Tuesday, 25 October 2011

Should I get private health insurance?

by Rob d'Apice
Turns out most of us have no idea how Private Health Insurance works.

The reality is that Private Health Insurance is an extremely complex product. In fact, so much so that many people we spoke to while researching this topic (private insurance policy holders, doctors, and insurers themselves) couldn't really explain what exactly it does.

Given this, we've found that many purchasing decisions about Private Insurance aren't particularly well informed; purchasing decisions seem too often to be guided by emotion and half-truths rather than the real underlying economics of the product.

Our goal at Prosple is to help people make the best decisions for themselves as consumers. So today, we're shining some light on the murky world of Private Health Insurance: to understand the product, to highlight its real benefits and to dispel the myths.

It's two different products, really.

There are actually two very different types of Private Health Insurance: Hospital Cover and Ancillary or 'Extras' Cover.

Hospital Cover helps you pay for expenses you incur as a patient in a private hospital (though it will almost never cover all of the costs - more on that later). It's important to know that Hospital Cover doesn't admit you to a highly privileged Private Patient Club. You do not need private health insurance to be admitted to a private hospital; Hospital Cover simply helps you pay the costs associated with your admission and treatment.

Ancillary or Extras Cover helps you pay for the cost of outpatient medical treatments that aren't covered by Medicare: dental, optical, physio, chiro, osteo, natural therapies, alternative therapies, some pharmaceuticals and often a few others.

There is a third type of cover (that can often be bundled into either Hospital Cover or Ancillary Cover, or bought standalone): Ambulance Cover. Yep. Ambulances aren't free. The cost depends on distance travelled, the level of care given in the journey and the State within which the ambulance is operating - but is typically $300-$1,000. NB: ambulances are free in Queensland, covered by a $100 p.a. levy added to all electricity bills.

Most insurers offer bundled packages that include Hospital, Extras and Ambulance. However, a recent Choice study found that, in many cases, buying a bundled package didn't offer better value than buying individually - so we like to think of them as separate products altogether.

Of all these covers, Hospital Cover is the most costly, most relevant to your tax situation and the most misunderstood. As such, we'll look at Hospital Cover today, and will get to Ancillary Cover next week.

So, you want a Private Hospital?

The purpose of Hospital Cover is to help you pay for Private Hospitals. So the first question you need to ask yourself is whether there are foreseeable reasons you may want to use a private hospital in the future.

Good reasons to use a Private Hospital
  • 'Elective' surgeries. For many medical interventions that are considered non-urgent, the public system has very long waiting lists to get treatment. Depending on the treatment, the hospital, the seriousness of your condition and sheer luck, the wait can take months and in some cases more than a year. The Government publishes a lot of information on waiting times on the My Hospitals website - see for yourself. In a private hospital with your own doctor, on the other hand, you will be able to get treatment very quickly.

    Some of the types of surgeries that are considered elective: wisdom teeth/tonsil removal, knee/hip/shoulder investigations/reconstructions/replacements, gall stone removal, hernia, neurosurgery, heart bypass surgery, and more...

  • Choice of doctor. In a public hospital, you will be treated by whoever is available at the time. If you want to be able to choose your doctor, and be assured you'll have the same doctor seeing you throughout your treatment, you can do so in a private hospital.

  • Pregnancy. Many expecting mother choose to use the private system for their pregnancies. The advantage is related to the above: getting to choose an obstetrician and have that doctor see you throughout the whole pregnancy. Some mothers we spoke to also mentioned they had more extensive ante-natal contact as a private patient than in a public hospital. The total cost of the pregnancy in a private hospital can be $2k - $8k (if you don't have private health insurance, it'll be more like $6k - $18k). More info on costs here.

    Of course, our world-leading public health system can and does cater for many pregnancies, and does so with no out-of-pocket expenses to the patient (which is just absolutely amazing). Most of your ante-natal visits will be managed by mid-wives, and if you have a low-risk vaginal delivery, you may in fact not see an obstetrician throughout your whole pregnancy.

  • (Arguably) comfort. Private hospitals are generally more comfortable than public hospitals. You're more likely to get your own room,

Bad reasons to use a Private Hospital
  • 'If something serious happens, I want the best care'. Many of the doctors we spoke to who are familiar with both public and private hospitals said they'd prefer to be treated in a public hospital if they had a serious condition. There were a few reasons for this:
    • There are more doctors 'around'. In a public hospital, if you are in sudden need of urgent medical attention, you can have a handful of doctors are your bed in less than 5 minutes. In private hospitals, since all doctors are privately engaged by the patients, there are less 'hands on deck' should something go wrong. Of course, the hospital itself employs support staff (nurses and doctors), but there would still be less people on hand
    • Wide range of specialists available. If you are being treated by a neurosurgeon in a private hospital, but have minor complications with your respiratory system or joints or digestive system or otherwise, your neurosurgeon may tend to provide minor treatment to those complications rather than engage another specialist. In a public hospital, you have a team of healthcare providers with a wide range of specialties on hand to treat you.

  • 'If I have an emergency, I'd prefer to go to a private hospital'. If you have an emergency, you'll most likely end up in the public hospital. Only some private hospitals have emergency wards and they are generally much smaller and less equipped. You could be transferred to a private hospital at a later stage, but if you are in a real medical emergency, you're likely to get the timely treatment you need in a public hospital.

So, what does Hospital Cover do?

Now that we've got a better understanding of the benefits of a private hospital, it's important to understand exactly what Hospital Cover does to assist you in meeting the costs of treatment in a private hospital.
  • Pays for (generally) 100% of the cost of hospital fees. This is a lot. When you are treated in a private hospital, the Private Hospital will charge you a certain amount for your stay. The amount they charge will depend on the length of your stay and the type of treatment you receive, but can be in the range of $1000-$5000 per day. Your Hospital Cover will pay all of these costs on your behalf, but will sometimes require you, to pay a co-payment/excess, which can be a few hundred dollars a day (and generally no more than $500). This is generally the case for cheaper forms of Hospital Cover.

  • Pays for 25% of the Medicare Scheduled Rebate for your doctors fees. This is not much. This is where is all gets a bit confusing. Let's explain how this works step by step:
    • On top of your hospital fees, you'll receive a bill from each of your doctors for the treatments they performed on you.
    • If a particular treatment is on the Medicare Benefits Schedule, Medicare will pay 75% of their prescribed total benefit to you (even though you were in a private hospital).
    • Your private health insurer will pay the remaining 25%, so you receive in total 100% of the Medicare Benefits Schedule.
    • The bad news? Medicare benefits are much less than most doctors charge, so you'll still have a big gap between your benefits and the total cost (this is known as the Medicare Gap and contributes to your Out-of-pocket Expenses).
    • The Gap is big. Despite your private health insurance, you can still have $1000's of out-of-pocket expenses that you will owe to your doctor. Note that your doctor must get your informed consent to the fees before they perform the treatments.

  • In rare cases, pay your Medicare Gap. Some private health insurers have arrangements with particular doctors where you will pay no out-of-pocket expenses. The doctor will need to opt-in to treating you under your insurer's scheme, which generally means the doctor will be paid less. These schemes are not commonly utilised.

So, how much will private hospitals cost me?

Insurance won't make private hospitals free. In almost all cases, you will still have significant out-of-pocket expenses when visiting a private hospital, even with your insurance.

Example 1: Wisdom teeth removal
If you were having your wisdom teeth removed from the Mater private hospital in Sydney's North Shore, your hospital fees of around $1,400 would be paid by your Private Health Insurance, but you would be liable for $800-$3,000 of doctor's fees (depending on the doctor). There is no Medicare coverage for dental care.

Example 2: Surgical removal of torn knee cartilage (meniscectomy)
If you were having a knee arthroscopy at the same hospital, private health insurance would pay hospital fees of closer to $2,500. Your insurer would also contribute to your orthopaedic surgeon's and anesthetist's fees, with probably around $200. Medicare might pay around $600, leaving you with another $500 - $2,000 worth of out-of-pocket expenses.

The Medicare Levy Surcharge

The federal government has implemented a Medicare Levy Surcharge of 1% on high income earners to incentivise them to take out private health insurance. You will be liable to pay the surcharge if you:
  • Don't have approved Hospital Cover with a private health insurer; and
  • Have a taxable income of more than:
    • $80k for an individual, or
    • $160k for a couple or family, + $1.5k for each dependent child after the first child

If you exceed the income threshold for the Medicare Levy Surcharge, you should (at least) get the cheapest hospital cover available. Note that you only need Hospital Cover, not Extras/Ancillary. The cheapest cover for singles, according to this government comparison website, is HIF Goldstarter, at $39.25 per month (for NSW customers). Your total premiums will be $471 each year, which will save you at least $800 in taxes - and potentially more, depending on how much you earn. It's worth it.

Note that the Medicare Levy Surcharge is separate to the Medicare Levy. The Medicare Levy is applied at a rate of 1.5% to your taxable income, and cannot be avoided by procuring health insurance (exemption to this levy is only provided to low income earners, to foreigners or on medical grounds).

The Bottom Line: Should I get private health insurance Hospital Cover?

It's a difficult question, and (as with any insurance) is a personal one; it depends on your appetite for risk. To assist you in your decision making, we find it useful to consider the following 4 questions.

Would I otherwise be liable for the Medicare Levy Surcharge?
If you answered yes, you should get (at least) basic level of cover, as discussed above.

Would I want to have a baby in the next 3 years? And if so, would I want to choose my own obstetrician and/or have my baby in a private hospital?
If you answered yes, you should get a policy that covers you for obstetrics. Note that most covers have a 12 month waiting period on obstetrics - and you generally need to conceive after the waiting period is over. Make sure you are prepared and sign up for health insurance in advance.

Am I likely to need at least one elective surgery in the next 5 years?
If you answered yes, you should get a basic level of cover. This may seem like a strange question (and a difficult one to answer), but it's based on the economics of your premiums. A basic level of Hospital cover costs around $500 per annum, and the amount insurance can contribute to elective surgery is around $2,500. If you receive one elective treatment in the next 5 years, you will (very roughly) break even. You may have an increased need for elective surgery in the next 5 years if you have an existing medical condition, play a sport that has a high risk of injury, or if you have a history of dental problems.

If something 'serious' happens in the next 5 years, would I want to be in a private hospital?
If you answered yes, you should obtain a level of cover that is suited to your risk appetite. The cost of a long stay in a private hospital will substantially outweigh your premiums. The good and bad reasons for private hospitals above will help you in answering this question. Remember that the public system caters for (and arguably is better suited to treat) 'serious' medical conditions.

What's your experience with private health insurance? Got a question about insurance that you still don't get? Or got a completely unrelated query? Throw them all at us!

Stay tuned next week as we tackle the other half of Private Health Insurance: the Extras.

Friday, 14 October 2011

We're back - and we're funded!

by Rob d'Apice
You may have noticed a distinct lack of finance tips, tricks and insights coming from the Prosple Blog over the past few weeks. Rest assured; we've been really busy behind the scenes pulling together the resources we need to build Prosple into Australia's best online finance tool...

... And we're pleased to announce we've hit a major milestone: we have just secured enough investment to support Prosple's development over the next 6-9 months!

So, what are we going to do?

We're still keeping a lot of our plans up our sleeve (mostly because they're a work-in-progress and we don't want to over-promise!). We're hoping to build a tool that will help you make the best decisions about your money as quickly and easily as possible. Our initial plan is to focus on helping people compare and switch their bank accounts, superannuation and credit cards; as well as providing tools to manage your spending habits and plan for the life you want to have.

We think that managing your finances is a means to an end. There is certainly a distinct minority that enjoys managing money; the rest just want to make sure things are sorted out so that they can live the life they want to life. We want Prosple to be the tool that does that for you - a resource you can trust to save you time, save you money and save you hassle.

For more, check out our mini-tour of what Prosple will be, if you haven't already!

We need you.

The next 6-9 months is a 'proof of concept'. We need to prove that this product works, helps people and is sustainable in its own right - such that we can procure further investment to take it to its next level.

We have no way of achieving this without you. Prosple will require constant user feedback and rapid iteration to develop the really high quality, high usability product we have in our minds. We also need your help working out how we can spread the word about the product (more on this to come!).

What can you do? For now, make sure you've signed up for an early access account. We'll be in touch when we've got news for you. Of course, if you've got some ideas for us/expertise to offer us/anything else to rant about, please make sure you get in touch - we'd love to hear from you.

In the meantime, though, continue to watch this space. We'll be back next week with our regular dumps of finance tips, tricks and hacks that cut through the crap in the world of personal finance!

Friday, 29 July 2011

Why Captain Compare won't save you

by Rob d'Apice
Some of you may have seen Captain Compare advertised on radio or on buses in Sydney.  Perhaps you've seen the (somewhat painful) advert they've thrown on a lot of the major TV networks.

"Go Captain! Go Captain!" ... Yep, I think they've really captured the zeitgeist of modern Australia.

In spite of these cringey branding decisions, we'd welcome with open arms any attempt to help improve competition between Australia's oligopolic consumer industries and empower consumers to more easily make better product decisions.

Unfortunately, Captain Compare isn't your guy. Why? Hold on tight; we'll fill you in.

1. It's owned by A&G Insurance (hint: they offer products in the very market they're comparing)

It's one of those things that, when you learn about it, you ask yourself: how did someone let that happen? Captain Compare is fully owned by A&G Insurance, who also own a wide range of insurance brands: Budget Direct, Australia Post, ibuyeco, Virgin Car Insurance, Cashback, 1st for Women, Retirease and Ozicare.

But hey, if they're comparing all products equally and fairly, then hopefully their obvious conflict of interest shouldn't affect their results, right?


2. They don't compare all products

I don't think our editorial can speak any stronger than their own 'About' page:
As the proud team behind Captain Compare and many of the car insurance brands on this website, A&G Insurance Services is excited to let consumers compare our own award winning car insurance brands [...], right next to other confident providers such as Real Insurance and AI Insurance. Captain Compare will continue to offer all insurers the opportunity to take part. We look forward to growing our list of providers and products in all of our comparison lines.

Yeah, I'm sure they're desperately looking forward to growing their list of direct competitors to their own product suite.

But hey, if they're offering a great comparison engine, then at least there's some utility for consumers there, right? Well, here's the coup de grace in this corrupt, incompetent trifecta:

3. It's not actually useful

Have a look at their credit card comparison tool. This is what we got from it:

  • It firsts asks you do select a category of card types ('low interest', 'reward cards', 'balance transfer').  But what if a consumer doesn't know which type is best for them?
  • It then presents a mysteriously unsorted list of cards fitting that category.  How do I know which of these cards is the best?  The top result?  Why?
  • I can re-sort the results by annual fee, interest rate, or reward points per dollar spent. But don't I want to find a card that has a good balance of these features depending on my situation?
  • I can enter the how much I spend or how often I pay back. But the inputs are completely relative ('a little', 'moderate', 'lots') - how the do I know if my 'lots' is the same as someone else's?

... We could go on and on. Ultimately, though, we just get the strong feeling they've pumped all their resources into expensive advertising campaigns instead of actually trying to solve a real consumer problem.

Our Philosophy

At Prosple, we're trying to pick up where sites like Captain Compare fall down. We're holding to the following principles very tightly:
  • It must empower consumers. That means providing information on how products work, what matters and what doesn't when you are comparing them, and how to make sure you get the most out of them (and don't get screwed).  If the answer for you is 'you shouldn't have a credit card', then we want to help you get there!
  • It must compare as much of the market as possible. If we want to drive more competition in Australia, we need to make sure we're covering everyone. Encouraging you, Australia's pro-active consumers, to switch to companies that offer better products at lower prices is the only way to drive innovation in our stuffy oligopolies.
  • Our business model mustn't compromise the above. We want to build a business that is sustainable: that means it must earn enough money to pay for its costs. But we want to make sure that this doesn't sideline consumers in anyway. We've got some ideas on how to do this, but we're definitely going to need your help to make it work.
We're so close to getting started with this new brand; we've got a lot of really exciting things in store!

So keep watching this space!

*     *     *

Have you used Captain Compare? Or have you tried other comparison engines? Let us know what you think of them - what you like and what you think they could do better!!

Tuesday, 19 July 2011

10 Tips for 2011 Tax time

by Rob d'Apice
As is likely no surprise to you, income taxation is fundamental to making our Australian society work. In fact, 43% of the Government's expected revenue in the 2011-12 financial year is derived from it.

Total government revenue 2011-12.  Source

Paying income tax is the responsibility of all Australians such that we can get welfare to the less fortunate, public hospitals, free or low-cost education, critical infrastructure and really expensive, faulty, unused, unnecessary, Australian-made submarines.

It's important to know, though, that the government has designed a series of complex rules regarding the quantum of tax you should be liable to pay.  An oversimplification of these rules might suggest that they come from two different sources:
  1. The broad principle that any expenses incurred in the course of earning taxable income should be tax deductible; and
  2. A variety of tax incentives/penalties designed to encourage/discourage certain behaviour (eg charitable donations, private health cover for the rich, having lots of babies, etc.).
It's important that you understand these rules, at least to the extent that they impact you. Ignoring them can lead to two unfortunate results:
  1. You don't pay enough tax. The tax office has powers to review your tax return many years after its submission, meaning that you can still be liable for mistakes you have made many years in the past (they won't simply forgive the amount owing - you'll need to pay it all back).
  2. You pay too much tax. Ignoring the rules might mean you are paying tax on income that the government decided you shouldn't have to pay tax on (and your fellow taxpayers aren't paying tax on).  Finding $1,000 worth of deductions to which you are entitled could mean reducing your tax liability by several hundred dollars.
So, on that note, here's our 10 Tips for 2011 Tax Time!

Disclosure: we are not tax accountants or tax lawyers.  We can't guarantee the accuracy of this information.  When in doubt, consult a tax lawyer or the ATO.

1. Understand the Basics

Gross income.  Your whole income before any deductions and before any tax is applied (this amount will be bigger than your 'take-home' cash, that already has tax withheld from it).  Gross income includes regular PAYG income, bank interest, investment returns, government welfare, and services you may have charged for as a contractor (if you have your own ABN).  See Tip 3 for more.

Deductions.  Expenses you have incurred that are 'tax deductible'.  This means that the whole amount of the expense is deducted from your Gross income before tax is applied.  Conceptually, think of it as netting our the gains of your employment (Gross income) with the costs associated with your employment (deductions) to work out the net amount that you 'really' earned from your employment, in other words your...

...Taxable income. Gross income less deductions.

Medicare Levy. A levy charged to all Australians (1.5% of taxable income), unless you qualify for reduction or exemption.  You can qualify if you have a low income, are in medical hardship, are residing overseas or you are a temporary resident in Australia and are not entitled to Medicare.  E-tax will calculate your eligibility for exemption.

Medicare Levy Surcharge.  An additional 1% levy payable if your taxable income is greater than $77,000 (or $154,000 for couples/families) AND you do not have an adequate level of private health insurance.

Gross tax payable. The total amount of income tax (including medicare levy and surcharge) based on your taxable income.

Offsets. An entitlement that reduces your Gross tax payable by a specified amount.  For example, the (unnecessarily complicated) Low Income Tax Offset (best explained here, but you don't really need to know the details - E-tax does the grunt work for you).

Tax Refund / Tax Debt.  Your Gross Tax Payable, less Offsets, less total Taxes Withheld (the tax your employer has already paid for you).  If this number is negative, you've overpaid tax and the ATO will send you your money.  If it's positive, you owe more tax than you've paid and you have to send it to the ATO.

2. Get E-tax

If you've ever done your tax before, you've used it.  E-tax 2011 is an application built by ATO that helps you lodge your tax return. The interface is questionnaire-based, and there's plenty of (perhaps overly) detailed help along the way, so if your situation isn't too complicated it's the best way to DIY your taxes.

It's Windows only, though, friends.  You (we?) mac-lovers will have to head to your parents house to get it running. (The upside? The costs associated with your journey are tax-deductible! Yep, any costs associated with lodging your tax return are tax deductible.)

3. Declare all your income

If you're working, your employer(s) should give you a PAYG statement that will list your 'Gross Payments' (the total amount of money you earnt, inclusive of tax) and your 'Total Tax Withheld' (a portion of your Gross Payments that your employer didn't pay you, and instead forwarded to the ATO as a tax payment on your behalf).

All your PAYG should obviously be entered into E-tax.  However, there are a few other key sources of income that young people should be aware of:

  • Youth Allowance / Newstart Allowance (or other centerlink payments).  Centrelink should send you a statement with your total payments, including any amounts of tax withheld. (Item 5)
  • Bank account interest. You should include any interest you earned from online savings accounts, transaction accounts or managed fund investments. Often net-banking interfaces will have a section for showing you this exact information. (Item 10)
  • Personal Services Income. If you have an ABN, and have used it to invoice a business as an independent contractor, you need to declare the amounts you were paid. (Item 14)

4. Deductions: know when you need written evidence

If your total work-related tax deductions are less than $300, you do not need to keep written evidence for these deductions (but you do need to be able to show how you worked it out, if requested).  

If you are claiming more than $300 in total work-related expenses, you'll need to keep written evidence.  It won't be submitted to the ATO, but the ATO can request for up to 7 years.

IMPORTANT: Written Evidence doesn't have to be receipts. Written evidence can include bank or credit card statements, email receipts or BPay receipts. All of this stuff is easily stored online, should the ATO request it. Additionally, many receipts, like internet and phone services, can be emailed to you instead of sent by paper.  This is not only good for the planet, it's great come tax time.

To qualify as Written Evidence, a document must have:
  • The name of the supplier
  • Amount of the expense
  • Nature of the goods or services (if not shown, you may write this on the document before you lodge your tax return)
  • Date the expense was incurred, and
  • Date of the document
A credit card or bank statement showing the relevant transactions can cover of all of these points.

Note that special 'written evidence' rules apply for car expenses, meal allowance, award transport payments allowance, and travel allowance expenses. E-tax will give you the details when you get to these questions.

5. Deductions: do you use your mobile phone or internet connection for work?

If you make calls on your mobile phone, or use your home internet connection for work, you can claim the expense as a tax deduction.  Your mobile phone statements, or your creditcard statements, can count as 'written evidence'.  Put this under Item D5 - Other Work-related expenses.

If you use a mobile phone or internet connection for both personal and work purposes, you need to attribute a percentage of the total cost to work-related expenses.  The written evidence required for this is an analysis of 4 weeks of usage - dividing up how much usage was work-related and how much was personal. The % split can then be used for the whole year's worth of expenses. The ATO suggests looking through a phone bill and working out the % of calls that were work-related vs personal, but it's somewhat ambiguous now that mobile phone plans include add-on services like data, SMS, etc - just make sure whatever approach you take is defensible if the ATO requests your documentation.

6. Deductions: Use computer hardware/software for work? Welcome to the whacky world of depreciation.

If you use your home laptop or desktop computer and peripherals for work, you can claim the cost of these goods as a tax deduction.  While depreciation is scary on the surface, this is a good example of something that is actually fairly simple being presented in a crazily complex way.

Firstly, you need to be able to divide the expenses based on personal/work usage.  This can be done using the sample 4 week sample ratio methodology as above. The ATO's website suggests keeping a diary of usage for 4 weeks then calculating the ratio based on time. Again, just make sure you could defend your approach.

If the total cost if less than $300, you can claim the total expense immediately as a full deduction in this financial year. Answer 'yes' for Item D5 - Other work-related expenses, and put the item in table at the top of the next page. No depreciation needed. Easy.

If the cost is greater than $300, you need to depreciate the expense over-time.  In simple terms, if you buy a $1,500 computer that will last 3 years, you can claim $500 this financial year AND $500 in the next two financial years.

E-tax will handle the calculation for you, but it's not as easy as the above example suggests.  Go to Item D5 - Other work-related expenses, then click the 'Decline in value' button under the table.  This opens up a worksheet that needs to be completed for each item that you are depreciating. Here's a run through of the key information you need to fill out (let me say again: it seems much more complex than it really is):
  • Description of the asset
  • Personal use percentage. As per the methods described above.
  • Date acquired
  • Cost
  • Asset type. Pick from the drop down list. Computer devices are 'Other than motor vehicles'.
  • Depreciation rate and method. You can choose whether to use Prime cost (aka Straight line) or Diminishing Value depreciation.  Diminishing Value will give you a bigger deduction in the year of purchase, but the deduction will decline over time.  Prime cost will give you the same deduction in each year.  We've generally chosen Diminishing Value to see a big deduction in the first year, but if you know that you're likely to have a much larger tax exposure in later years, it may make sense to choose Prime Cost.
  • Effective life in years.  You can make your own estimate of effective life of the asset (for computers, 3 or 4 years is good).  The commissioner has made a bunch of recommendations, too.
  • Have you self-assess the effective life for this asset?  Yes. Yes you have.
The remaining fields should be calculated for you. If you have more assets you want to list, click 'Create new worksheet' on the left.  Otherwise, click 'next'.

Bonus Tip: you can easily roll-over this information for next financial year, and E-tax will remember how much to depreciate in future years.  Just make sure you keep you .TAX file so you can import it (or 'roll-over') next year.

7. Deductions: Find your donation receipts

Given money to a charity? Have friends hit you up with their Movember/Dry July/Oxfam work campaigns?  Search through your inbox to find your donation receipts, as all these donations are tax deductible.  Chuck them into Item D9 - Gifts or donations.

8. Deductions: Work-related books, magazines or equipment?

You can claim the cost of work-related books, work-related journals and/or work-related magazine/newspaper subscriptions.

Do you have a work brief-case or workbag? Tools that you bought yourself for work? A travel suitcase you use for work? These can also be claimed (but remember you need to depreciate any equipment whose total cost is greater than $300, see Tip  6).

All of these expenses go in Item D5 - Other work-related expenses.

Work things you can't claim: 
  • Travel to and from work is generally not deductible - travel expenses are only claimable if it is incurred in the course of your employment, to move between two different jobs, OR if you need to use it to carry bulky tools or equipment that you can't leave at work. 
  • No, your work clothes (and laundry) aren't deductible! You can only claim a deduction for clothes and their laundry if they are 
    • compulsory work uniforms that are unique (designed and made only for the employer) or distinctive (the clothing has a logo on it and isn't available to the public), OR
    • occupation-specific clothing that is not 'everyday' in nature and would allow the public to easily recognise your occupation (eg chef's checked pants), OR
    • protective clothing, ie clothing you wear to protect yourself from the risk of illness or injury posed by your income-earning activities (using an expensive suit to protect yourself from humiliation does not count, sorry).

9. Deductions: Getting Austudy, ABSTUDY, or Youth Allowance?

If you are receiving Austudy, ABSTUDY or Youth Allowance to study, you can claim the cost of textbooks, stationery, student union and course fees, and the decline in value of the computer equipment you use for study. This is brand new policy as a result of a High Court challenge last year.

Put this stuff in Item D4 - Self-education expenses.

10. Complex situation?  Get help. 

Tax accountants do this for a living.  If you've got a complex situation (eg kids, investment properties, sole trader businesses...) then it's prudent to see a tax accountant. Not only can they generally pay for themselves in claiming deductions you didn't know you were entitled to, their fees (and all expenses incurred in engaging them) are a tax deduction.

You can also consult the ATO's fairly clumsy website. The help documents embedded in the E-tax software package are also quite useful for the nitty gritty issues that might pertain to you.

Done?  Now: Prosple needs you!

The Beta version of Prosple is live.  Prosple will assess your financial health, and give you a bunch of targeted recommendations on how you can make your money healthier. We want your feedback on our tools, and how we can make them even better.
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Need more info on some of the things we've talked about in this post? Got some tips you think we've missed? Please let us know in the comments below!!

Monday, 4 July 2011

The free perks that come with your card

by Rob d'Apice
Many premium credit cards come with a couple of really valuable extras: complimentary travel insurance (when you purchase return airfares with your card), extended manufacturer warranties, loss/theft insurance on purchased goods and free concierge services.

Now, before you say "Shut your mouth, Prosple! Cards with those services are only for the filthy rich!", many of these freebies can actually be worth much more than the additional annual fee cost that is usually associated with these cards. Let's go through each of the premium benefits one-by-one so you can understand just what you can get (and how much it can be worth to you).

1. Travel insurance

Many cards include complimentary travel insurance spanning anywhere from 3 to 12 months, if return airfares are purchased with your credit card. This is possibly the biggest benefit from premium cards depending on how much you travel.

For example, our dear friend Hugo is travelling to the americas for 6 weeks, spending most of his time in the US. Travel insurance with Covermore would cost Hugo $302, with an excess* of $250. However, if Hugo had the Westpac Earth Gold card, and paid for his flights with that card, he'd get a very similar level of insurance coverage free of charge, with an excess of $200. The annual fee for the Westpac Earth Gold is only $125, meaning he's saving $175 - PLUS Hugo will earn Qantas Frequent Flyer points on all purchases on the card (including the flights he just bought).

*For the less insurance-literate of us, an excess is an amount payable by you in the event of a claim. For example, if you lose a laptop during your trip worth $2,000 and need to claim back the amount on travel insurance, you will receive $2,000 LESS the excess of $250.

2. Extended Warranty

We're fairly public about our love for Apple products. One big annoyance, though, is the limited and expensive insurance available with the product - Apple Care for a Macbook can cost more than 20% of the laptop cost itself.

Hugo just told us that he has cancelled his overseas trip (and luckily hasn't lost any money on the insurance, since he got it for free from his card anyway), and has decided to spend that money on a Macbook for use with Uni studies.

He buys the $2,099 Macbook Pro, then ponders over the option to bundle in 'Apple Care' for $449. This will extend his warranty from 1 year to 3 years, and will provide him with technical support by phone for those three years too. His other option is to buy the laptop using his Westpac Gold card (annual fee $125), which will automatically extend the manufacturers warranty by 12 months.

Hugo does some more investigation and decides to upgrade his credit card to the Westpac Earth Platinum (annual fee $250) - this card provides an additional 24 months manufacturers warranty. So he's now receiving the same warranty as apple care for $199 less (PLUS he's earning even more Qantas points and can now get upto 6 months of travel insurance, instead of 3...)

Note that the extended warranty applies to all purchases with a warranty - it also covers the bed, fridge and TV that Hugo buys for his college room that year.

3. Purchase Protection

In his first week at college, Hugo gets uncharacteristically inebriated and his Macbook mysteriously vanishes. Unfortunately for him, theft is of course not covered by the manufacturer warranty.

But his Westpac card saves him thrice - the card comes with four months of free theft, loss or accidental damage protection (up to $125,000 of total claims covered per annum). This means Westpac insurance will replace his laptop at no cost.

Wait a minute, are you in bed with Westpac?

Nope. We've just highlighted it as an example here; in terms of insurance, however, it is one of the best value for money cards on the market (no other card has 24 months extended warranty, for example). Commonwealth Bank actually has the longest complimentary travel insurance policies on its platinum cards - up to 12 months.

So what's the best card for premium services? It depends a lot on you. Fortunately, our credit card comparison tool is well on the way: it allows you to filter cards based on these premium services. You can use the tool to find the card that saves you the most money, but that has at least 2 months travel insurance and 12 months extended warranty, for example.

Interested in being involved in our beta testing? Let us know now! We're currently building our beta testing database. NB: if you've already emailed - don't worry! You're on our list.

Anything else I should know?

Two important things to keep in mind:

  • Always compare the actual insurance policies available on each card. Claim limits and excesses can vary substantially between policies.
  • Always keep the receipt for your significant purchases. All insurance policies require that you have proof of purchase.

Have you ever used insurance or extended warranties that come free with your credit card? Let us know in the comments below!

Monday, 20 June 2011

Should I get a car loan?

by Rob d'Apice
Post-GFC, 'debt' has become a much naughtier word: at best, a necessary burden; at worst, the harbinger of financial ruin.

Debt does have a positive role to play in personal finance, particularly in building investment assets (and, of course, most often for property). But how about using debt to finance depreciating assets?

According to this recent Commonwealth Bank advert, it's the best idea in the world!

Something about this ad just screams 'evil'. Perhaps it's the baritone, sensual, Shakespeare-inspired narration; perhaps it's the 'Meet Joe Black' suited Commonwealth Bank personification that happily hands the car keys to the helpless, naive youth; perhaps it's the allusion in the final line ("Happiness...") that a personal loan can bring young people all the joy and fulfilment that comes with the immediate gratification of acquiring things you can't afford, without any future consequence.

Yep, it's probably that last thing.

What's really so bad about buying a depreciating asset with debt? It's fairly simple: you're burning money on both interest (the money you owe the bank for your loan) and depreciation (the amount of value you lose in your car each year), and that means losing a lot of wealth.

Meet Kim and Tim

Kim and Tim are twins. They both have savings of $5,000, both have $400 per month of spare income to go toward savings or assets, and both desperately want to get some wheels.

Kim is an aspiring high-roller and wants a brand-spanking new VW Golf for $22,000. She puts in her $5,000 cash and gets a $17,000 personal loan from the good people at the Commonwealth Bank. Her $400 per month is going to the bank to pay off the loan

Tim, on the other hand, wants to save up for some property; he opts to buy a used car online for $5,000 - a 2001 VW Golf. He puts his $400 per month into an online savings account.

Meet Kim and Tim, 5 years later

In just 5 year's, Tim's wealth is now more than double that of Kim's. It's clear that Tim will be better off, but it's quite stark how big the difference really is.

Each person's net wealth can be considered as the sum of their car's value and their cash savings, less any outstanding debts they have.

Overall, Tim ends up with around $33k, made up of $30k in cash and $3k value left in his car. Kim's car will only be worth a bit over $12k, and she'll have just $3.5k in savings - less than half the total wealth of Tim.

So who took Kim's money?

There are two things that really hurt Kim.

1. Kim lost nearly $10k in her car's depreciation, Tim loses only $2k. We've taken our depreciation assumptions from a Choice guide to car depreciation: you'll lose about 14% of the car's value in the first three years, then about 8% per annum for the remainder. In reality, the cliché is true: as soon as you drive your car out of the dealership, you instantly lose a good chunk of money.

2. Kim will pay $5k in loan interest and fees; Tim will make about $4k in savings interest. It's well known that the path to wealth is to accumulate income-generating, capital-gaining assets, rather than load up with debts for depreciating assets. The difference in Kim and Tim's interest exposure is clear evidence of this.

A blow-by-blow account

Don't believe us? For the more numerically curious of you, we've mapped out Kim and Tim's financial position for the first five years to show you what drives the changes in their wealth.

What about running costs?

Yes: in this analysis, we've ignored the running costs of the cars. A new car under warranty often has free service for the first few years of the car's life, and registration doesn't require an inspection. On the other hand, comprehensive insurance can be more expensive (because the car is worth more). A newer car may also be more fuel efficient. While all these things are true, even if Tim's running costs were $1k more than Kim's every year, he would still be well ahead of Kim's financial position at the end of year 5.

What's your experience with car loans or personal loans? Do you have one? Has it worked for you? Let us know in the comments!

Friday, 17 June 2011

Revisiting First Home Savers Account: now an even better idea

by Rob d'Apice
Back in April, we wrote a post about the government's First Home Savers Account.

We talked about how it's good for two reasons:
  • For every $100 you put into the account, the government puts in $17
  • The tax payable on the interest earned in the account is capped at 15%

The downside to the scheme is the '4 Year Rule' - you need to make contributions of at least $1,000 in four different financial years before you could use the money to buy a house; and if you bought a house before then or changed your mind, the money would become locked up in your superannuation.

What's changed?

A friend of Prosple pointed out this recent change to the scheme which has relaxed the '4 Year Rule'.  If you buy a house before you have completed all 4 years, you can now withdraw the money after the remaining years have elapsed to use toward mortgage repayments - meaning that it's not locked away in super until your retirement.

So is it a good idea now?  If you are sure that you will one day want to buy a home in Australia, then it's hard to see how this is a bad idea (in fact, we're going to open one up right now).

Want another reason?

The 2010-11 Financial Year is coming to an end.  If you open an account now and make at least a $1,000 contribution before the end of June, you will have already satisfied one year of the 4 year requirement, meaning there's only a 3 year wait until you can get your funds.

Are you going to open an First Home Savers Account?  Let us know in the comments!

Thursday, 9 June 2011

Prosple on 2UE

by Rob d'Apice
Prosple was on 2UE last week discussing the value of Flybuys and reward credit cards.

Have a listen below (EDIT: or listen to it on the 2UE website)

Thursday, 2 June 2011

Are Flybuys actually worth it?

by Rob d'Apice
How many times have you been asked whether you have a Flybuys card? "Too many times, dear friend!" is what I'm imagining you saying, if you were somehow reading this as-yet-unpublished blog post. So today, we put pen to paper to help you demystify the truth behind the value of the FlyBuys Scheme.

The Math

To calculate the value of FlyBuys, there are three things we need to know:
Actual value to you
= [A. Your spend] x [B. Reward point earn rate] x [C. Value of a point].
A. Your spend
Flybuys points can be accrued at major Coles brands: Coles, Kmart, Target, BiLo and Liquorland. The amount of spend obviously varies for each person, but (at the risk of exposing the author's alcoholism or penchant for expensive deli goods) the author of this post has calculated his total spend at Coles and Liquorland for the previous 12 months as $978, so let's use $1,000 as a plausible annual spend.

B. Reward point earn rate
It's 2 points for every $5 - or 0.4 points per dollar.

C. Value of a point
Again, this depends on what you redeem with your points. Ironically, Flybuys' travel rewards are pretty average - domestic travel is available with Qantas or Virgin Blue, but international travel is very limited.  All Qantas travel still incurs taxes, etc.  We've calculated that redeeming points for a return trip to Brisbane equates to a point value of about $10 per 1000 points* (or $0.01 per point). FYI: Redemption for vouchers and other rewards is also possible, but equates to a point value of about $6-8 per 1000 points - a few dollars less than flight redemption.

*For you data-geeks out there: return flights to Brisbane is 22,500 Flybuys points PLUS taxes with Qantas.  The same flight through the Qantas website is $225.05 PLUS taxes.  Therefore 22,500 points = $225.05, which can be reduced to roughly 1 point = $0.01.

So, returning to our formula above:
Actual value to you
= [A. Your spend] x [B. Reward point earn rate] x [C. Value of a point]
= $1000 x 0.4 x 0.01
= $4.00

The Horrible Truth

Yes, you read that correctly.

In our example, Flybuys will return about $4 worth of rewards per annum.

The Lesson

Don't be generous with your trust. When an offer is confusing enough that you give up doing the math in your head, consider it a red flag.

Our goal is Prosple is to help cut through the crap.  That's why we have this blog, and that's why we are working furiously building a tool that can help you make decisions like these 24/7. For credit cards, for example, we put all available cards on a level playing field and produces a simple $ amount that each card will ultimately mean to you given your situation. You don't need to think through reward points, annual fees, interest rates, signup bonuses, etc. We're really excited about it because there's nothing like this in Australia (but more on that later!).

Got a Question?

This post came about in response to a reader's question.  Have you got a question that you're quietly sitting on?  Hit us with it!  We'd love to know what information you all need to dominate your financial life in this complex (and often manipulative) commercial world.

Until next time!

Wednesday, 25 May 2011

Understand the pitfalls of your credit card's Interest-free Period

by Rob d'Apice
Do you sometimes get interest charges on your credit card account when you think you shouldn't have? You may be falling into a common trap with your card's interest free period that's buried deep in the fine print.

Already bored? Well, mismanaging your interest free period could cost an average credit card user up to $70 every month.  That's a lot of cappuccinos.

What is an "Interest Free Period"?

It's the period in which purchases made from your credit card do not accrue any interest. It generally stretches from the day that the purchase was made to a set number of days after your monthly statement was issued (typically 10-15 days). It means that, if you pay off your monthly balance in full within the required window each month, you will never pay any interest on your purchases.

Like. But what's the catch?

It's simple: you don't always get an interest free period. This means you start racking up hefty interest charges from day 1 of your purchase. There are actually 3 completely different situations where the bank won't give you an interest free period, and it's important you know about all of them.

1. When you have an outstanding balance
It's very poorly understood by consumers, but it's the same with all cards: If you don't pay off your balance in full for a particular month, you will forfeit the interest free period for the following month.

Here's an example: Caroline spent $2,000 on her card last month, and had until 20 May to pay off the balance in full. Unfortunately, Caroline is addicted to poor quality drama and spent the week watching Offspring episodes back-to-back instead of paying her bills.  It's now 25 May.

Caroline can't stay mad at Offspring's delightful cast and crew for long

Caroline now has two problems:

  • First, her $2,000 debt is now accruing interest, costing her about $1.21 per day or about $36 in total if the debt runs for a whole month; and
  • Second, all her expenses this month now have no interest free period. If she spends another $2,000 this month on her card (assuming it's spread evenly over the month), this could amount to another $36 in interest charges. 

By forgetting to pay off her balance, Caroline could have cost herself up to $72 in just one month. Lesson: pay off your balance in full. You forgot? Pay it off right now anyway (that fixes problem 1), and put in any extra money to slip your balance into the black - this means new purchases will be 'instantly' paid off and won't accrue any interest. And make sure you pay off any remaining balance in full at the end of the month to avoid entering an interest charge spiral.

2. When you have a balance transfer
Did you dutifully obey the advice of Prosple Credit Card tip 3; that is, balance transferring your debts to minimise interest? Well, there's a big catch with balance transfers - don't spend anything on the balance transfer card when you get it. One big reason is that you don't get an interest free period when you have an oustanding balance transfer amount. That means you're instantly racking up interest on your brand spanking new card until you knock off the huge chunk of debt you wheeled over to it.

The second reason? It's about the debt-repayment order on a credit card, which is a blog-post in itself, but put simply: when you make a repayment to the balance transfer card, the bank will use your money to pay off the (very low interest) balance transfer amount in full before you can pay off any of the (very high interest, with zero interest free period) new purchases. Yes, it's unscrupulous. But now that you know, go ahead and be unscrupulous right back to them.

3. When you get a cash advance
Credit cards 101: don't get cash advances. Cash advances attract a higher interest rate. They often incur an instant fee over at least a few dollars, and sometimes much more. And, on top of that, they don't attract an interest free period.

How can I remember to pay?

Paying your bill off in full can be particularly difficult for us internet-o-philes, because the reminder of the monthly due date can be less obvious in your email inbox than in letter form.

We suggest putting aside 20 minutes each week to check in on your finances. This means checking your internet banking site to see if you have anything due, and processing any bills/payments/boring stuff that you need to get out of the way. A Sunday night often works well, or first thing monday morning to ease yourself back into the week.

Does this sound outrageously boring to you? You're thinking about it the wrong way. This 20 minutes per week is a small investment to stay on top of your money. Trust me, if you do it right, it's going to be the most lucrative 20 minutes of your week. More on this topic down the track.

What else could you do in those 20 minutes?

Wednesday, 18 May 2011

Calling all students: you may be eligible for a payment from the ATO

by Rob d'Apice
Did you receive Youth Allowance anytime between 2007 and 2010?

A recent High Court decision has concluded that students should be allowed to claim study expenses - like text books, home study expenses and depreciation of laptops/computers - as a deduction against income earned from Youth Allowance.

The ATO is now applying this decision retrospectively by adjusting the tax assessments of anyone who received Youth Allowance between 2007 and 2010, applying an additional tax deduction of $550 for each year.  If your marginal tax rate was (say) 15%, that's $82.50 that should be returned to you for each year - and potentially higher for a year where you may have started full-time employment.

If you have evidence that your study expenses were greater than $550, you can claim for a greater deduction - but you should contact the ATO now.

What do you need to do?

If you are eligible, the ATO should have already contacted you.  Haven't heard from them? Give them a call right now on 132 861 to make sure you aren't missing out.

If you've received your letter, and you haven't got evidence of study expenses greater than $550 in a year, you shouldn't need to do anything - the ATO will deposit any refund into your account before the end of May (as long as they have your bank details!).

What does this mean going forward?

If you're still a student, make sure you keep receipts relating to your study expenses.  At the very least, hang on to your receipts for textbooks, any electronics you may use for study (laptops, desktops, tablet PCs) and peripherals for those devices that you use for study (laptop stands, keyboard/mice, headphones, etc). Without these, you may miss out on deductions that you are entitled to that could end up saving you several hundred dollars a year.

Monday, 16 May 2011

Get rid of credit card debt with the Balance Transfer and the 20% Rule

by Rob d'Apice
Let's be clear: credit cards aren't for everyone.

So far in this blog, we've spent a lot of time focusing one (key) part of becoming more financially empowered: getting the right information on how to optimally use financial products.  But this can only ever be part of a money solution; as with many things in life, most of us know what we should be doing (not spending as much, eating better, exercising more, etc.) - but we still choose to buy things we can't afford / eat that whole tub of ice cream / put off going to the gym.

Managing debt is then part-scientific and part-behavioural; that is, getting the right information AND translating that into easy-to-implement principles to change your behaviour.

So: you have a big credit card debt?  We could say: "Stop spending and slowly pay it off over time.  Easy!" - but that doesn't help you (and, really, you already know you should do that).  So, here's our take on the best way to get out of credit card debt, mixing our knowledge of financial products and consumer behaviour.

Step 1: Balance Transfer your debt

Haven't heard of Balance Transfers?  Many banks offer a special deal if you transfer your existing credit card debt to their credit card; they give you a temporarily discounted interest rate on the transferred debt.  The saving can be very serious - from a 20-25% interest rate on your current card, to 0-6% on the new Balance Transfer card (generally for a period of 6-12 months).

How much could this save you?  On a $5,000 credit card debt, undertaking a Balance Transfer for a 12 month period could save you more than $1,000 on credit card interest.

Prosple will be the best way to find the right Balance Transfer deal for you; but for now, here are a selection of some of the good ones:

Step 2: Cut up ALL your credit cards

This is absolutely key. You've just transferred all your debt from your current card. That is not a blank cheque to start spending again. Cut up this credit card straight away. Then call the bank and cancel it. If any bank says "you can't cut up cards until you've done X, Y or Z": don't listen to them. They want to keep the temptation there for you, that's all.

Then: when your new Balance Transfer card arrives in the mail, CUT IT UP STRAIGHT AWAY. Spending on a Balance Transfer card is an absolute disaster. Interest-free periods are forfeited while you have the Balance Transfer. Any repayments you make go toward the Balance Transfer amount (low interest), and not your high-interest recent purchases - which is useless to you. Cut it up and get the debts out of your life.

Want to get really pro?  Instead of cutting them up, you can turn them into these nifty earbud holders.  Take that, Apple! (Thanks: Hamish)

(BTW, if you don't want to cut your cards because you need Visa or Mastercard facilities, you should get a Visa or Mastercard debit card that is linked to your savings/transaction account. We'll explore this more in a later post.)

Step 3: Set up a repayment plan (Use the 20% rule)

Your credit card debt isn't going to go away over night. It's going to take time and work. But you'll feel so much better when it's gone (and you can then start saving money, which means actually building wealth for the future).

Use the 20% rule. 20% of your earnings should go into repaying your debt. If you can stomach more, then set it higher. But set it and stick to it religiously. As soon as you get paid, transfer the 20% into your credit card. Yes, this will hurt, but all the pain will go away when you are debt-free. This strategy means that if you earn (say) $600 a week post-tax, you could pay off a $5,000 debt in less than 10 months.

Want to know how long it'll take you? Moneysmart, a recently launched government initiative to improve financial literacy in Australia, have a tool for calculating credit card debt repayment times. Have a play with it to see how soon you could be debt-free - or post in the comments below and we'll help you look into it!

Thursday, 5 May 2011

Always use American Express (except when the service fee is 1% or greater)

by Rob d'Apice
As a general rule, American Express cards earn more reward points than Mastercard or Visa.  Why?  American Express charges higher fees to merchants/retailers when you use the cards, so therefore they have more money coming in that they can return to you in the form of reward points. For this reason, it's better for you to always spend on an Amex when you can - you'll get more money back.

This advice used to always be true, but the tables turned on American Express in 2003, when the RBA introduced reforms aimed at reducing Merchant Service Fees (also called the credit card 'interchange fee'). One component of these reforms was the abolition of the 'No Surcharge' rule: merchants could now enforce a surcharge for using a credit card, and the surcharge could be different depending on the card.

In practice, I've found roughly half of the merchants I buy from don't charge a Service fee on any card. In these cases, always use your Amex. For the remainder, you should always use your Amex EXCEPT where the Amex surcharge is (roughly) 1% higher than the Mastercard/Visa alternative. The reason behind this is that Amex (roughly) returns 1.5% of the transaction total in reward points, whereas a visa or mastercard generally only returns 0.5% - the difference between the two being roughly 1%.  This obviously depends a lot on the cards in question, but is generally a good rule of thumb.

You may be thinking: "You want me to get a Visa AND an Amex?? You are downright loco!" Well, almost all the banks now offer credit card accounts where you get both an Amex and Visa/Mastercard linked to exactly the same account (only one credit limit, annual fee, etc.), so don't go around calling people loco so quickly, eh hombre?

Tuesday, 3 May 2011

Always redeem your reward points for flights

by Rob d'Apice
If you've been following Prosple Blog, you'll remember we recently blogged about the key reasons to get a credit card: namely, to make you money, rather than take it away. That was only one half of the story (actually, only one third, but we'll get to that in a bit). Once you get a card, you need to know how to use it right, and a bank isn't going to tell you this (it's not in their interest to do so, unfortunately).

So, we present to you a new Prosple series: the 10 top tips for getting the most out of credit cards. We'll be publishing these tips over the next few weeks, so keep your eyes on the prize.

Tip 1: Always redeem thy reward points for flights

This does depend somewhat on what card you're using, but it is almost always true that redeeming reward points for vouchers, cashback or products will return less money to you than spending them on flights.

The actual business strategy that leads to this outcome is a pretty fascinating aside. Putting someone in a seat that would otherwise be empty comes at almost no additional cost to an airline (perhaps the cost of the meal, as you can imagine that's not very pricey...). Airlines therefore had a very interesting problem: a product that is effectively zero cost, but isn't selling.

So airlines developed a variety of strategies for getting extra $ from these seats. One obvious idea is selling seats very cheap at the last minute. Another is packaging up discount 'mystery flights' where people buy a cheap ticket to an unknown destination (and the airline just chucks them on any empty flight when they rock up to the airport). Perhaps the most lucrative and successful, though, is the proliferation of frequent flyer reward points. The premise was simple: people who flew frequently accrued reward points and could use their points at getting some of these empty seats for free. The points were almost zero cost to give away, and yet have such a strong perceived value with consumers and incite such strong brand loyalty.

Nowadays, Frequent Flyer points are big, big business. Qantas (for example) sells Frequent Flyer points to other companies (like Visa, Amex, Woolworths, various restaurants, etc.) to give to their customers as deal-sweeteners. To prove the point, Qantas now makes more money from Frequent Flyer points than actually flying people:

BTW, EBIT = Earnings Before Interest & Tax, for you non-Finance nerds. Source
That's worth stopping and thinking about, really. If someone asks you "what does Qantas do?", what would you answer?

There's another interesting tidbit in the table above, too: Jetstar made double the profit of Qantas in the last financial year ($131m vs $61m). No wonder Qantas' current CEO is Alan Joyce, the man responsible for building Jetstar.

In any case, the key point for us humble consumers is that points generally go further with flights than products or cash. To put a nail in this tangent-ridden coffin, here is a comparison of how I can spend my Qantas Frequent Flyer points:

Cents of value per Qantas Frequent Flyer point
through different redemption methods

In other words, if I'm spending 1000 points toward redeeming an iPod (through the Qantas Frequent Flyer Store), I'll get roughly $5.90 of value.  Alternatively, if I spend the same 1000 points toward a return flight to LA, I'll get $12.50 worth of flights - that's nearly double how much I was getting when I was redeeming for an iPod. Simple, no?

Again, your 'common sense' instinct fires: "Why would return flights to LA be such better value?? Am I being duped somehow?"  Well, now you know: the cost for Qantas of providing seats on underbooked flights is MUCH cheaper than buying you an iPod.

Thursday, 28 April 2011

With $342,000 already shared, introducing the new dapShare!

by Rob d'Apice
Happy days, friends.  The new dapShare has now been fully rolled out!

Introducing the new dapShare

Tell me more, good sir

dapShare is a free tool to help friends share money with each other.  It keeps a record of shared expenses in your sharehouse, roadtrip, group holiday, or any situation where you are paying for things that should be split.  It'll remind people how much they owe, and give them your bank account details when they need to pay you.  Get more information or sign up now.

The new site is a zillion times better than what it used to be.  Why?
  • Belong to multiple groups. Have one group for your sharehouse, start another for a group holiday.  Easily move in and out of groups.
  • Facebook-style commenting and newsfeed. Easily discuss payments, expenses, house news, or anything through dapShare - and get all the latest news summarised in a dashboard newsfeed.
  • Bank details.  Give dapShare your bank account details, and your fellow sharers can easily access them when they need to pay you back.
  • Better notifications. More information in your email notifications that is relevant to you. 
  • Debt Alarm and Debt Reminders.  Automatic debt reminders sent out when debts exceed a set value (or login to send an automated debt reminder to your fellow sharers when it suits you).
  • Easier sharing. No more calculators.  dapShare now does all the ugly math for you.
  • More reliable.  dapShare has been completely reprogrammed from scratch.
  • Prettier. Yep.

Why should I use this?

1. It's quick, easy and painless to use
2. It'll make your sharehouse (or group holiday or roadtrip) simpler and happier
3. It's 100% FREE, and always will be 

Yeah... thanks, but no thanks

How do you currently split expenses in your group?

If the answer is "with difficulty": dapShare takes the pain away.  Just pay the bill yourself, enter it in dapShare, and all your housemates will be reminded to hit you back.  It will even give them your bank account details so they can easily pay you.

If the answer is "we use a cash kitty": let me introduce you to the 21st century (hint: less paper, more web).  Handling cash is clumsy and time-consuming; plus it's not transparent at all - how do you know who spent what on what?  dapShare is essentially an online kitty.  It's the Microsoft Word to your handwritten letter.  It's the Twitter to your SMS.  It's the YouTube to your... real life.  Get it?

If the answer is "we don't": you'll be surprised the kinds of tensions that can arise in a sharehouse when people feel others aren't contributing.  Why submit yourself to this? dapShare can provide a transparent ledger of your house's expenses, and keep track of who has paid for what, while you spend your time having fun (and occasionally cleaning the bathroom, dammit).

Still not convinced?  Leave a comment below to let us know why, and we'll see if we can do better.

$342,000 already shared: much more to come

Since inception, dapShare has faciliated $342,000 worth of expenses between friends. That's a lot of money to ignore and just hope it all breaks even in the end! We like to think this means we've helped the friendships of hundreds of Australians (and possibly a few of our British members too).

To show how far we've come, here's a snapshot of dapShare circa 2006:

dapShare.  So useful you'd even endure this.

What next?

Our goal is to get to 10,000 registered users. And when we get there, we plan on making a dapShare iPhone app to make it even easier to share money between friends.

So please, sign up and give it a try - and be sure to let your friends know if you think they'll find it useful (we reckon they will).

We'll keep our ears to the ground, and we are working to continue smoothing out the site over the coming weeks. So, most of all, we want to hear from you - if you have any feedback or suggestions, please don't even think twice about getting in touch with us.

Happy sharing!

Wednesday, 13 April 2011

The little-known 'First Home Savers Account'

by Rob d'Apice
Many prospective first-home buyers know the state government will give you a $7k grant toward your first home (the First Home Owner Grant).  Quite a few also know about the first home owner stamp duty relief, that can save up to $18k in avoided duty depending on the cost of the house (the elusively named First Home Plus Scheme).  But few people are aware of the First Home Savers Account - a recently introduced federal government scheme to help you save toward your first home.

What is the First Home Savers Account?

The First Home Savers Account was an election promise of the 2007 Labor platform - and became effective 1 October 2008.  The basic features of the account are:
  • Government contributions: Each year, the government will contribute an amount equal to 17% of the savings you have placed in the account - capped at $935.  This amount is indexed and will increase over the life of your account.
  • Reduced tax rate on interest: You will only pay 15% tax on the interest you earn in the saving account (if your taxable earnings are between $37k and $80k, this is a 50% discount on the tax you would otherwise pay).

There are a few things to keep in mind in deciding whether the account makes sense for you:
  • The four-year rule: You cannot withdraw your money until you have made at least a $1,000 deposit in four separate financial years (they don't have to be consecutive).
  • Changing your mind: If you purchase a house before you have satisfied the four-year rule, or if you decide to discontinue your contributions, you cannot withdraw the money for another purpose - the funds must be transferred into your superannuation and cannot be accessed (generally) until retirement. [EDIT (17/06/2010): These rules have now changed!  Check out our update post now.]

The account is perfect for you if you know:
  1. That you definitely want to buy a house sometime down the track; and
  2. That the purchase won't take place in the next 4 years [EDIT (17/06/2010): No longer true!  Check out our update post now.]

One other pointer worth noting: the accounts are linked to individuals, not couples - so you and your partner can both open an account.  Furthermore, only one of you needs to satisfy the four-year rule.  That means if Bob has been saving in his First Home Saver Account for four years, but Jane only opened her account two years ago, Janes can still withdraw her money to use with Bob on that new condominium.  So if your partner has already knocked off a bunch of the years in their four-year requirement, why not consider opening an account now?

How much is it worth, really? 

If you can save $400 per month for 4 years, the total gov't contributions (including interest) would amount to $3,560 PLUS $310 in avoided tax on your savings (if you are in the 30% tax bracket, ie earning > $36k pa).  A grand total of $3,870.

Where to get one?

The First Home Savers Accounts are managed through the banks - each have their own accounts offering the above features with their own interest rates, so it's worth having a look around at what's available.  

At time of writing, the Members Equity Bank (meBank) appear to have the best offering with a 5.50% variable interest rate, followed up by ANZ at 5.25% (if you want a big brand) [EDIT 15/2/2012: ANZ is no longer offerring FHSAs to new customers. To find the best deal, create a free account with Prosple and we'll help find the best plan for you!].  Be warned: some banks only credit the interest annually (eg Commonwealth bank), so you'll end up with less interest earned overall.

Choice magazine did a great comparison of the offers back in August 2009 - worth checking out if you're looking into one of these accounts.

The ATO website is also a good stop for any more information.