Kuta Beach

Kuta Beach

Tuesday, 29 July 2008

Australians Angry as Superannuation Funds Tank

I have been reading How to Cope with the Super Blowout. In Australia, like America, there is a forced savings policy whereby employers must give 9 per cent of income into a retirement fund. Most Australians it seems have no idea what the fund manager does with this money. They just seem to have faith in the government. Around about now annual reports are arriving in the mail telling Australians that in the last year their super fund has gone down in value by 10 to 20 per cent thanks to global financial uncertainty.

As the comments section suggests, many are not happy. Some are blaming the Rudd Government who went into power just as things started to go bad. This doesn't necessarily mean that Rudd is guilty of anything. If I walk into the house just before the vase falls and breaks, who says the vase wouldn't have fallen if I hadn't walked into the house? Some are saying buy gold. No doubt, gold has done well recently, but who says it will continue to do well. Some say buy property because it only ever goes up. This is just false. The super fund mangers are telling everyone to relax and to look at the long term.

Although I am a fan of investing my money in super, I do not like the arrogant and paternalistic policy whereby the Government thinks it is a better money manager than the average person and therefore forces a portion of income to go into investment they deem are superior. Not everyone wants to be invested in shares and long term increases in share value are not guaranteed. If they were, these gains would be arbitraged away. In my opinion, forced savings or superannuation should be done away with altogether so that regular Australians can do what they want with their money. Some say that with SMSF (self-managed super funds) individual do have control. But this is not total control. You cannot purchase a Coke with money in your SMSF.

Monday, 28 July 2008

The Prestige of Darkness

I haven't seen The Dark Knight yet. I will see it soon. I have read a lot about it, and most people who saw it seem to agree that it is good. Their reasons, however, are interesting. Many say that The Dark Knight is dark, gritty, and brooding. It seems as if any film that is violent, dark, somber, serious, and cynical about human nature, is lauded by critics.

I have read somewhere that so-called erotica is just a name for pornography that is tweaked for upper class consumption. Erotica allows individuals to indulge in pornography without feeling guilty that what they are consumed is sinful.

The same might apply for violent movies. Many serious critics disapprove of the gratuitous violence and gore in teen slasher movies like House of Wax. However, many of these critics praise violent movies like Road to Perdition and Mystic River (both good movies, by the way). These dark, gritty, and brooding films popping up all of a sudden are like the erotica of violence.

Saturday, 26 July 2008

Beijing Olympics Terrorist Threat from Separatists

A bus attack in China was performed by an Uyghur separatist group (see Uighur Group Claims Bus Attacks). Many have heard about Tibet being oppressed by the Chinese. However, to the north-west of China is another autonomous region called Xinjiang, which is made up of many Uyghur people.

The history of humankind is filled with people claiming that certain groups should separate. Not only do Tibetans claim this but so too do Scottish people who want to be separate from the British.

Although I personally think that the CCP's treatment of Tibetans is horrific, I do not think any group of people should simply separate. The problem lies in the definition of a people. Many nationalists claim that all groups should have sovereignty over their own land. However, these people never define what a people is. They never define what an ethnic group is. Looking at the issue objectively and scientifically, it is clear and obvious that due to subjectivity there is no such thing as an ethnic group. There can be one or infinite groups of people depending on who you question. If in theory there can be infinite groups and if the nationalist ideal of giving all groups sovereignty and territory is met, then what we will witness is constant splitting. For example, if Tibetans control Tibet, one group of Tibetans will claim that they are different to other Tibetans and will demand separation. This continues ad infinitum. It is impossible for infinite groups of people to share finite land.

Does this mean Tibetans should be tortured and oppressed by Chinese Communists? Certainly not. Just because we cannot draw lines between ethnic groups, it doesn't mean we cannot draw lines between individuals. It is difficult to know where an ethnic group starts and where it stops, but it is relatively simple to know where an individual starts and stops. Demarcation of individual identity is achieved using the skin. Everything within my skin is me including my heart, my brain, my lungs, etc. Everything within your skin is you. Because it is so easy to define the individual, we can easily set up political systems that give freedom to the individual. These freedoms exist in many countries that emphasize individual liberty such as the United States and the United Kingdom.

Directing Welfare Money to Employment Agencies

In just about all rich countries there is a major problem with the ageing population. With the ageing population, it is expected that public health expenditure will rise. As the population gets older, more and more people drop out from the labor force, which means tax revenue decreases at a time when tax revenue is needed to fund rising health expenditure.

One solution to this problem is to encourage more people to work. In Australia a considerable number of people receive welfare. One way I believe the Government can increase labor force participation is to pay employment agencies to put unemployed people in jobs.

Suppose currently the Government pays an unemployed man $10,000 per year. Instead the Government can auction this unemployed person to employment agencies, who bid down the price of getting this man. That is, the starting price is $10,000 and then employment agencies bid down until one employment agency bids, say, $9,000 for the man. Then the employment agency tries to find employment for this man and if they are successful they will receive $9,000. At the auction full details of this unemployed person is given, including education, work experience, computer skills, language skills, etc. Agencies then can evaluate how easily this man can be put into employment and thus bid the right amount for him.

This system would use the power of the market to put people into employment.

Thursday, 24 July 2008

Harry Potter and the Half Blood Prince

Harry Potter and the Half Blood Prince is the sixth Harry Potter book. The first three I remember were very good. I read them quite a number of years ago. I especially liked the third book Harry Potter and the Prisoner of Azkaban because I thought the time travel was very ingenious. The fourth book Goblet of Fire was okay, but kind of long, and the fifth book Order of the Phoenix was extremely long and quite forgettable.

It has taken me about two years to read Half Blood Prince mainly because I tend to read books long after the hype is down and because for the last two years I have spent much time stressing over university. Now that university is over and I have a six-month holiday before I start working full time next year, I have time to finally read all those books I've been wanting to read. Half Blood Prince is one of them.

I'd like to start off by saying that Half Blood Prince is very dull at the beginning. In fact, one of the reasons why I found it difficult to read this book was because of this dullness. The books throws up hundreds of names and places. I feel like I'm reading Lord of the Rings again. To survive this onslaught of jargon I have to have Internet connection nearby so I can do quick research on various characters and spells I have forgotten.

The fact that many of the characters are older now means that many of them are starting to date others. While many people will like this, I do not like it at all because Harry Potter now seems like a gossip magazine.

At the end, a major character dies. I won't say who it is but I think that Rowling's decision to kill off a character is sensationalist. Obviously death is something that provokes a lot of emotion in people, but when it's overused by artists it starts to lose its effect.

After finishing Half Blood Prince I am now going to start reading Deathly Hollows now, which is the last book. I am also reading a number of other books at the same time, so I will talk about them later.

Wednesday, 23 July 2008

We Wasted $100 Today!

One-hundred dollars is gone! A series of unfortunate events caused it. Firstly, I have a bank account with the Commonwealth Bank (ASX: CBA). CBA has treated me well ever since I was a little boy. My dad started up an account at this bank for me. The main problem with these accounts is that they charge $5 per month in fees. Since I was a university student these fees are waived. However, since my days as a student are numbered, these $5 will come back soon. Therefore, I tried to fix the problem by signing up for a cash management account from CommSec. I figured I might as well sign up and check it out since everything is free and there is no monthly fee for the cash management account. I was asked to transfer some money from my old CBA account to my CommSec cash management account, so I elected to transfer $10. When I did this I had about $60 in my bank account, so everything seemed fine. However, it took ages for CBA to get everything working and by the time everything was ready there was only $8 in my bank account, which meant that I was overdrawn by $2 and therefore the Commonwealth Bank will charge me $30 this Thursday after I get my pay. I'm pretty annoyed because I spent all this time trying to avoid fees and then in the process of trying to avoid fees I overdraw and get slammed with fees anyway. My brother blames me for not being organized with my cash and my dad blames me for not keeping enough cash in my bank account just in case. However, I have always believed that cash is not king and that holding money in the form of currency is a bad idea not only because of loss of investment opportunity but also because of inflation. This is why I always try to get rid of cash as soon as I get it. I wouldn't mind putting my money into the Commonwealth Bank's mutual funds (those managed by Colonial First State) but the problem is that many of them seem to have high fees. As a rule of thumb, do not invest in any managed fund or mutual fund that has MERs greater then 1 per cent.

My family lost another $70 because this week my mom got a second-hand car. It's a 7-year-old car. In order to get the car we have to trade in my mom's old car. However, my mom accidentally filled the car up with petrol and now we are going to give the car to the used car people with a free tank of petrol. One tank of petrol is worth about $70. We tried to siphon the petrol out but the car we have seems to have some mechanism that prevents that.

What surprises me is just how much pain my family and I feel when we see for ourselves the fact that we have lost money. However, both my parents and I have assets in the form of mutual funds and property that fluctuate in value wildly, and yet because all this is relatively invisible we don't feel any loss aversion or emotion.

Update 25 July 2008:
I have been paid from my employer and it seems as if the Commonwealth Bank hasn't charged me any overdraft fees yet. This is slightly strange, but maybe it's because the money transferred didn't actually go out of CBA since it was transferred between NetBank and Commsec, which are both owned by CBA.

Commsec looks interesting. They give cheap trades ($20) but I am a little bit wary about trading. I remember last year when I lost some money buying and selling on the ASX. I might dip my toes in later when I feel more comfortable.

Man Drought? Check Out Cracker Personals!

On the television today there was a news story about a so-called man drought in Australia. Apparently among people aged in their 30s there are more females than males mainly because men are being lured overseas to places like Manhattan where there is a surplus of unmarried males. There is an article on The Age about this called Where Have All The Good Men Gone?

The article states the following: "The fact is there are 20,000 more women than men aged about 30. In economic terms this amounts to a supply shortage. Many of those women who might have contemplated producing a brood of new Australians could have trouble finding a partner."

This idea of a "supply shortage" assumes that everyone is out to get married and that polygamous relationships are not considered. Marriage I understand is a traditional social institution. It's something people do because it's what everyone else does. However, the average Australian has a $3000 credit card debt so just because everyone else is doing something it doesn't mean you should follow. My aunt and other members of the family have asked me whether I would like to get married. They told me that if I wanted them to go shopping for a women for me then they would love that. A lot of people have negative things to say about arranged marriages but I don't see the harm of a little bit of outsourcing especially since modern courtship rituals nowadays are highly complex. In the old days I suppose fathers negotiated with other families to sell their daughters to families with the most wealth. Nowadays the idea that women are owned by their fathers is looked down upon. Women own themselves and are given the freedom to pursue any man they want. The problem is that many women don't, instead expecting men to come to them. Then there are all sorts of complex questions such as whether you have to get consent from a female before you kiss her otherwise you might find yourself in a courtroom being sued for physical harassment. All this reminds me of an EconTalk podcast about Signalling in which Professor Hanson claims that when men and women judge each other they usually look at intelligence, wealth, and health, and that they usually engage in wasteful and inefficient rituals to prove or signal each of these competencies. For example, a man will try to be funny to prove he is intelligent. He will stay up late, party, dance, and play sports to prove he is healthy. He will buy expensive cars to prove he is rich. Hanson claims that this courtships ritual is inefficient and, for the sake of economic efficiency, single men and women should just approach a table and hand each other certified documents of bank accounts and titles of property (to prove wealth), blood test results (to prove health), and academic transcript or IQ tests (to prove intelligence). All this brings up many questions, e.g. how much money is being wasted per year on courtship rituals? To discourage these inefficient behaviors should tariffs be applied?

The whole idea of a man drought I think just doesn't make sense. The last time I checked the Cracker Melbourne Personals, there was a huge surplus of males and there were virtually no women there except for professional escorts who were just far too expensive. Why is it that just about every single woman who advertises here are looking for money in return while men are offering nothing.

Uni Student Cultural Divide

There is an article in The Age today called Backlash Feared Over Uni Students' Culture Divide. The article claims that many Australian universities are dependent on funding from international students and that there is segregation within universities between international students and domestic students.

I have finished university now but while I was there I did indeed notice that international students stuck around with other international students. But that is what was expected. Many of these international students may have been to the same schools together and therefore they know each other well. It makes sense for people who know each other well to continue to be together.

I came from a high school that is under-represented in the tertiary sector, so when I was at university I didn't see anyone who went to the same school as I did. This meant I had to make new friends. Roughly half were international and half were domestic. The main problem with some international students was shyness.

The article claims the following: "Local students tended to work off campus and were not active in student life, while international students spent most of their time on campus, generally in the library, Professor Simon Marginson, of Melbourne University's Centre for Higher Education, told The Age." So then the problem may not be a conflict between international students and domestic students but a conflict between those who study a lot in library versus those who spend much time working off campus.

The article also talks briefly about Voluntary Student Unionism (VSU). It claims that student union groups could organize events that attempt to bring students together but they simply don't have any funding because, when students have the option not to pay student union fees, many choose not to. If students unions are not organizing events then the university administration itself could organize events. If student do indeed want to be involved in social activities then universities can generate more demand for their services by providing these activities. More demand means they can increase prices and get more revenue.

What I really suspect however--and my suspicions are based on observations of other uni students--is that most students nowadays don't care about social activities. They just want to go to university, get their degrees, get out, and get a job. This seems to be the behavior of just about all students, both international and domestic students.

Wednesday, 16 July 2008

Criticism of Kevin Myers's Comments on Africa

I would like to talk about a recent piece by Kevin Myers titled Africa is Not Giving Anything to Anyone -- Apart From AIDS. It was published in the Irish Independent.

I myself give a considerable amount of money to the starving and I'm sure most of that money goes to Africa. Myers however refuses to give money. He says, "It is nearly 25 years since Ethiopia's (and Bob Geldof's) famous Feed The World campaign, and in that time Ethiopia's population has grown from 33.5 million to 78 million today. So why on earth should I do anything to encourage further catastrophic demographic growth in that country?"

The idea here is that the Ethiopians are breeding too much. Given that there is limited food, creating more mouths to feed means each individual gets less food. However, this ignores the reality that in many poor countries there are no institutions set up to give welfare to people. As a result, poor people must breed in order to increase the size of their family and therefore increase the strength and stability of their lives. In many poor countries it is tradition that individual take care of their parents in old age. Thus producing children is a way of providing yourself a pension.

Since most poor people live agricultural lifestyles rather than urban lifestyles, producing more children gives more labor, which in turn can produce more food.

Myers also forgets to demarcate between government and citizens. He says, "Even as we see African states refusing to take action to restore something resembling civilisation in Zimbabwe, the begging bowl for Ethiopia is being passed around to us, yet again." Myers is assuming that because Africans are not intent on civilizing then people in rich countries should help Africans become more civilized by feeding them. Many African governments may not be keen on civilizing Zimbabwe, but the collection plate is being passed around by many organizations that have nothing to do with African governments, e.g. NGOs like World Vision, Care International, and Oxfam, and furthermore, these NGOs are helping African citizens, not African governments. Myers believes that because African governments are guilty then therefore the African people are guilty as well. To use this argument on Germans during World War II, it is like saying that because Nazi Germany has a poor history on human rights that it would be wrong for American soldiers to try liberate Jewish victims of the Holocaust who were German citizens.

Myers's comments are the end are especially horrific:

[Poverty in Africa] is inspiring Bill Gates' programme to rid the continent of malaria, when, in the almost complete absence of personal self-discipline, that disease is one of the most efficacious forms of population-control now operating.

If his programme is successful, tens of millions of children who would otherwise have died in infancy will survive to adulthood, he boasts. Oh good: then what? I know. Let them all come here. Yes, that's an idea.

Myers is saying that malaria needs to work it course because it kills people and killing people is good because the world is overpopulated. Many people want Africans to die and they often use the environmental argument. To test whether they really do care about the environment versus whether they simply hate Africans, you apply the same policies to non-Africans. If Myers wants the poor to fend for themselves against diseases, he must want to same thing for non-Africans (e.g. Europeans), which means that he believes infections in Ireland should run their course and kill children. He would necessarily believe that a European child who is disabled and cannot work to feed himself must be left to die.

The fact that at the end Myers suggests that bringing Africans into Ireland is a bad idea backs up my suspicion that Myers hate these Africans not because of environmental degradation (that is likely just an excuse). Rather, he hates them because they are African.

Australian Energy Companies Boom As Oil Rises

Last Thursday on 10 July 2008 I invested $703 when the All Ords was 5000. Today, Wednesday 16 July 2008, the All Ords has fallen to 4815. The market seems to be going down and down.

A closer look reveals that the problem comes mainly from financials and banks such as the Commonwealth Bank and NAB. Investors may be spooked by problems in America with Fannie May and Freddie Mac.

Energy companies listed on the ASX however seem to be fine. Based on my records, I have done 14,956 kilometers of driving since 17 February 2007. Since today is 15 July 2008 then that means that I drive on average about 10,000 kilometers per year. Since I have driven my car 14,956 kilometers and since my car's fuel economy is 11 liters per 100 kilometers, then it means I've used 1645 liters of petrol so far. Based on my records, petrol during 17 February 2008 cost $1.14 per liter and now on 15 July 2008 costs $1.61 per liter. That is a 41.22% increase. Because petrol has increased by this much, I have spent $773 extra on petrol. This means that if petrol prices continue to go up by this same amount and I do the same amount of driving as I have already done, I will pay an extra $500 per year. That is actually not that much. That is approximately how much is costs to sponsor a child from World Vision for one year.

Here is the the interesting thing. Since 17 February last year petrol has gone up by 41.22% but the stock price of Woodside Petroleum has gone up by 66.9%, the stock price of Oil Search has gone up by 57.7%, and the stock price if Santos has gone up by 86.4% These are all Australian energy companies. It seems as if these energy companies are doing very well under conditions of high petrol and oil prices.

So then what if I buy shares in energy companies as a hedge against fuel inflation? If I assume that share prices move exactly like petrol prices (which is unrealistic) then how much will I need to hold to fully hedge against any rise in petrol? After some number crunching, the answer is $1154. Not much. If I buy $1154 worth of shares in energy companies and if these energy companies' shares go up by the same amount as petrol prices, then I will be fully hedged. If petrol prices rise, I lose more at the pump but I am compensated by capital gains. If petrol prices drop, I make a capital loss but I am compensated by lower fuel expenditure.

Any Australian can buy shares from the ASX by signing up for Commsec. It just so happens that I have about $22,000 invested in a mutual fund. This mutual fund invests about 44% in Australian shares. That means $9680 is invested in Australian shares. Since this is an index fund, it tracks the ASX300 index. I know for a fact that 9% of the ASX300 is made up of energy companies. This means that I have already $871.20 in Australian energy companies. Therefore, I may already have a partial hedge.

Tuesday, 8 July 2008

Petrol From Coal: Energy Crisis Solved

As oil heads to US$140 per barrel, many are looking towards alternative energy. One alternative source of energy is coal. Coal is often used to run turbines that generate electricity, but coal can also be used to produce petrol that runs our cars. The technology for generating liquid fuel from coal has been around for a long time. South African company Sasol can generate petrol from coal at a cost of US$45 per barrel, which gives a hefty profit in today's market. It is estimated that there is enough coal in America to produce petrol to last another 250 years. There is much talk about peak oil and limited supply, but this news deflates all those fears. There can be no doubt now that $140 oil is overpriced. What is needed for a price drop is for this technology to be available for the public. Once this is achieved, and assuming no collusion, competition among suppliers will drive the price of petrol down.

Monday, 7 July 2008

Caught With Child Porn? Call it "Art"

Some time ago artist Bill Henson was arrested for displaying nude pictures of 13-year-old girls during an art exhibition. No charges were laid and he was eventually released. Prime Minister Kevin Rudd criticized the painting and some artists, such as Cate Blanchett, were infuriated.

Now the issue has come up again with Art Monthly Australia releasing a magazine that has on its cover the picture of a naked 6-year-old.

Many people say that banning nude child photos and taking pictures of children at sports games is political correctness taken to the extreme. However, many people do not understand just how many people out there are pedophiles. The fact that child sexual crimes occur over and over again is evidence that sexual attraction to children is rife. There are thousands of websites on the Internet that feed this desire by providing fiction that depicts sexual acts involving children. Even just browsing through a common erotic fiction Usenet newsgroup like alt.sex.stories.moderated can yield hundreds of stories of child sexual abuse.

In addition to the high numbers of child porn fiction out there, there is also a large and growing pro-pedophile activism happening on the Internet. Many pedophiles claim that they are an oppressed people who deserve respect. Pro-pedophile groups include not only NAMBLA but also MARTIJN.

Many pedophiles get away with looking at child porn by searching for family nudist pictures that happen to have naked children in them. Likewise, many pedophiles can also get away with looking at child porn simply by looking at nude child photography, which seems to be immune to criticism because of associations with the art world.

What about parents taking pictures of their children at sports games? Unfortunately, there are pedophiles who go around taking pictures of children in public. They then document their findings on the Internet for other pedophiles to see. One such pedophile is Jack McClellan.

Sunday, 6 July 2008

Buying the Wrong House

Many people believe that property is safe because it is less volatile than the share market. In a thread called Shares vs Property at the Big Footy forums, someone said the following:


It's quite simple:

100% of the share market react to trends. Meaning when there's a crash, a large percentage of share holders react (ie sell up). This causes bigger crashes.

Conversely, 70% of the property market do not sell/react when the housing market downturns.

This means the property market is more stable.

However, in the news today there is an article called Dream Home Becomes a Nightmare, which is about a family that purchased a house and rented it to others. The renters turned out to be murderers who let a little girl starve to death, and now nobody wants to buy or rent the house. Effectively the house is worth nothing. This story illustrates the risks of property investments.

Emerald Lake Park

Yesterday was Saturday. I decided to go to Cardinia Reservoir with my uncle, aunt, grandma, and another family. We took two cars.

When we arrived at Cardinia Reservoir, we couldn't find any spare barbecues, so we had to leave and go elsewhere. We went instead to Emerald Lake Park and saw Puffing Billy. We didn't actually ride on Puffing Billy but we saw it. The reason why we didn't catch the train was because my aunt was very price conscious and didn't want to pay $20 for a train ticket when she could buy a train ticket from Connex for $3. She clearly didn't understand that the Puffing Billy experience is completely different to a suburban train ride. The former is recreational while the latter is functional, that is, we catch suburban trains to get to work.

We ate food at Emerald Lake Park and then walked around the place. There were many families around and lots of little kids running about. One little girl with pigtails was running around in circles and I blocked the circle she was running around in, so she stared at me for a while.

We saw a donkey that was being used for someone's party. It was a party for a little girl named Vanessa. It was her third birthday party. I must admit I was envious when I see kids nowadays getting spoiled with nice birthday parties because I had nothing when I was young. One little girl got on the donkey and as the donkey rode past us, the girl waved at us.

Even though we had to pay $6 for parking for the whole day, I must say it was worth it. The place was beautiful. The lake was especially beautiful. I think it's good that they charge us because that way the place is not too crowded. That was the problem with Cardinia Reservoir. Parking fees keep enough people away so that there is space for everyone. If there are too many people then the administrators can simply increase prices. They keep raising prices until supply equals demand. The fact that I didn't actually pay helped as well.

When we drove back from Emerald Lake Park, we went to Cardinia Reservoir again and found some Kangaroos. We got close to them and took pictures but once we got too close the Kangaroos got scared and backed off.

Thursday, 3 July 2008

The Importance of Dollar Cost Averaging

There seems to be bad news everywhere. Australian shares have sunk below 5000. This is the lowest I have ever experienced. All in all, I have lost about $4000 so far. I am not the only one who has done badly this year (see Buffett's Berkshire in Bear Territory and Enough Wealth June 2008 Net Worth Report). Because I am young and still just starting out in the world, I have relatively little money invested and therefore I have suffered smaller dollar losses compared to actual millionaires or even billionaires like Warren Buffett.

I went through some of the data today and looked at contributions I made to my mutual fund. I wanted to see whether I have been dollar cost averaging. To dollar cost average is to put in the same amount of money every month, e.g. investing $1000 per month. Dollar cost averaging helps smooth out the performance of your investments. Unfortunately I haven't been dollar cost averaging very well. The graph below shows how much money I put in (on the vertical axis) and how the value of the Australian share market (based on the All Ords) when I put money in. If I have been dollar cost averaging successfully then I should expect to see equal height bars everywhere. If there are high bars they should be dispersed across many different All Ords values.


The chart clearly shows many huge spikes when the share prices are high. The $5000 contribution was unavoidable because Vanguard requires you to have that much to start a mutual fund. However, instead of setting cash aside and dollar cost averaging like I should have, I noticed that the market was heading up and up in the early days and so I plunged everything I had into the mutual fund, creating the three other massive spikes you can see nearby. Then when I ran out of money I began to put in around $400 to $500 per fortnight, which was all I could afford given my part-time job. The $1500 spike at the lower end was when my brother repaid me money he owed me.

My plan now that the market is down is to do extra hours at work. After all, I have finished all my exams at university and I have secured myself a full-time job for next year. I have nothing to do but work. While the market is low I will pump in as much money as possible to try even out things. I will try to produce lots of high bars at the lower end of the graph.

Tuesday, 1 July 2008

HECS/HELP: Pay Now or Later?

I have a HECS debt of $35,091 so far and with the interest of about 3 per cent applied every year (interest is inflation rate as measured by CPI) I was charged a little over $800 in interest. My HECS debt then is ballooning.

One option is to pay everything upfront and get a 10 per cent discount. But is this worth it? According to my calculation that I have done on spreadsheet, if I assume I earn $50,000 forever and if I assume inflation stays at 3 per cent and return on investment is 8 per cent, then for a HECS debt of $35,091 I will pay a stream of income whose net present value is just $22,537. Therefore, it is much better to leave HECS debt and to invest any spare money.

However, what if this is taken to the extreme? Suppose that it is possible for an individual to salary sacrifice into super and therefore lower HECS/HELP repayment income (I don't know whether this is possible, so I'll have to ask an accountant). Once HECS/HELP repayment income is lowered below $39,824 then I no longer have to pay any HECS. I can then invest this money. Would I be better off?

The answer is yes. In 22 years if I just leave my HECS alone then the debt will balloon into a $67,238 debt. However, the compulsory repayments, instead of going to the Government or the ATO, goes into my super fund, which I assume grows at 8 per cent per year. For someone with an income of $50,000 the compulsory repayment rate is 4.5 per cent or $2250. This much money invested in super for 22 years gives $133,149, which is much more than the HECS debt.

This concept is graphed below. Investments in super rise at a much higher rate than the untouched HECS debt, which grows according to inflation. The conclusion is that I should try to defer all HECS debt.

Net Worth Report for June 2008

Age: 24

Cash: $155
Managed Funds: $22,852
Super Funds: $3,254
Car: $5,825
Kiva: $313

Net Worth: $32,399

Comments:

My net worth dropped by 2.26 per cent from last month. In dollar terms my net worth decreased by $753. There has been poor share market performance all over the world and especially in Australia. Now that the financial year is over, it is revealed that this year that had just past has been the worst for the Australian share market since the mid '80s.

I am surprised that my super fund is able to get positive returns this month. When I logged in to check my super fund balance I noticed that some funds seem to have negative balances (e.g. -$20) and this got me worried about what sort of fee structure my super fund manager has imposed on me. I have sent an e-mail to them asking about what is going on.