statement remain consistent and she does not spend the $31 surplus, she will be able deposit $1,031 per month into her savings account, or $12,372 over 12 months. The result is that by February 2022, with her initial deposit of $12,000 and monthly interest compounding at 0.50% per annum, Janice will have accumulated total savings of $24,461, falling short of her goal by $25,539 (Appendix 1). In order to accumulate the additional funds required to meet her target, several adjustments to Janice’s monthly cash flows are advised. Increasing her salary is likely unrealistic in the short term, however Janice can reduce the amount she is required to deposit each month by switching to a higher interest bank account. AMP’s Saver Account offers a variable interest rate of 1.25% per annum, compounding monthly, provided at least $250 is deposited per month (AMP Bank Limited, 2019). This will allow her to accumulate $50,000 within the desired 12 month time frame by depositing $3,136.07 per month, as opposed to the $3,154.42 required under her current 0.50% compound interest savings account (ING, 2021). To increase her current monthly savings to this level, it is recommended that Janice focuses on reducing the items highlighted in Figure 2.1, due to their discretionary nature and availability of more competitively-priced alternatives. At $400 per week, Janice’s rent currently accounts for 25% of her total monthly expenditure. Assuming she will not be forced to pay a break-lease fee or incur substantial moving costs, there is scope to reduce this dramatically by moving into a four bedroom shared accommodation. At an average weekly cost of $176.17 (Flatmates.com.au, 2015), this will result in monthly savings of $895.32. This will allow furthermore allow her to share the cost of utilities four ways, saving an estimated $80. By switching to a cheaper gym membership at Jetts Australia, Janice will be able to save $44 per month (or $530 per year), whilst benefiting from the flexibility of 24-hour club access (Gym Price List, 2021). Furthermore, by switching to health insurance provider AHM, which offers hospital and basic extras cover for $19.80 on their Starter Flexi Basic plan, she can save $140.60 per month. As a young working professional, particularly considering her role in social media, it is understandable – and perhaps necessary – that clothing accounts for a major portion of Janice’s discretionary spending. There are, however, avenues through which she can reduce such spending without sacrificing this

luxury. A monthly membership to an online designer clothing rental store such as GlamCorner will allow her unlimited access to a wardrobe suited to her lifestyle (GlamCorner, 2021), whilst saving $250 per month. Entertainment expenses can also be significantly reduced by seeking savvier alternatives, such as by substituting the cinema for a video streaming service, borrowing books from the library rather than purchasing them new, or hosting dinner parties at home rather than going out. It is further recommended that, for this year only, Janice does not holiday to regional Queensland, instead encouraging her friends and family to visit her in Brisbane. Whilst a sacrifice in the short term, this will allow her to contribute an extra $150 per month towards her goal. Finally, by relying on public transport for the majority of her travel, Janice can drastically lower her spending on petrol and parking. Assuming she lives within the Greater Brisbane region, a single public transport fare should not exceed $4. Should she commute to and from work five days per week, her monthly travel cost will total approximately $160. Whilst a small allowance for petrol and parking ($40 per week) has been provided for weekend trips, she will still be able to save $320 on driving-related expenses. Overall, by implementing such changes and following the revised budget detailed in Figure 2.1, Janice has the potential to more than triple her current monthly savings to $3,162.12, without drastically modifying her lifestyle. In 12 months’ time, she will have deposited $37,944 and, with her $12,000 initial account balance, have compounded interest income totalling $147.22. The result is total savings worth $50,091.22, approximately $90 above her goal.

3.0 Other Recommendations In addition to following a revised monthly budget, Janice’s long-term financial standing may be improved by adopting the following recommendations. Janice currently holds $73,000 in superannuation contributions, split across three funds. It is recommended that she consolidates this into one fund and, should she change employment, elect to use this rather than opening a new employer-nominated fund. In doing so, Janice will ultimately save money by paying only one set of administration and insurance fees and will be able to track and manage her superannuation balance and investment portfolio with greater ease. It is in Janice’s best interest to select a fund that offers low fees coupled with high average returns over the long term. Given her highrisk tolerance, this can be achieved by selecting a high risk, high growth investment portfolio over more conservative, balanced options. In addition, it is recommended that Janice takes full advantage of the interest-free period remaining on her store credit card by paying off the outstanding $1,200 balance within six months. To do so, she will need to double her current repayments to $200 per month. It should be noted that the recommended monthly budget has not been adjusted to reflect this six-month increase, as repayments have been averaged over a 12 month period and therefore will not change from their current $100 value.

4.0 Investment Research Recommendation Investors seeking to accumulate wealth have long debated the merits of property versus shares. Both offer unique advantages and disadvantages and are largely dependent on variables such as the investor’s financial position, goals and risk profile. As a result of the COVID-19 pandemic, interest rates have currently hit record lows, and are likely to remain there for several years, offering Janice increased borrowing capacity, a favourable environment for entry into the property market (Iara, 2021) and an opportunity to successfully leverage returns. Brisbane’s strong population growth and economic performance has driven consistently attractive returns on investment, with houses averaging 8.21% capital growth per annum and apartments 6.58% per annum (Aquila, 2021). By comparison, the long-term return on a diversified Australian share portfolio averages 8.7%, including dividends of 4% (Australian Investors Association, 2021). Entry into the property market is further aided by government incentive programmes such as the $15,000 First Home Owner Grant. Tax savings exist in the form of the main residence CGT exemption and, should Janice elect to use the property exclusively for investment purposes in the future, deductions for interest charged on her mortgage, rental expenses and depreciation on the building (Chamoun, 2021). Whilst potential savings are not as extensive, managed funds also afford some tax benefits, such as the ability to claim franking credits on dividends and deductions for investment losses (Moneysmart, 2021). Purchasing her own home affords Janice greater financial security and stability, as the property market has traditionally been characterised by low levels of volatility. This is of particular value considering the extreme economic downturn and market uncertainty surrounding the COVID-19 pandemic. The

Australian Securities Exchange (ASX), by comparison, has experienced ongoing erratic trading behaviour, swinging from record lows and billion dollar losses throughout 2020 to sharp rebounds and high investor optimism (Chau, 2021). A managed fund may allow Janice to partially mitigate this high volatility by utilising an expert investment manager with access to superior information, research and investment strategies. A managed fund may also provide greater opportunity for risk reduction by allowing diversification across asset classes, sectors and geographies that may otherwise be difficult to access (ASX, 2021). Despite such benefits, both options have notable disadvantages. Australian housing prices are rising at their fastest rate since October 1988, with growth of 2.4% in Brisbane during March 2021 (Chalmers, 2021). Furthermore, buyer demand currently outweighs supply, with 1.1 homes sold for every new listing added. As a result, Janice may struggle to find a suitable property and could be forced to pay an overly inflated purchase price. She must also consider the impact of fees on her earning potential. Property incurs ongoing annual costs such as Body Corporate levies, rates and insurance, amounting to approximately 1 per cent per annum (Nash, 2021). Managed funds, on the other hand, typically charge an upfront entry fee, a performance fee should the fund manager achieve returns better than the market, and a commission element of approximately 0.5% per annum. Additionally, all funds charge an investment management expense of up to 2%. Broadly speaking, the more actively managed the fund and more complex the investment strategy, the higher the fee. The impact of these fees on earnings has the potential to offset any major benefits: paying a fund manager 2%, for example, amounts to an almost 25% drag on actual returns. Considering the guaranteed return on a no-risk investment such as a term deposit is approximately 6%, investment in a managed fund may see Janice lose virtually all of the risk premium gained by investing in shares (Australian Investors Association, 2021). Considering such pros and cons, it is recommended that Janice invests in the property market over a managed fund. Despite rising house prices, with interest rates at an all-time low there is greater opportunity for her to maximise her returns through leveraging, whilst enjoying the greater security and stability afforded by the property market. By comparison, the erratic behaviour of the ASX due to the COVID-19 pandemic presents a significantly higher risk. This, coupled with the potential for high ongoing fees that are likely to offset any substantial returns, makes managed funds a less attractive investment strategy.

5.0 Conclusion By her current spending patterns and seeking cheaper alternatives, Janice has the capacity to achieve – and exceed – her personal savings goal of $50,000 within 12 months. It is recommended that she uses this money to purchase her first home, due to the property market’s stable nature, opportunities for tax savings and potential for long-term growth. Janice can further improve her financial position by consolidating her superannuation accounts and ensuring her store credit card is repaid within its interest-free period.

Reference List AMP Limited. (2019). AMP Saver Account. Retrieved from AMP: https://www.amp.com.au/banking/info/p/ampsaver-account?extcmp=sem-google-newsaver_aq------aud----0421&gclid=CjwKCAjwkN6EBhBNEiwADVfyawl787STdFy4BvY35so3yylzIChtqUA1jDn_PK8DZOgDLE1S_G8NRoCpPQQAvD_BwE&gclsrc=aw.ds Aquila Property Investment. (2021). Brisbane Property Investment. Retrieved from Aquila Property Investment: https://www.aquilaproperty.com.au/brisbane-property-investment ASX & Russel Investments. (2018, June). 2018 Russell Investments/ASX Long Term Investing Report. Retrieved from ASX: https://www.asx.com.au/documents/research/russell-asx-long-term-investing-report-2018.pdf Australian Investors Association. (2021). Managed Funds. Retrieved from Australian Investors Association: https://www.investors.asn.au/education/other-investments/managed-funds/ Australian Securities Exchange. (2021). Benefits and risks of investing in mFund. Retrieved from ASX: https://www2.asx.com.au/investors/learn-about-our-investment-solutions/investing-in-mfund/benefitsandrisks#:~:text=One%20transaction%20can%20give%20you,otherwise%20be%20out%20of%20reach.&te xt=Managed%20funds%20can%20help%20you,could%20be%20difficult%20t Brycki, C. (2021, January 23). Should you invest in property or shares? Retrieved from Stockspot: https://blog.stockspot.com.au/property-or-shares/ Chalmers, S. (2021, April 01). House prices rising at fastest pace in 32 years as listings can't keep up with demand: CoreLogic. Retrieved from ABC News: https://www.abc.net.au/news/2021-04-01/home-pricesrise-at-fastest-pace-in-2-years-in-march-corelogic/100043190 Chau, D. (2021, March 16). Record-breaking market frenzy will come to an 'abrupt halt', experts warn. Retrieved from ABC News: https://www.abc.net.au/news/2021-03-16/covid-crash-markets-asx-wall-streetfomo/13250212 flatmates.com.au. (2021). The cost of renting a room in a larger sharehouse. Retrieved from Flatmates.com.au: https://flatmates.com.au/info/how-much-cheaper-is-renting-a-room-in-a-bigger-house GlamCorner. (2021). Membership Plans. Retrieved from GlamCorner: https://www.glamcorner.com.au/premiummembership-plans Gym Price List. (2021). Jetts Gym Prices List 2021. Retrieved from Gym Price List 2021: https://gympricelist.com/jetts-gym-prices/#Per_Week moneysmart.gov.au. (2021). Compound Interest Calculator. Retrieved from moneysmart.gov.au: https://moneysmart.gov.au/budgeting/compound-interest-calculator Nash, B. (2021, March 24). Property vs. shares: The investment that is more likely to make you rich. Retrieved from news.com.au: https://www.news.com.au/finance/economy/australian-economy/property-vs-sharesthe-investment-that-is-more-likely-to-make-you-rich/news-story/42b7e0a90f7504ed8fa2ee1cb36637d5

APPENDIX 1 – Recommended Monthly Budget Workings

1.25%

APPENDIX 2 – Interest Income Schedule (Adapted from ARGH Industries Ltd, 2021)

A. Projected Earnings Breakdown – Current Savings Account

B. Projected Earnings Breakdown – Recommended AMP Savings Account...