A managed fund, also known as a unit trust, is simply where you pool your money with other investors into a single fund. The fund has a fund manager who will invest on your behalf. The fund manager is then able to spread their accumulated buying power across a number of different investments.

A fund manager accepts the worry over the investment—that’s what they are paid for. When the share market falls heavily they can be more level-headed than you are in how to handle a share market melt down. There are many other advantages of using a fund manager. They may be able to buy certain shares or be able to participate in an IPO (an initial public offering, commonly known as a share float) that you could not do as an individual investor.

A major advantage of a managed fund is that if you only have a small amount of money to start investing you can still buy shares through a managed fund and keep adding to it as part of your savings plan on a regular basis. Investing in a $500 block in a share parcel doesn’t offer strong returns, however by using a fund manager and investing $500 per month in that fund you will not only increase your share holding, you will also benefit from dollar cost averaging. Dollar cost averaging is investing a fixed dollar amount on a regular basis, in order to smooth out the volatility in the marketplace.

Managed funds do attract fees known as management expense ratios (MER) and some managed funds may also charge entry and exit fees. Like any investment, there is also no guarantee that a fund will make you money and always remember that past performance of a managed fund is no indication of its future performance.
(Suggested alternate text)
Managed funds do attract both direct fees (charged directly against the account) and indirect fees (not charged against the account but against the gross investment return) and may also charge entry and exit fees and fees for certain transactions. Like any investment, there is also no guarantee that a fund will make you money and always remember that post performance is no indication of future performance.

Parents want nothing better than their child to receive the best education possible, and many are losing faith in the public system.

But for what reasons? Is it because we read continuously of the lack of funding to our state schools? Is it the perception of a lack of discipline in the public system? Or, is it because perhaps the student can benefit from the old school tie, which may present the ‘right’ contact down the track? There are many arguments for both sides and I’ll let you decide on which ones you listen to.

There are many reasons why parents today are working so incredibly hard and in many cases more than two jobs to place their children through private schools. Most of the time this means that families are working four jobs to ensure their child’s education. In these families, all this hard work is not taken for granted. The children of these parents walk through the school gates everyday focused on learning and value education. The whole family unit has a clear commitment to learn and do your best.

Common reasons parents send their child to a private school include:

• They value education and appreciate what a good education means for not only the importance of learning but also the head start it provides their child in fulfilling their potential.
• They cater for the social, cultural and spiritual needs of individual pupils, not just academic.
• Government funding of public schools has fallen away and in many cases some schools are simply receiving little or no funding at all. Parents don’t want their child to miss out on opportunities as a result. According to the Australian Education Union, Commonwealth funding to public schools has decreased from 42% to 36% between 1996 and 2006 . The system simply does not have the resources it needs. It is hard to believe that in a so-called intelligent Western society such as ours, focused on being competitive in the world, our education system is poorly funded.
• Discipline appears to be more prominent in private schools.
• A wider range of facilities from sport and music to debating.
• Private schools have higher retention rates and students are more likely to complete Year 12. A report by the Centre for Independent Studies shows this rate is as high as 84%.7
• Studies have shown that students from private schools are also more likely to go on to further study, which enhances their future employment opportunities.8

As we can see from this chapter, there is a trend towards private schooling in Australia. As the past, present and future costs of fees shows us, if this is something you are considering for your child, it requires forethought and planning. This issue of rising school fees is not going away. If you want to send your child to a private school, prepare, plan, and avoid disappointment.

In the next chapter we will look at what you need to consider in making this decision.

It’s amazing how little importance everyone places on this aspect of wealth creation. Personal insurance is about protecting what you have financially built to date. It’s about making sure that the strategies and plans you have in place remains in tact should anything happen to your health or die prematurely. Don’t leave your family in a mess.

Personal insurance
Being more specific, when I speak about personal insurance I am referring to the following four areas of protection:

• Life cover
• Total and permanent disability insurance (TPD)
• Income protection
• Trauma insurance.

I will cover each of these areas later in the chapter.

I can remember the slogan for a major credit card ‘Don’t leave home without it’? Well this same line can apply equally to personal insurance. Personal risk insurance is financial cover that protects you and your family in case of death, sickness and injury.

In this chapter we will take a look at what personal insurance is, what insurances you need and must knows on insurance.

It can never happen to me!
Research shows that Australians have a one in three chance of becoming sick or disabled for more than three months before the age of 65.12 Insurance is therefore critical to helping family members manage if the major source of income is lost.

As a parent, when someone depends on you financially, you have a financial responsibility. If you have dependants and other financial liabilities, you need to be adequately insured to help those left behind pay off those liabilities.

Again I am always amazed how people will walk out theirre front door uninsured. However, if you have just purchased a brand new car, imagine the horror of not insuring your new purchase for its full market value? Could you imagine if you didn’t insure your car and someone rear-ended you? Most of us would not even dream of having our brand new car uninsured it. So why would you treat your own life and health any differently?

Be responsible and insure yourself so that you protect the main income sources of your family—you and your spouse.

Should I insure my non-working partner?
It’s a well-known fact that many Australians, regardless of how large their salaries, are a month away from being in a serious financial difficulties. Should your non-working spouse pass away unexpectedly or be in a situation where he or she is unable to help with the running of the family, you would come undone. This is a major role that needs cash funds behind it to ensure that all the domestic duties are done and that the major income earner can still go about their business of delivering income to the family.

Work through this exercise with your spouse right now. Be honest and don’t cut corners and expect your in-laws or parents to help out. They have a life too.

However, if you have nothing saved at all and you need to start from the beginning, your best option is to invest in a managed fund. It is the same principleal as a savings account, you organise a direct debit of a set amount to come out of your account each month that goes into the managed fund.

Which managed fund?
As mentioned previously, the best shares to buy are Industrial shares, therefore the best managed fund to choose is an industrial shares managed fund that pays you as many franking credits as possible.

A note:
• Don’t pay entry fees.
• Do consider using two or three different managed funds, and diversify your risk with each fund manager.

Direct investing
If you have a lump sum and are considering a tailored direct share portfolio, you will need between 15 and 25 stocks, seeking advice would be strongly recommended. There is a lot to consider and learn.

Where possible, invest any additional cash from work, such as bonuses or an inheritance, straight into the savings plan. Ensure that the income from the investment is being reinvested so that it’s compounding and the franking credits are returned back to the plan so that the income stream is added to the overall saved amount.

If you require a savings calculator see www.infochoice.com.au and look under the banking section. Please note, this calculator gives an indication only. An exact figure requires advice from a financial adviser.

It’s amazing how easy this strategy is, but how many people have not yet this plan into action.

Let’s look at a case study.

Case study 1
Names Mary and Phil Evans live in Melbourne
Number of children They have one daughter, Theresa, who will begin school in 2011
Age Theresa turns 2 at the end of 2007
Total family income per annum $110,000
Employment Phil has his own business and seven employees at his manufacturing plant. Mary is an architect and works from home part-time.
Education strategy The goal is to send her to a private school from kindergarten to Year 12.

Strategy choice Simple savings plan
Current savings set aside for schooling $20,000
Figures supplied by MLC Limited

Step 1
Identify the school
Mary and Phil have chosen a Catholic private school in the suburbs of Melbourne and wants to send herim there from kindergarten, all the way through to Year 12.

Step 2
Calculate the cost of tuition and extras
Theresa’s date of birth is 31 November 2005 and she will start kindergarten when she is five years old in January 2011. Theresa will finish Year 12 in 2023.

From the research they’ve done, Mary and Phil have found out that currently the tuition fees for the school are $24,500 a year and they have worked out that the total fees will be $328,000 .

Step 3*
Choose the asset class
Because Mary and Phil have already saved $20,000 for Theresa’s tuition fees, they have chosen to make adopt a regular savings plan and invest in industrial shares, which have a growth rate of 5%, will provide income of 5% and a franking credit rebate on their portfolio of industrial shares of 80%.

Based on these assumptions, the amount that is required to save every month is $870 .

Note: If this is the only child for Mary and Phil, they may wish to consider to stop saving in year 2023 and then sell the down their investment portfolio.

However, by then, Mary and Phil may decide to continue on with the savings plan for Theresa’s university fees or other needs.

Some fixed interest investments will produce a steady, regular income return, but their main problem, like cash investments, is limited growth. A fixed interest fund manager will invest your money into an array of corporate infrastructure projects, government bonds and bank bills. Other examples of fixed interest include structures like convertible notes and floating rate notes.

I recall many discussions with investors telling me that investing in fixed interest is safe and they can’t lose money. This is not always correct. Ask those investors who looked for the high interest rate returns from investing with Pyramid Building Society, Victoria’s largest building society and Australia’s second largest, in the late 1980s and early 1990s, their investments are gone.10 Ask those who may have been holding corporate bonds from previous entrepreneurs whose company may not be able to pay their coupon interest and therefore defaulted on their obligations.

I am highlighting these examples to prove that you can lose your capital on fixed interest investments. Investors also misunderstand the higher yield catch. A higher yield means higher risk. If it’s too good to be true, it probably is. For example, a debenture paying a high yield of 11% is being invested in riskier property building projects than the banks may want to be involved with. Some debenture companies take on this riskier project and therefore are required to pay out a higher yield in order to attract investors.

For our purposes, however I don’t recommend investing your cash in fixed interest investments. The previous generation preferred fixed interest investments because they could depend on the regular monthly income, and they were happy with that. As our goal is to find an asset that will generate enough income to pay for our yearly private school fees bill, we need assets that produce a stable and growing income together with some growth to protect our capital base.

If we need our original capital base (our initial investment) to grow, we need to invest in growth assets. When we want our investment to go from $10,000 to $50,000 over a number of years, it requires a growth factor to get us there. The growth component of our return moves the value of our portfolio upwards in value.

Now I’ll show you some growth assets.

The decision to send your child could to a private school will be driven by many issues and there are several things you need to take into account like:
• personal preferences
• religious beliefs.

However the most important issue for most people is financial. For many parents, their financial situation and the amount of time they have available to save for school fees determines if it is possible for them to send their child to a private school.

To help you determine whether or not to send your child to a private school here are some things you should think about. Take a moment to consider the following questions.

Question Your comments
Is religious denomination a major issue?
Do you plan to have more children?
What extra cash do you have that is not budgeted?
Is it important to have regular holidays away?
Is lifestyle expenditure important to you such as eating out regularly or updating your car every few years?
What equity do you have in your own home?
Are there unnecessary financial liabilities that you can remove completely or at least reduce?
What expenses can you reduce quickly over the next three years (for example, car loan)?
What level of security do you have with your current job/income level?
What are your current debt obligations and are they onerous?
Are there other possible sources of income you can draw upon. For example, inheritances, gifts from grandparents
Do you already have a savings plan?

When is the right time?
In Chapter 1 we looked at the stages of schooling. All stages have both public and private school options so you may decide to choose a mixture of both public and private education for their child.

When you decide to send your child to a private school, the next question is in what year of their education you’d like them to start in.

You can start your child at a private school in kindergarten but many parents have decided to send their children to private schools at later stage in their schooling, for example in Year 7. The main reason is the cost. Many parents believe that as long as their child is educated towards the end of their schooling years, tertiary education may not be as hard.

Based on my own experience, this is not necessarily the best move. In discussion with other parents we have noticed the increased confidence in our children, their increased learning capacity, and their ability to effectively communicate (they start presenting in front of their class from first term). These early years are so very important, and it will truly benefit them for the rest of their lives. The most important skill they are leaning is the skill of ‘how to learn’. This, I believe, is as important as the content in the curriculum.

Another thing to take into consideration is your child’s maturity, or sensitivity levels. For some a move from a public to a private school at age 13 can be disastrous where at age 6 there may have been less opposition. Likewise they may not thank you for trying to move them in their last years of schooling. At this time, established peer friendships also have to be considered.

If you choose to enter your child into private education at a later level, will he/she be able to fit in easily. Will his current education standard meet that of the selected private school? Often both academically and socially the standard can vary—how greatly depends on both the schools involved and the child themselves. Factor in time to help them through this transitional phase.

Jonathan Cattana

: THE PRIVATE SCHOOL FEE SURGE

HOW TO AFFORD IT – AND STILL HAVE MONEY IN THE BANK

Australian parents are increasingly looking to put their kids through private schools, but a child born today will cost a staggering $445,000 in basic tuition fees by the time they get through Year 12.

A new book – ‘How to Pay For Private School Fees, And Still Have Money In The Bank’ – explains how parents can provide the type of advantages they believe private schools deliver to their children.

“In 2007, the private school fees for Year 12 will be more than $20,000 and they will continue to grow – taking an ever increasing chunk of our earnings. Even Kindy can cost $13,500 per annum,” notes financial strategist and author, Jonathan Cattana.

“But there are things you can do to, not only put your children through private school, but to also fund their university studies and still have money left over. You don’t even need to be rich to start with.”

DOING YOUR HOMEWORK AND GETTING RESULTS

 Currently, 67% of Aussie students go to a government school. However, there has been a significant trend towards non-government, or private, schools.

 Parents want to give their children the best chance in life and many have lost faith in the public system. During the past ten-years, the number of students enrolled in independent schools increased by 46%.

 In 1955 it cost 129 Pounds to put your child through Year 12, which represented 14% of the average adult wage. In 2005 the cost was $18,000 which represented 33% of the average adult full time wage. On current projections, the 2020 cost will be $53,500 and a whopping 61% of the likely parental paypacket.

 The book – ‘How to Pay For Private School Fees, And Still Have Money In The Bank’ – examines the various reasons why people want to give their child a private education, and how to achieve it.

 Leading financial strategist, Jonathan Cattana, not only explains how to save, but the investment strategies you should be employing to completely underwrite your child’s education. There are a range of options to consider, and the book delivers plain English advice on the best strategies to suit your needs.

 The book details specific ways to beat the crippling cost of a good education and, in the process, develop positive habits for a lifetime: “It’s something that extends beyond school fees, and can establish sound wealth creation for all members of the family,” notes Cattana.

The book is released on Monday December 18, giving people time to start planning for the school year ahead.

• To arrange an interview, contact the author Jonathan Cattana on (02) 8230 3846 or (mob) 0419 201 700

Strategy 4 – A discretionary trust

This strategy takes one of the previous investment strategies and places it into another structure which you may not be familiar with—a trust.

Trusts are not uncommon and there are many types. There are two types of trusts, however, which are used more often than others. They are:
• discretionary trusts
• unit trusts.

However, for the context of this book, I will focus on one main type of trust and avoid going into too great a detail—discretionary trusts. There are many books that cover trusts and I suggest you get as much background information as possible before you take on this strategy.

So, who is involved in a trust and what are their roles?

There are a number of parties or people involved in a trust. They are:

Appointor The boss, the person with the most control. The appointor has the power to change the trustee and appoint a new one at any time
Trustee The person/s or company that controls the trust
Trust The structure that holds the investment assets
Beneficiaries Owners of the assets and entitled to the income of the trust

Financial Adviser Provides advice and manages the affairs
Solicitor Establishes the trust
Accountant To liaise with the adviser and prepare the regulatory requirements for the ATO

One point to always keep in the back of your mind with a trust; you (as the trustee) are the legal owner of the trust property although you are not the beneficial owner of the assets. The trustee has the responsibility to manage the trust assets and must act in the best interest of the beneficiaries.

Note: I may have already started to confuse you at this point. This area requires sound legal and accounting advice to ensure you have the right trust tailored for your situation. Don’t always assume the ‘off the shelf trust’ is right for you. You are far better to pay more for a tailored structured trust than a run-of-the-mill document.

A discretionary trust is called just that because the trustees (typically the parents in this context) can determine how much income may be paid to the beneficiaries of the trust. It is their discretion. The trustees can vary this amount from year to year.

A discretionary trust can achieve a number of objectives:
• It will take care of your family for the long term
• It has sound asset protection. That is your assets may be protected from creditors.
• A trust can be very flexible. It can assist in sharing the tax burden among your family and/or other members of the trust.
• It can trade in its own way but it is different from your personal tax structure and/or a company tax structure.

Jonathan Cattana: How much will a financial advisor cost?

How much will a financial advisor cost?
There are two ways financial planners charge:
• A fee for service – a yearly fee or a percentage of your assets invested whereby you are managed at all times by your adviser. If there are any investment commissions or trailing income paid they are rebated back to the client:
• Commissions and trail commissions – this is where the adviser is paid via a product supplier in order to pay for the client’s cost.

Would you pay an adviser a yearly fee? This is purely your decision and sometimes a planner will only work in one particular way anyway. What is required by law though is that they give you a written Statement of Advice (SoA). This term has replaced the more common term ‘financial plan’.

What does a good financial advisor do?
First, all advisers want their clients to succeed. A financial planner provides strategies to help you be on the right road map for your personal and financial goal whatever they are.

For example, what are your goals? If you look at your children as an example, there are a few life goals that your child will go through which your financial adviser can help you plan for:
• school education.
• university education.
• an investment portfolio which may be invested in their first property
• funding their wedding
• assisting them to purchase their first home.

[Insert Road Map – to come – Margaret to do]

A financial adviser ensures that along the way towards saving for your life goals, nothing is left to chance. You have an end result and you simply work backwards and plan every last detail.

This does not mean that you, the client, needs to know all the strategies and legal and tax implication—that’s the planner’s job. However, the client needs to be aware of the disciplines of managing their own cash flow. Cash flow management is the main driver and the separator between success and failure in any financial objective.

A financial planner cannot guarantee returns (if one does then run the other way quickly). The role of a financial planner is to demonstrate the relativity of market returns between the asset classes you are looking to invest in.

Jonathan Cattana explains asset classes

What are asset classes?
The following are investment basics. At the very minimum you should aim to understand the four asset classes and be able to explain them to someone else. The principles of asset classes are very important and will not only prepare you for your approach to saving for private school fees, but also for any other lifetime financial goals you may be aiming for.

There are only four asset classes and they are:
• cash
• fixed interest
• property
• shares.

Cash This is a simple as it gets. Cash assets include any salary or wages you may receive and deposits in the bank or products like cash management trusts. Cash is the most dangerous to be in if you stay invested here for too long when you have longer-term goals. The only reason you would have cash sitting in a bank account is because you are about to buy another asset with it in the next 12 to 18 months.
With cash you can invest:
- in many forms
- directly or through a managed fund
- within Australia and overseas.

Fixed interest Fixed interest investments are mainly referred to as debt securities. This type of asset can be found in the form of government debt and bonds. Other fixed interest investments may sound familiar to you such as term deposits, corporate bonds, bank bills, inflation indexed bonds and debentures. These bonds and other debt instruments can be purchased locally as well invested internationally. With fixed interest you can invest:
- within Australia and overseas
- directly—though this may prove difficult—or through a managed fund.

Property We are all familiar with holding physical property such as owning your own home. This is referred to as holding direct property. You may also own other property such as an investment property.

You can hold property indirectly through a fund manager in the form of a listed property trust (LPT). LPTs can be purchased on the ASX (Australian Stock Exchange), or again managed by a fund manager. Over the past few years, interest and returns in this asset class has exploded and, more recently, Australian fund managers are looking to invest offshore. With property you can invest:
- directly or through a managed fund
- within Australia and overseas.

Shares When you buy shares, you are buying a piece of a company and become a part-owner of that business or a ‘shareholder’ of that company. By being a shareholder of a listed company you are in fact participating in the performance and profits of that company. You can find companies listed on the ASX in any major newspaper.

You may be familiar with listed companies with household names such as Woolworths, the Commonwealth Bank or BHP. Australia represents only a fraction of the total share markets in the world. International shares are a popular asset class. Some examples of international companies are General Electric or IBM in the United States. In this book we are referring to listed shares on any given stock exchange around the globe. You can buy shares within Australia and on overseas share markets. You can invest in shares in two ways:
- directly, that is buying shares on the ASX through a broker
- through a managed fund.

The only consistency between these asset classes above is this: They all perform differently at different times so they all have varying levels of income, they all have their own risks, (yes even cash!) and their price may rise and fall in value.

When you are reading other financial papers or magazines you may see reference to schemes such as tree and almond plantations that are referred to as another asset class. This is not correct, the majority of these schemes are tax driven. There are only four asset classes and I’ve outlined them above. I have always been wary about investment schemes that promote anything that sleeps, eats, grows or walks!