The ‘F’ word

‘Free’ is my second favourite four letter “F” word after ‘food’. Who doesn’t love free stuff, especially ‘free food’?! But sometimes free comes at a price! The following is a true story but with some change of details to conceal the identity of the people involved.

The story…..

Brian the engineering student

A few year’s into my career as an accountant I was talking to Brian, a friend who just started university. Brian was studying engineering so was quite bright and intelligent. We were talking about our work and how it was going to help us achieve our goals in later life. We were both going to save our money in our careers and build up a portfolio of investment’s to enjoy with our family.

‘I can’t wait to finish university and start making some real money’ Brian said.

‘It is great to start working full time earning a professional salary. I have more money then I had as a student and I have started saving and investing. I have even set up a trust for investing in.’ I said.

With a pause in conversation Brian’s face changed to one of curiousity. His mind digested the words I had just spoken.

Brian was now clear with his question and asked ‘What is a trust and why are you using it?’

In good trust

I began to explain my new learnt understanding of tax and legal structures I had gained from working as a tax accountant.

‘Well, a trust is a way to hold assets for the benefit of the trust beneficiaries. My trust beneficiaries are my family members. So I buy investment’s in the trust. When I make a tax gain or profit in the trust, that is distributed to the beneficiaries, which are my family. We use a discretionary trust so we can allocate the distribution based on what is the most tax advantageous way. So it is also a way to reduce the tax we pay on the profit.’

I continued to explain more as Brian asked more questions. It included how I used a lawyer to create the trust, the benefits a trust had over a company, how the trust could be used to also protect assets.

‘Wow, that’s really great to know. Thanks!’ I could see the excitement on Brian’s face as he thought about how a trust could be used for him and his family.

10 years later….

Henry the business student

Some 10 years later I was at a university student and alumni networking event. I was talking to Henry, a mature age student who grew up in my home town. As it turned out Henry was Brian’s cousin. I told Henry I was an accountant.

Henry replied ‘I wish I knew you 5 years ago.’ He said shaking his head.

‘Why is that?’ I asked.

Henry explained. ‘I won $20,000 in a lottery. It was the first large sum of money I ever had. I didn’t want to blow it and my family also encouraged me to do something good with it. My family told me I needed to use it for my future, so I had a lawyer create a trust. The lawyer charged $8,000 in fees to create the trust. Then there was accounting costs. Within 3 years there was less than $10,000 in the trust so we decided to pull it out as it was costing too much.’

Bad advice

I was disheartened by Henry’s story. I put two and two together and could only assume Brian had convinced Henry that he needed to set up a trust based upon our conversation. I was the one who told Brian about trusts. I was upset with both myself and Brian. Brian was a smart guy. But he didn’t have the knowledge and years of experience to know when and how to use a legal structure such as a trust. He wasn’t the right person to be giving tax and financial advice. I could only sit there and think ‘if only Henry had spoken to someone who would have given him the right tax and financial advice. Then he would be better off instead of worse off as an outcome. What was $20,000 was now less than $10,000.’

The moral of the story

The moral of the story is that while getting something for free is great, it could possibly cost you more in the long run.

So learn from Henry’s story. Speak to people with the right knowledge and experience to get the right advice for you. But be prepared to pay for it. While it will cost you money now, it will save you a lot more in the future.

The silver lining

The silver lining to this story is that in losing this money, Henry realised how much he didn’t know about money. So he decided to go to university and do a degree in business. Henry was using what was left of his $20,000 to help pay his way through university over the coming years. Henry is a smart guy, but Brian’s free advice as someone who didn’t have the right knowledge and experience had cost Henry a lot of money.

When I received my first pay as a university graduate, it was by chance that I found an easy way to budget and save money for investments. Let me tell you how I did it in 5 steps.

First, I had two bank accounts. The first bank account is where my money went into from my pay. Lets say I make $1,000 after tax, so what goes into my bank account. This account is one that I would rarely have access to with a card to draw from. I would then transfer a weekly allowance to myself to my second account. I wanted an account with no transaction fees and ideally paid interest.
I then had my second bank account which is my card account. This is the one I draw money from to pay for my weekly expenses such as fuel, groceries, and going out. By only having a weekly allowance it meant that I was aware of how much I could spend. Being a card account, this may come with some transaction fees.
To ensure I had the right amount of money going into the card account, I had to prepare a budget. So I determined my allowance based upon my budget. The budget began with my essentials ie groceries, fuel. loan repayments etc. (my rent came from my first account as a regular payment). Then my discretionary spend ie dining out, going out etc. Excluding any loan repayments, I really only need about $200 for the week to cover all of this. Note that I spent with my cash / debit card and not my credit card. This way I was strict in my spending. But I also only paid my credit card from my allowance.
So lets say my rent is $200 per week and my allowance is $200 per week. This gives me savings of $600 per week. Now I will have other one off payments come from this as car registration and insurances. But ideally I will know when these are coming up and I will take this into consideration to save money from my allowance money by cutting back on my discretionary spend.
So by doing this I am able to save money in the first account. Once I reached an amount I can use to invest with, which my minimum investment in shares is $1,000, and I have found an investment I am happy with then I transfer the money out to buy the investment. If not, I would transfer it into a bank savings account bearing a higher interest rate.

Hints and Tips

Look for accounts with no or low transaction and account fees.
Look for an account where you earn bonus interest, especially for your first account that your pay goes into!
Only use your credit card where necessary.
Remember Pay Later app services like ‘Afterpay’ are essentially like a credit card. These services are being heavily promoted to students by stores as an alternative to paying with your existing cash. You should treat them as a loan or a credit card!
I found certain financing arrangements do work well for necessary bigger ticket items such as white goods as a way to improve my cashflow and to pay from my allowance.

NB: I have just got off the phone from the Commonwealth Bank who I bank with. I was checking out their products and was surprised there was no product combination that currently meets all of my requirements listed above. I have left feedback for them to reconsider how they structure their products to improve customer satisfaction to promote better customer saving and investment strategies.

Please note the above article is my own personal experience of how to save, budget and invest and should not be relied upon. You should speak to your financial planner for advice on your own financial matters to ensure they are right for you.

The price you pay for ‘free advice’