How happy are you: measuring happiness across countries and generations

Posted on June 18, 2024 by Arrowroad

Experts use responses from people in more than 140 nations to rank the world’s ‘happiest’ countries in the World Happiness Report1. As Jon Clifton, CEO of Gallup, commented, “Our role in research on World Happiness is a natural fit with our longstanding mission: providing leaders with the right information about what people say makes life worthwhile.”

In 2024, Finland tops the overall list for the seventh successive year. Significantly, the United States of America (23rd) has fallen out of the top 20 for the first time since the World Happiness Report was first published in 2012, driven by a large drop in the wellbeing of Americans under 30. Afghanistan remains at the bottom of the overall rankings as the world’s least happy nation.

Serbia (37th) and Bulgaria (81st) have had the biggest increases in average life evaluation scores since they were first measured by the Gallup World Poll in 2013. This is reflected in the climb up the rankings between the World Happiness Report 2013 and this 2024 edition, of 69 places for Serbia and 63 places for Bulgaria.

Rankings are based on a three-year average of each population’s average assessment of their quality of life. Interdisciplinary experts from the fields of economics, psychology, sociology and beyond then attempt to explain the variations across countries and over time using factors such as GDP, life expectancy, having someone to count on, a sense of freedom, generosity, and perceptions of corruption. These factors help to explain the differences across nations, while the rankings themselves are based only on the answers people give when asked to rate their own lives.

For the first time, the report gives separate rankings by age group, in many cases varying widely from the overall rankings. Prof John F. Helliwell, a founding Editor of the World Happiness Report, said, “There is a great variety among countries in the relative happiness of the younger, older, and in-between populations.” Lithuania tops the list for children and young people under 30, while Denmark is the world’s happiest nation for those 60 and older.

Observing the state of happiness among the world’s children and adolescent population, researchers found that, globally, young people aged 15 to 24 report higher life satisfaction than older adults, but this gap is narrowing in Europe and recently reversed in North America.

In comparing generations, those born before 1965 are, on average, happier than those born since 1980. Among Millennials, evaluation of one’s own life drops with each year of age, while among Boomers, life satisfaction increases with age.

Further work examines the relationship between wellbeing and dementia, identified as a significant area of research in a globally aging population. Researchers highlight not only the impact of dementia on the wellbeing of individuals but also the demonstrable predictive power of higher wellbeing to reduce the risk of developing the disease in later life.

  1. https://worldhappiness.report/ ↩︎
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Quarterly Economic Update: Jan-Mar 2024

Posted on June 18, 2024 by Arrowroad

The first quarter of 2024 saw the Government roll out considerable changes to the Stage 3 Tax Cuts, inflation continuing to slow but remaining stubbornly high across some areas, surging stock market highs and continuing pressures in the property sector.

Government Overhauls Stage 3 Tax Cuts

In January, the Labor government unveiled changes to the proposed stage 3 tax cuts, aimed at providing bigger tax cuts to middle Australia. The new changes, which passed the Senate to become law in February, retain the tax bracket that would have been scrapped under the original proposal and adjust tax rates to benefit both lower and higher-income earners.

The changes will take effect from July 1 and are summarised as follows:

 Taxable Income BracketTax rate
New Tax Plan from July 1, 2024Below $18,2000%
$18,200 to $45,00016%
$45,000 to $135,00030%
$135,000 to $190,00037%
Above $190,00045%
Original Stage 3 tax cutsBelow $18,2000%
$18,200 to $45,00019%
$45,000 to $200,00030%
Above $200,00045%

Inflation continues to ease

Inflation continues on a downward trend, with the RBA expecting it to return to the target range of 2-3% in 2025 and reach the midpoint in 2026.

Service price inflation remains high despite goods price inflation decreasing, supported by continued excess demand and strong domestic cost pressures.

The RBA expects the consumer price index (CPI) to come in at 3.3% by June, compared with 3.9% forecast three months ago. As a result, the board decided to leave the cash rate unchanged at 4.35% at the first official meeting for the year. 

Share Market Highs

Global share markets have been breaking records this quarter, with the ASX200, S&P500, Eurozone and Japanese markets reaching record highs, helped by US inflation data coming in as expected, leaving the US Federal Reserve on track to cut rates from mid-year.

Whilst economic growth both locally and globally is forecast to slow, there is optimism in the market as inflation has started easing and is likely to continue falling. Central banks across the US, Canada, and Europe are expected to start cutting rates in the coming months. Recession still looms as a risk, but it appears the economy may be moving toward a soft landing.

Housing market continues to tighten

The national vacancy rate fell to a new low of 0.7% in February, highlighting the ongoing supply and demand challenges in rental properties across Australia, as a result of a construction sector under strain, rapid population growth from migration, and rising urban property prices.

Whilst the government has put stricter measures on international students to try to ease demand pressures, supply continues to be an issue, with building approvals falling by 15 in January, though multi-unit dwelling approvals increased by 19.5% in the same period.

Property prices continued to rise despite higher interest rates, inflation and cost of living concerns. The Home Value Index was up 0.6% nationally in February and showed an increase in all capital cities except Hobart.

Labour market cooling

Labour market conditions cooled over the December quarter 2023, with an ongoing shift away from full-time employment, growth in part-time jobs, and a decrease in recruitment activity. These trends are consistent with Treasury forecasts that growth will continue to ease, and the unemployment rate will increase from 3.9% in January to 4.2% by June, and 4.3% by the end of the year.

Despite clear softening, labour market conditions remain tight, and many employers are experiencing challenges finding suitable workers to fill positions, while some shortage pressures remain evident.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional.  We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.

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Dozens of Australian businesses have gender pay gaps above 50%

Posted on June 18, 2024 by Arrowroad

According to the Australian Bureau of Statistics (ABS), Australia’s national gender pay gap is 12%. As of November 2023, the full-time adult average weekly ordinary time earnings across all industries and occupations were $1982.80 for men and $1744.80 for women. In other words, for every 100 cents on average men earned, women earned 88 cents. That’s $238 less than men each week. Over a year, this difference adds up to $12,3761.

The ABS data:

  • estimates full-time weekly base salary employees in the public and private sectors,
  • excludes overtime, pay that is salary sacrificed and superannuation,
  • excludes junior and part-time employees.

Australia recently, for the first time, released data2 reflecting the gender pay gap of every private company with 100 employees or more, at nearly 5,000 companies. Dozens of these Australian businesses have gender pay gaps of over 50%. These pay gaps are not reflective of companies paying male and female employees different amounts for the same work (which has been illegal for more than 50 years), but mostly represent men working in higher-paid roles within a company. More than 3,000 employers, or 61.6%, had a gender pay gap that favoured men. Meanwhile, 30.1% (1,493 employers) had a neutral gender pay gap, defined as a gap of 5% or lower, and just 412 employers, or 8.3% of the total, had a pay gap that favoured women3.

The Workplace Gender Equality Agency (WEGA) explains its methods for calculating the pay gap as follows: WGEA used remuneration information supplied by employers in the 2022-23 employer census to calculate employer gender pay gaps. Part-time and casual salaries are converted into annualised full-time equivalent earnings. This year, the data excludes salaries of CEOs, heads of business, casual managers, employees who were furloughed, and employees reported as non-binary, as this comparison is between women and men.

State gender pay gap data

Australia’s base salary gender pay gap differs significantly by state. As of November 2023, the gender pay gap is4:

  • 11.0% in New South Wales
  • 10.7% in Victoria
  • 11.5% in Queensland
  • 9.2% in South Australia
  • 21.7% in Western Australia
  • 5.4% in Tasmania
  • 15.4% in the Northern Territory
  • 10.3% in the ACT

These differences can be partly explained by the industry profiles of each state and territory. The full-time workforce in Western Australia, for example, has a larger share of mining and construction than in other states. These two industries have relatively high earnings and low representation of women. 

Industry gender gap gaps

Australia’s base salary gender pay gap is5:

  • highest in Professional, Scientific and Technical Services
  • lowest in Public Administration and Safety.

In the past year, the ABS data shows significant reductions in the gender pay gap in Construction, Transport, Postal and Warehousing, Retail and Wholesale Trade.

However, increases were recorded in Professional, Scientific and Technical Services, Arts and Recreation Services, Manufacturing, Electricity, Gas, Water and Waste Services, Accommodation and Food Services, and Other Services.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional.  We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.

  1. https://www.wgea.gov.au/data-statistics/ABS-gender-pay-gap-data ↩︎
  2. https://www.wgea.gov.au/data-statistics/data-explorer ↩︎
  3. https://www.theguardian.com/world/2024/feb/27/australia-gender-pay-gap-new-data-wgea-men-women-salary-difference ↩︎
  4. https://www.wgea.gov.au/data-statistics/ABS-gender-pay-gap-data ↩︎
  5. https://www.wgea.gov.au/data-statistics/ABS-gender-pay-gap-data ↩︎
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Trend following in crises

Posted on June 17, 2024 by Arrowroad

In times of market turbulence, trend-following strategies can offer valuable diversification for investment portfolios. Winton’s latest article delves into how these strategies perform during major equity drawdowns and the challenges faced by Commodity Trading Advisors (CTAs) in providing “crisis alpha.” The piece suggests the benefits of maintaining a strategic allocation to trend-following CTAs, showcasing their low correlation to traditional assets and their historical performance during crises.

However, it’s important to remember that past performance is not indicative of future results, and different strategy implementations may yield varied outcomes. As always, consider seeking professional financial advice tailored to your individual circumstances before making investment decisions.

General advice warning: The information provided is general in nature and does not take into account your personal financial situation or needs. Please consult with a financial advisor for personalized advice.

The full article can be read here:

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Vanguard’s April 2024 investment and economic outlook

Posted on May 22, 2024 by Arrowroad

Our region-by-region economic outlook and latest forecasts for investment returns.
U.S. Consumer Price Index (CPI) data for March underscore the challenge faced by Federal Reserve policymakers as they try to guide inflation down toward their 2% target. Getting there would require a slower pace of growth for two especially sticky CPI components—shelter and services excluding shelter. Without progress on those fronts, the Fed may not be able to cut its benchmark interest rate target.

Price increases for services excluding shelter have accelerated since December, propelled by a tight labour market and strong wage growth. Meanwhile, a year-long slowdown in the pace of shelter inflation has not been sharp enough to comfort the Fed. “Shelter inflation is critical to core inflation reaching the Fed’s target,” said Ryan Zalla, a Vanguard economist who studies price behavior. “If shelter inflation were to return to its prepandemic average of around 2.5%, core CPI would be approximately 2%.”

Stubborn shelter prices reflect heightened housing demand, supported by a strong labour market, and low supply, abetted by the reluctance of many homeowners to give up low mortgage rates by moving. “For shelter inflation to moderate, labour market conditions will have to materially weaken, or housing supply will have to increase,” Zalla said. “Meaningful changes in either appear unlikely to materialise soon.”
The views below are those of the global economics and markets team of Vanguard Investment
Strategy Group as of April 17, 2024.

Vanguard’s outlook for financial markets
Our 10-year annualised nominal return and volatility forecasts are shown below. They are based on the 31 December, 2023, running of the Vanguard Capital Markets Model® (VCMM). Equity returns reflect a range of 2 percentage points around the 50th percentile of the distribution of probable outcomes. Fixed income returns reflect a 1-point range around the 50th percentile. More extreme returns are possible.

Australian dollar investors

  • Australian equities: 4.3%–6.3% (21.7% median volatility)
  • Global equities ex-Australia (unhedged): 4.9%–6.9% (19.4%)
  • Australian aggregate bonds: 3.7%–4.7% (5.5%)
  • Global bonds ex-Australia (hedged): 3.9%–4.9% (4.8%)

Notes: These probabilistic return assumptions depend on current market conditions and, as such, may change over time.

Source: Vanguard Investment Strategy Group.

IMPORTANT: The projections or other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modeled asset class. Simulations are as of 31 December, 2023. Results from the model may vary with each use and over time.

Region-by-region outlook

Australia

Sticky rent prices and a still-tight labour market position the Reserve Bank of Australia (RBA) to be among the last developed market central banks to ease policy rates. We expect the RBA to cut the cash rate by 50 basis points, to 3.85%, by year-end, and that the rate eventually will settle in the 3%– 4% range, in line with our assessment of the neutral rate—the theoretical rate that would neither stimulate nor restrict the economy.

  • We foresee both headline and core inflation falling to around 3% year over year by the end of 2024, down from 3.4% and 3.9% on a “trimmed mean” basis, respectively, in February. We expect inflation to fall to the midpoint of the RBA’s 2%–3% target range in 2025.
  • We forecast a year-end unemployment rate of about 4.6%, as financial conditions tighten amid elevated interest rates. It was 3.7% in February.
  • Leading indicators suggest that broad economic activity is marginally below our estimate of trend or sustainable growth. We expect rising real household income, a reflating housing market, and improving business and consumer sentiment to support a gradual acceleration in growth. We continue to expect that Australia will avoid recession in 2024, with below-trend GDP growth of about 1%.

United States

The latest inflation and labour market data imply that U.S. production of goods and services remains healthy and underscore our view that continued economic strength might prevent the Federal Reserve from cutting interest rates in 2024.

  • Measured by the Consumer Price Index, services prices were 5.3% higher on a year-over-year basis in March. Headline inflation advanced 3.5% year over year. We expect the Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index, which excludes food and energy prices due to their volatility, to record full-year 2024 inflation of about 2.6%.
  • The U.S. labour market remains irrefutably strong. Workers on private nonfarm payrolls earned an average of $34.69 per hour in March, up 4.1% year over year and above the 3%–3.5% annual rate that we view as noninflationary. We forecast a modest rise in the unemployment rate—from 3.8% to about 4%—by year-end.
  • We expect real (inflation-adjusted) U.S. economic growth of about 2% in 2024, higher than our initial estimate of about 0.5%.

China

China’s economy appeared to have made a solid start to 2024. But already questions have arisen about the sustainability of its growth after the second quarter, when year-over-year comparisons will be relatively easy.

  • Economic growth had softened by the second quarter of 2023, as the unleashing of strong, pent-up demand post-COVID couldn’t be maintained. That soft patch will flatter year-over-year performance in this year’s second quarter. Continued strong growth increases the prospect that, with its full-year growth target of “about 5%” well in sight, China may not address underlying economic imbalances.
  • Structural imbalances are likely to remain given the government’s policy priorities for investment and manufacturing upgrades over more direct measures to support consumer spending. We expect resulting supply-and-demand imbalances to continue to add to deflationary pressure amid weak consumer demand. To mitigate deflationary pressure, we forecast that the People’s Bank of China will cut its policy rate from 2.5% to 2.2% in 2024 and trim banks’ reserve requirement ratios.
  • We foresee elevated real (inflation-adjusted) interest rates continuing to weigh on prices. We recently lowered our forecast for full-year core inflation from a range of 1%–1.5% to 1% and our forecast for headline inflation from 1.5%–2% to less than 1%, well below the central bank’s 3% inflation target.

Euro area

Speaking on April 11, European Central Bank (ECB) President Christine Lagarde emphasised that the ECB would be “data-dependent, not Fed-dependent” in considering the appropriate policy rate. Her reference was to the risk that, by maintaining its current rate target for an extended period, the U.S. Federal Reserve could spur other central banks to leave their rate targets higher than they otherwise might. Cross-border gaps in policy rates can put downward pressure on currencies where rates are lower, increasing inflation risk.

  • Vanguard expects the ECB to trim its interest rate target by 25 basis points at each of its five remaining 2024 policy meetings, but rising energy prices skew risks toward a slower pace of easing. (A basis point is one-hundredth of a percentage point.) In our baseline case, the ECB’s policy rate ends 2024 in the 2.5%–3% range.
  • The euro area’s economy is showing tentative signs of having bottomed in the fourth quarter of 2023. We continue to expect 2024 economic growth of just 0.5%–1% amid still-restrictive monetary and fiscal policy and the lingering effects of Europe’s energy crisis.
  • The confluence of moderating wage growth, inflation expectations that remain in check, and lackluster demand supports our expectation that headline inflation will fall to 2% by September 2024 and core inflation will reach that same target by December. Headline prices were up 2.4% on a yearover-year basis in March. Core prices, which exclude the volatile food, energy, alcohol, and tobacco sectors, were up 2.9%.
  • We expect the unemployment rate to end 2024 around its current 6.5% level. The labour market may be softer than the unemployment rate would suggest, however; job vacancy rates, though still high, have receded, labour hoarding remains elevated, and the number of hours worked has stagnated.

United Kingdom

A continued moderation in wage growth and encouraging inflation news could set the stage for policy interest rate cuts this summer. Growth in average regular pay, which excludes bonuses, slowed to 6.0% between December and February, a sixth consecutive moderation in the rolling, three-month measure.

  • A reduction in the maximum price that energy suppliers can charge for a unit of energy should support falling headline inflation. Ofgem, Great Britain’s independent energy regulator, reduced its energy price cap for the April-June 2024 period by 12% following recent falls in wholesale energy prices. However, we’re watching crude oil prices amid heightened tension in the Middle East. We foresee headline inflation falling to just below 2% and core inflation falling to about 2.6% by year-end. The latest year-over-year readings, for March, were 3.2% and 4.2%, respectively.
  • Encouraging wage and inflation data underscore our view that the Bank of England will begin a series of interest rate cuts beginning in August, with the bank rate falling by a percentage point to 4.25% by year-end.
  • GDP data for January and February suggest the U.K. economy is emerging from a brief recession in the second half of 2023. We recently lowered our forecast for 2024 GDP growth to about 0.3%, down from an initial range of 0.5%–1%.
  • As in the euro area, the labour market’s gradual loosening appears mainly driven by reduced vacancies and fewer hours worked, rather than an increase in unemployment. We recently lowered our year-end 2024 unemployment rate forecast from 4.5%–5% to 4%–4.5%.

Emerging markets

Amid continued strength in the U.S. economy, we have upgraded our 2024 GDP growth forecast for Mexico. U.S. demand for Mexican goods has remained strong, and domestic wages and consumption are holding up. Our revised forecast is for 1.75%–2.25% growth, up from 1.5%–2% but still below trend amid restrictive monetary policy.

  • We continue to expect the world’s emerging markets to deliver economic growth of about 4%, on average, this year, led by growth of about 5% for emerging Asia.
  • We forecast growth in the 2%–2.5% range for emerging Europe and Latin America, though U.S. growth could have positive implications for Mexico and all of Latin America.
  • We expect that Mexico’s core rate of inflation will fall to 3.6%–3.8% and that the Banco de México will cut the overnight interbank rate to 9%–9.5% by year-end.

Canada

Canada’s economy avoided recession in the fourth quarter of 2023, thanks to the strongest population growth since 1957, which fueled consumption, and U.S. economic resilience, which buoyed exports. We continue to foresee below-trend growth in 2024 but have increased our growth forecast from about 1% to a range of 1.25%–1.5%. Risks skew to the downside amid the continued bite from restrictive monetary policy.

  • We expect that the Bank of Canada (BOC) will trim its overnight rate by 50 to 75 basis points this year, to a year-end range of 4.25%–4.5%. (A basis point is one-hundredth of a percentage point.) The first cut is likely to be announced on June 5, after the next central bank policy meeting.
  • As in the U.S., the “last mile” of inflation reduction could be the most challenging. We continue to foresee core inflation falling to a year-over-year pace within the BOC’s target range of 2%–2.5% by the end of 2024, with house prices moderating in response to declining affordability. Shelter prices, up 6.5% on a year-over-year basis last month, remain an upside risk amid immigration-fueled population growth.
  • Amid weak economic growth, we forecast that the unemployment rate will end 2024 in the 6%–6.5% range. It was 6.1% last month.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model® regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM results will vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.
The Vanguard Capital Markets Model is a proprietary financial simulation tool developed and maintained by Vanguard’s primary investment research and advice teams. The model forecasts distributions of future returns for a wide array of broad asset classes. Those asset classes include U.S. and international equity markets, several maturities of the U.S.
Treasury and corporate fixed income markets, international fixed income markets, U.S. money markets, commodities, and certain alternative investment strategies. The theoretical and empirical foundation for the Vanguard Capital Markets Model is that the returns of various asset classes reflect the compensation investors require for bearing different types of systematic risk (beta). At the core of the model are estimates of the dynamic statistical relationship between risk factors and asset returns, obtained from statistical analysis based on available monthly financial and economic data from as early as 1960. Using a system of estimated equations, the model then applies a Monte Carlo simulation method to project the estimated interrelationships among risk factors and asset classes as well as uncertainty and randomness over time. The model generates a large set of simulated outcomes for each asset class over several time horizons. Forecasts are obtained by computing measures of central tendency in these simulations. Results produced by the tool will vary with each use and over time.
This article contains certain ‘forward looking’ statements. Forward looking statements, opinions and estimates provided in this article are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Forward-looking statements including projections, indications or guidance on future earnings or financial position and estimates are provided as a general guide only and should not be relied upon as an indication or guarantee of future performance.
There can be no assurance that actual outcomes will not differ materially from these statements. To the full extent permitted by law, Vanguard Investments Australia Ltd (ABN 72 072 881 086 AFSL 227263) and its directors, officers, employees, advisers, agents and intermediaries disclaim any obligation or undertaking to release any updates or revisions to the information to reflect any change in expectations or assumptions.

© 2024 Vanguard Investments Australia Ltd. All rights reserved.

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Building better money habits with your kids

Posted on May 16, 2024 by Arrowroad

Generally speaking, we Australians are pretty financially savvy, that is, we understand the how and why of effectively managing our money. Unfortunately, that doesn’t mean we put that know-how into practice to make astute financial decisions.

According to the Australian Bureau of Statistics (ABS), the average Australian household debt has risen by 7.3% (over $260,000) in the 2021-2022 financial year[1]. As of July 2023, Australians were paying $18.4 billion[2] – that’s billion with a B – in credit card interest every year.

As parents, we are role models, integral to shaping our children’s values and beliefs. Like little sponges, they absorb our behavioural patterns, pick up on signals, and mimic our actions.

For us to replace bad money habits with good ones may be a big ask, particularly as they’ve evolved throughout our lives. But the trouble is that kids are a cluey bunch, eager to learn from us, and not surprisingly, our money habits are among many characteristics we unintentionally pass onto them.

Of course, we all want the best for our children. But in this busy world, we’re pulled in so many directions at once that sometimes juggling our daily work, family, school, and social lives is all we can do. Who has time to consider the inadvertent messages we could be sending?

Yet, when it comes to ensuring our children are equipped to build themselves a secure financial future, it’s worth the effort, right?

The table below shows a list of poor money habits and alternative better money habits that we can aim to model for our kids[3].

Poor money habitsBetter money habits
Impulse buying We regularly make spur-of-the-moment purchases. Additionally, we tend to indulge our kids – we want them to be happy. Impulsive or indulgent behaviour can inadvertently foster in children an attitude of instant gratification, normalising impulse buying.Lead by example As a family, we discuss the difference between needs and wants. When we see something we want, we walk away and give ourselves a cooling-off period to determine whether we genuinely need the item. We encourage our kids to wait for things they want, and suggest that delaying the purchase can lead to smarter choices and savings. When shopping we compare prices and identify items that offer better value.
Not budgeting We don’t have a household budget, preferring to manage our money as it comes in. But even though we know what bills are due, we often seem to have trouble getting the money together. Sometimes, we run out of money before payday.  Not budgeting can engender a culture of living pay-to-pay and children can grow up not understanding the importance of tracking spending and living within their means.Family budgeting / Mindful spending We involve our children in creating and monitoring our household budget. We discuss decisions around allocating money for different purposes so that when our kids receive pocket money or gift money, they can practice budgeting by setting amounts aside for saving, spending, investing, etc.
Credit card misuse We rarely use cash; using a card is fast and convenient. Although occasionally we max the card out, we make sure we pay off as much as we can every month. Some months, depending on expenses, we can’t manage the full balance. Cards, while useful, can cause children to perceive them as a source of unlimited money.No free money We have taught our children how to read our card statements. They know how to check purchases against receipts and understand how interest adds to the card balance. We involve our kids in making card payments and explain the consequences of not paying the full balance each month.
Not saving We’ve never set up a structured savings plan, so we have little-to-no savings. We’d like to take a holiday or have a nest egg for emergencies, but there never seems to be any money left over at the end of the pay cycle. Children seeing parents struggling to save may not learn the value of saving or setting goals.Set goals, save We stick to our budget and always try to allocate a portion of income towards savings, and investing and encourage our kids to do the same. We get them to set short-term goals like saving for a new toy or book, and long-term goals like an outing or a larger purchase, and then help them create a savings plan to achieve their goals. We make it fun by using a visual chart to track progress. When they reach their goal, we celebrate the achievement, making a special occasion out of buying the item or attending the event.
Failing to discuss / Money is taboo We never talk about money with our kids. They have a limited understanding of how money is earned and how we use it. Failing to discuss how money is earned can lead to children not grasping the concept of money as a finite resource, and appreciating its value. Widespread use of credit cards or taking cash from ATMs suggests that money is readily accessible.Have the conversation We have always been open with our kids about the household finances. We want them to understand that money needs to be earned and that if not used wisely and allocated appropriately, it can run out. We have also provided the opportunity for them to earn pocket money for doing age-appropriate household chores.

If we can make time to examine the way we view and use money and replace poor habits with better ones, we can positively influence our kids by:

  • emphasising the importance of planning early in life,
  • encouraging them to make informed decisions,
  • empowering them to set goals and work towards achieving them.

As parents, we have a limited opportunity to equip our children with tools like, knowledge, confidence and forward-planning skills – before they decide they know more than us!

So, by modelling good financial behaviour ourselves, we can instil the habits that will set our children up for a life of financial freedom.

I don’t know about you, but if I can achieve that, I’ll know that I’ve done what I can to enable the next generation to succeed and thrive.

What a legacy!

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional.  We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.

[1] www.abs.gov.au “Average household debt grows by 7.3 per cent”, 13 December 2022

[2] www.finder.com “Australian credit card and debit card statistics

[3] https://moneysmart.gov.au/family-and-relationships/teaching-kids-about-money

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2024-25 Federal Budget Recap

Posted on May 16, 2024 by Arrowroad

In his 2024 Federal Budget speech, treasurer Jim Chalmers announced ‘The number one priority of this government and this Budget is helping Australians with the cost of living’.

But what exactly does that mean?

Let’s take a closer look at what the 2024 Budget proposes –

An average tax cut of $1,888 in 2024-25

The budget proposes significant tax relief for ALL Australian taxpayers to alleviate cost-of-living pressures, including reduced tax rates, adjustments to the income thresholds, and increased low-income thresholds for the Medicare levy.

This measure aims to boost disposable income and encourage economic activity by allowing Australians to retain more of their earnings.

$300 back in the pocket for ALL Australian Households

To combat rising energy costs, the government has allocated $3.5 billion for a one-time $300 energy bill rebate for all Australian households, designed to directly reduce headline inflation by about 0.5 percentage points in 2024-25 without adding to broader inflationary pressures.

This initiative also extends to one million small businesses, receiving a $325 rebate.

Superannuation contributions on paid parental leave

The 2024 budget integrates enhancements to parental leave and childcare into comprehensive support for families. It includes a $1.1 billion investment to extend superannuation contributions to government-funded Paid Parental Leave, improving financial security for new parents.

Additionally, the budget boosts childcare support, aiming to make childcare more affordable through increased subsidies, reducing the financial burden on families, and supporting parents’ return to work.

These measures are part of a broader effort to provide more robust support for families and promote gender equality.

$3 billion in student debt… wiped

In an effort to alleviate the burden of education costs, the budget proposes a change to the way the government calculates HELP debt indexation, erasing $3 billion in student debt for over 3 million Australians.

An investment in education for Australians

The budget commits to reforming tertiary education and increasing vocational training funding, aligning skills training with market needs.

Specifically, it allocates $88.8 million to provide 20,000 new fee-free TAFE places, including pre-apprenticeship programs relevant to the construction industry.

Additionally, the government is introducing Commonwealth Prac Payments to support students undertaking mandatory placements. The payment, which is worth $319.50 per week, will be offered to more than 73,000 eligible students, including those in fields like nursing and social work.

This investment is part of a broader effort to align skills training with labour market demands and support sectors critical to economic growth.

Supporting small businesses

To aid small businesses, the 2024 budget extends the $20,000 instant asset write-off for an additional year, enabling continued investment in necessary business equipment. This extension is designed to enhance the cash flow of small enterprises and encourage further economic activity among local businesses.

Additionally, the budget includes investments to support small business owners’ mental and financial well-being, recognising the unique challenges they face and bolstering the resources available for sustainable operation.

Access to affordable medicines

The budget allocates up to $3 billion to reduce the maximum PBS co-payments. This includes a one-year freeze on the maximum patient co-payment for everyone with a Medicare card and a five-year freeze for pensioners and other concession cardholders, ensuring that no pensioner or concession cardholder will pay more than $7.70 for PBS-listed medications until 2030.

… And an increase to health funding

The budget allocates $888.1 million to expand mental health services. This includes funding for new and existing programs that provide critical support for individuals facing mental health challenges. 

An additional $2.2 billion is directed towards improving the aged care system, and investments are made in strengthening Medicare with a focus on urgent care clinics, reducing hospital admissions, and supporting regional and remote health services.

This expansion aims to provide wider access to necessary health services, significantly improving health outcomes and making healthcare more affordable and accessible to more Australians.

A 10% increase to Commonwealth Rent Assistance

In response to the housing affordability crisis, the budget increases Commonwealth Rent Assistance by 10%, benefiting nearly 1 million households. This follows a 15% increase from the previous year, marking a substantial boost to aid renters, especially given the rising rental market costs.

Housing affordability

The government is investing $6.2 billion in new housing initiatives to tackle affordability and accessibility.

This funding supports the construction of more homes, including affordable and social housing options, addressing critical housing shortages and supporting community infrastructure development. The 2024-25 Federal Budget is strategically focused on alleviating financial pressure through targeted support measures. By understanding and applying these benefits, Australian households can better navigate the challenges of rising living costs.

For tailored advice on how to adjust your financial plan in light of the new budget measures, consider consulting with a financial adviser or accountant. They can help you understand the specific impacts on your finances and strategise accordingly.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional.  We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.

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What are investment bonds, and how could they be used?

Posted on May 13, 2024 by Arrowroad

Popular in the days before compulsory superannuation, investment bonds fell out of favor as super became the preferred tax-advantaged environment. With tighter restrictions on superannuation contribution limits and eligibility requirements, bonds might be worth a fresh look.

Investment bonds are a type of insurance policy primarily used as an investment vehicle. Available from a range of providers, investors can choose from a suite of underlying investments in much the same way as regular managed funds. Investment bonds shouldn’t be confused with interest-paying government or corporate bonds. They are a unique type of asset offering a range of advantages.

Tax advantages

The primary attraction of investment bonds is that earnings are taxed in the hands of the issuing company at a rate of up to 30%. Provided the bond is held for more than 10 years and the 125% rule is not breached, no further tax is payable when the bond is cashed in.

While 30% is more than the 15% tax rate that applies to superannuation earnings, it is less than the current marginal tax rates that apply to people with an annual taxable income above $45,000. The higher your marginal tax rate, the more attractive investment bonds become.

Moreover, investment bonds don’t lock up your money for the long term as super does. You can access your money whenever you like, but you need to be aware of some rules and tax implications.

If the bond is cashed out within eight years, all the growth in the value of the bond is included in your tax return. You will, however, receive a credit for the tax already paid by the issuing company. You won’t be double-taxed. Withdraw from a bond between eight and nine years, and two-thirds of the gain is declarable; and between nine and ten years, one-third of the gain goes into your tax return.

Bonds can be purchased with a single lump sum or with regular additions. However, to keep the original start date, an annual contribution cannot exceed 125% of the previous year’s contribution. If it does, the clock starts again for the 10-year rule. Another option is to simply purchase a new bond.

Additional benefits

Insurance bonds can be useful estate planning tools. As a form of life insurance, if the owner dies, the proceeds will be paid directly to nominated beneficiaries. The money doesn’t go through the estate and can be paid out quickly. In addition, the proceeds are not taxable in the hands of the beneficiaries, even if the bond is less than 10 years old.

Allowing for relevant tax rates, they may also be a good vehicle for saving for a child’s education or other long-term goal.

Timing

Due to their long-term nature, it isn’t just your current marginal tax rate that is important; it’s what your rate will be in the future. As many retirees pay little or no tax, particular consideration must be given to purchasing a bond that will be held until after retirement.

Suitability

Investment bonds aren’t for everyone, but they may suit investors who:

  • have reached their contribution  caps for super contributions or are no longer eligible to contribute to super due to age;
  • do not wish to lock away their money in super;
  • are saving for a long-term goal and have a marginal tax rate above 30%;
  • have specific estate planning needs.

There is much more about investment bonds than we can cover here. As with any type of investing, there are risks involved with bonds, and these must be taken into account.

Contact us if you would like to learn more about how investment bonds could be part of your investment portfolio.   

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional.  We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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How investment diversification can help you achieve your goals

Posted on May 13, 2024 by Arrowroad

Benefits of diversification

Diversification has several benefits for you as an investor, but one of the largest is as a strategy to reduce investment risk and to achieve more stable returns over the long term.

Diversification can lower your investment portfolio’s risk because different types of investments perform differently depending on the existing market conditions. Diversification lowers your portfolio risk because, no matter what the economy does, some investments are likely to benefit. For example, when interest rates fall, bond prices generally rise, and shares do less well at this time. If one business or sector fails or performs badly, (for example oil shares plummet or one fund manager fails), you won’t lose all your investments. By owning multiple assets that perform differently, you reduce the overall risk of your portfolio, so that no single investment can overly impact your overall returns.

How to diversify

You can spread your portfolio across different asset classes like shares, bonds, fixed interest, property, and cash.

Consider diversifying across industry sectors within asset classes to adapt to changing economic conditions. For example, if you buy shares, you could buy across a range of different sectors such as healthcare, resources, financials, retail etc.

Another type of diversification is by investing with different types of fund managers and product issuers.

Having a variety of investments with different levels of risk will also balance out the overall risk of a portfolio.

It’s worth taking the time to review your investments and look for opportunities to diversify.

Review your investments

List all your investments and what they’re worth. This could include:

  • cash in a savings account
  • shares
  • managed funds
  • an investment property
  • your home
  • your superannuation.

This will highlight which asset classes you’re currently invested in and where you could diversify.

Identify gaps and research other asset classes

If most of your money is in one or two asset classes, research other asset classes. For example, if you own a house, an investment property won’t help you diversify. To diversify, you could invest in different asset classes such as shares or bonds.

You can achieve a balanced portfolio with the right mix of investments, even with a modest amount to invest.

A simple way to diversify is to invest through a managed fund, managed account, exchange traded fund (ETF) or listed investment company (LIC). Managed funds and managed accounts can help you invest across a range of asset classes and/or fund managers. ETFs and LICs can also provide a low cost way to invest in an asset class or diversify within an asset class.

Contact us today to find out more about how you can diversify your investments to help achieve your goals.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional.  We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser. 

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