By Lacey Filipich BEng(Hons) MAICD
When I saw Joe Hockey on the news in March suggesting that superannuation (super) may one day be available to help First Home Buyers get into the property market, my jaw dropped. Could it be possible that our country’s most senior financial decision maker has such a limited understanding of the purpose of super? Or was this simply an off-the-cuff comment aimed at taking the population’s temperature on this issue?
Though it would still make me unhappy, as it’s an irresponsible way to poll opinions, I hope it’s the latter. If it’s the former and Hockey’s understanding of super and what constitutes an asset is that dismal, quite frankly we’re up the creek with no paddle. If a Chief Financial Offer (CFO) in the corporate world displayed such ignorance, they’d be in front of the board getting their marching orders. Unfortunately we – the voting Australian public – don’t get that chance till the next election.
If you’re thinking: “What’s the big deal?” Or: “But this will be my only chance to get into the property market – I hope they DO let me use my super!”, ask yourself these three questions:
1. Is a home an asset?
Australians are conditioned to think of property ownership as an investment and a ‘good thing’. We talk about land and buildings as assets – but is that strictly true?
First, let’s consider the term ‘asset’.
According to dictionary.com, the technical definitions include:
- items of ownership convertible into cash; total resources of a person or business, as cash, notes and accounts receivable, securities, inventories, goodwill, fixtures, machinery, or real estate (opposed to liabilities ).
- Accounting. the items detailed on a balance sheet, especially in relation to liabilities and capital.
- all property available for the payment of debts, especially of a bankrupt or insolvent firm or person.
- Law. property in the hands of an heir, executor, or administrator, that is sufficient to pay the debts or legacies of a deceased person.
All correct, but not very useful. I recommend you ditch these definitions in place of this one from Rich Dad Poor Dad author Robert Kiyosaki:
An asset is something that puts money in your pocket.
When does your home a put money in your pocket? Only when:
- You rent out part of the property – rare.
- You sell it and make a profit after all your costs – by no means guaranteed.
Aside from these two instances, your home does not make you money. It costs you money. In fact, it costs you a considerable amount of money. Given it’s not tax deductible and you’re probably going to be paying it off over 30 years via a mortgage, you’ll eventually pay somewhere in the region of twice the sale price to own it outright. You’ll also be covering the rates, water bill, maintenance and insurance. Every year, owning the roof over your head will be taking money out of your pocket, not the other way around.
The home you live in – your principal place of residence – is rarely an asset while you’re living in it. It’s a liability. Never mind the bank and other creditors putting it in your asset column. It’s an asset to them because they can sell it. Unless you have alternative living arrangements, you can’t.
2. Why do I want assets?
We need money to live. Money gets converted to food, clothing, accommodation and all the other more interesting stuff in life according to our whims and desires. Without money, we quickly find ourselves hungry and cold.
Assuming you don’t have a rich grandparent ready to drop off the perch, you get money three (legal) ways:
- Actively earning – exchanging your time and energy for a wage, salary, commission or profit. This is called working. The reason so many of us do it even though we claim to hate it is: it’s the easiest and most commonly available way to get ready cash.
- Drawing welfare – I think of this as being taxpayer sponsored. You can draw social security for a number of reasons if you meet the necessary criteria: not being employed, studying, incapacitated, over working age. Most people will never receive as much in social security as a person working for minimum wage (over $600 a week in Australia in 2015).
- Passively earning – essentially, this making money with your money. You invest your capital into whatever tool you like – term deposits, shares, rental properties etc. – and the cash flow from those investments becomes income. This is where assets come in: recall they put money in your pocket.
Passive earning is by far the best way to go because:
- It happens regardless of what you’re doing – sleeping, working, playing, recovering from an injury or operation, whatever. An asset delivering passive income will keep ticking away in the background no matter what’s happening in your day-to-day existence.
- There will eventually come a time when you can’t work anymore, or at least not at the same rate you used to. That time comes to people at different ages, but the government designates your mid to late 60’s as the age at which retiring from the workforce is ‘normal’. When you stop working, life goes on and you still need to eat and live. Assets providing passive income can fund your retirement so you don’t starve or end up in state care.
- Welfare will never be truly safe or guaranteed. As a population, we are ageing. This inexorably leads to fewer younger people funding (via taxes) the rest of us. With a smaller pool of money being drawn on by more people, what do you think happens? We each get less. Yes, even in our prosperous and well-endowed nation.
The bottom line: to get passive income you need assets.
3. How do I get assets?
Simple: you buy them. Simple I said, not necessarily easy.
If you want to retire before the government-approved age, you will be focused on using part of your actively earned income to buy assets. You’ll be putting aside 10, 20 or even 50% of your pay and slowly accumulating whatever types of asset take your fancy. Over time, the compounding effect of these assets and any growth they enjoy mean your passively earned income grows and eventually you don’t need the active income to survive. This is a liberating day, and I hope you have the experience.
Unfortunately, not everyone behaves this way. In fact, most people don’t.
They buy liabilities or go into debt, and before they know what’s happened they’re 65 and unable to continue working but without any of those lovely passive-income-generating assets, so they suddenly become reliant on taxpayer sponsorship (i.e. welfare) to live. It’s often a rude shock. After all, the pension is just a fraction above the poverty line – it’s not a recipe for fun.
To address this behavioural problem, the Australian government introduced compulsory super in the early 90’s. And it’s a jolly good thing they did.
Super is paid by employers over and above your salary into a designated fund of your choice. The purpose of that fund is to buy assets that will provide you with a passive income in your retirement, therefore relieving the taxpayer of the burden of sponsoring you and hopefully giving you a better quality of life. Genius. And that’s the wonderful thing about super – you’ll be accumulating assets without having to really try.
But it’s not foolproof.
Just ask those Australians who planned to retire in 2009 with their portfolios weighted to Australian or international shares. When the Global Financial Crisis (GFC) reared its ugly head, many saw half the value of their superannuation disappear overnight. For a large portion of that group, retirement was put back a few years at least, perhaps indefinitely.
How you manage and allocate the assets in your super will affect your passive income in retirement. So it’s best that you learn about assets and their markets so you can make informed and timely decisions about what assets you want in your portfolio.
So… what does that all mean?
In brief, our three questions and their answers were:
- Q1: Is a home an asset?
- A1: No.
- Q2: Why do I want assets?
- A2: To earn passive income.
- Q3: How do I get assets?
- A3: You buy them using your active income and super.
Now the big question… should you buy your home with your super?
If, after all this, you answered ‘yes’… give yourself a face-palm then please return to the start of this article and re-read. If you haven’t changed your mind by the time you’re back here, we need to chat. I’d hate to see you living on the pension when you’re in your 60’s. However, if that is your desire, I wish you luck creating a fun retirement on $400 a week.
I hope you answered ‘no’. If so, it means that you understand super is about buying assets that will put money in your pocket. This puts you ahead of the game. If our incompetent politicians somehow make it possible for you to access your super to buy your home, you will be intelligent enough to say ‘But that’s stupid, I’m not doing that.’
You can bypass the arguments about inflating property prices, or people making poor purchasing decisions on their home and therefore losing super value, or about our already escalating debt levels. These may or may not be relevant at any particular time in our economic cycle.
What is critical and everlasting regardless of the state of the economy is:
Super is for buying assets.
Your home is not an asset.
Therefore super should not be used to buy a home. Ever.
Q: But if I don’t use my super, I can’t afford to buy a home.
A: Then you can’t afford a home right now. Sorry, but that’s the truth. Try these four tips to help you toward your home-ownership dream.
Q: That’s not fair. I deserve the opportunity to buy my own home. Super is mine to do with what I will.
A: Life’s not fair. If you think it should be then I applaud your idealistic sentiments but I don’t like your chances of success. ‘Deserve’ is irrelevant – ‘earn’ is the only applicable term here. Super is not yours until you retire, but if you want to be more active in how it’s allocated, that’s fabulous and should be encouraged. Just not for your own home.
Q: What about using super to buy investment property?
A: Totally different from a home. An investment property should generate an income for you via the rent. The discussion is then about which property you buy, how you leverage debt against your super and how much of your super portfolio should be allocated to property – a subject for another post.
PS. If you happen to be connected to Joe Hockey, please send him the link to this article. I suspect he needs it.
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Lacey Filipich is the co-founder and director of Money School. She helps parents raise financially savvy kids and helps adults get on top of their finances. Connect with her on LinkedIn and follow the Money School Facebook page to learn more.