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Click here to see the article ‘Super Smart’ which was published in the latest issue of the TRADIE magazine, written by Trevor Thompson.
By TREVOR THOMPSON of
INSIGHT WEALTH PARTNERS
There are so many things to think of when you’re young and starting your own business – maybe that’s why the boring issues don’t get much attention. And there’s not much that’s more boring for a young bloke than super – in fact, you’ll probably spend more time choosing your mobile plan than planning you retirement.
WHAT ARE YOUR PRIORITIES?
Now you’re a sole trader, superannuation is no longer compulsory, and you’re not going to make voluntary contributions when you’re worried about getting enough work in to pay the bills. Fair enough too.
A new business needs cash flow, you have to feed it before it feeds you.
But at some stage it will be up and running well and you’ll be making a good living (if it doesn’t, I hope you stored the last boss’s number). Now it’s time to think of the future and turn business cash flow into personal wealth.
WHAT EXACTLY IS SUPER?
Before you all switch off because you’ve been looking at the annual statement telling you how much you lost for a few years, let’s just get one thing clear. Superannuation is not an investment. It is a tax structure for holding investments in. You can choose the investments your superannuation invests in (there is a fair chance one of the bosses you’ve worked for has his factory in his super fund) but that’s a whole other story to discuss in another article.
TALE OF TWO TRADIES
Let’s talk about two electricians, Mick and Johno. Each went out on his own two years ago at the age of 25 and each makes a profit of around $70,000. Mick fancies a new ute with a towbar. No problem, he can afford the payments. Johno’s three-year-old ute is running well and he just made the last payment.
After a chat with his accountant about managing his future tax bill he knows he can claim a deduction for super contributions. Reluctantly, he dusts off an old super statement, rings them up and starts a monthly contribution. Mick is 36 before his wife and accountant finally convince him to do the same thing.
DO THE MATHS
If you work for a boss and make $70k then the boss will be paying nine per cent to your super fund. The government holds out its hand for 15 per cent and you end up saving $446 per month.
So if Mick starts at 36 and Johno started at 27 is much difference if they both retire at 60?
On an average return of seven per cent over the term with inflation running at three per cent, Johno has just over $406,000 in today’s dollars producing a retirement income of just under $29,000 pa while Mick has $247,000 producing a retirement income of around $17,600 pa.
That’s the magic of compound interest. There’s a moral to the story of Mick and Johno. I bet you can work it out.
Trevor Thompson is Senior Financial Adviser at Insight Wealth Partners