30 March 2012

Next Eleven Frontier Market Countries

Back in 2001, Jim O'Neill from Goldman Sachs coined the term BRIC to denote four countries with very large populations that he predicted would dominate the world economy in the future. His predictions turned out to be correct. Today the BRIC countries dominate the world economy and even challenge the G8 in world politics.

Goldman Sachs has now moved on from the BRICs and have developed the Next Eleven ("N-11"), a group of eleven frontier market countries. The firm has created the Goldman Sachs N-11 Equity Fund for investors who believe the N-11 countries will experience significant growth.

11 March 2012

How to Not Worry about Parking or Speeding Fines

Today I received a parking fine of $66, but I am not worried. I walked back to my car to find a parking inspector standing there. I was with my grandmother, and she apologised to the man The parking inspector seemed apologetic and told me that he felt bad that he had to fine me but that he was only doing his job. I told him not to worry and to give me the fine.

I do not worry too much about parking fines or speeding fines. I believe that most fines are tools by government to raise revenue and that--especially with speeding--it is dangerous for drivers to obey the speed limit. There was a moment in my life when I was very cautious about obeying speed limits and I found that most of the time on the road I kept my eyes on the speedometer and not on the road. This resulted in some very near misses. I almost ran over a pedestrian I also didn't see because I was too busy looking at my speedometer. (For your information, the pedestrian was jaywalking anyway.)

Although I may have received a $66 fine, I will recover this simply by salary sacrificing more money into my superannuation fund. Under Australian income tax law, every dollar you earn above A$37,000 is taxed at 30 per cent. However, if at work I were to instruct HR to salary sacrifice a portion of my income into my superannuation fund, the amount that goes into my super fund will be taxed concessionally at 15 per cent. Therefore, for every dollar that I salary sacrifice into my super fund, I will save 15 cents. In order to recover $66, I would need to salary sacrifice $440 (66*100/15). Suppose I wanted to pay this all off within a year, then because I get paid fortnightly and because there are 26 fortnights in a year, then I would need to salary sacrifice $16.92 (440/26) or around $17 per fortnight in order to recover my fine in a year. Of course, we need to account for inflation and opportunity cost. If I were to take $66 and invest it in the stock market, I would optimistically say I'd get a return of 10 per cent per annum, and so because I am fined $66 then within a year I have actually lost $72.60 (66*1.1). If we do all these calculations again with the adjusted fine of $72.60, I would need to salary sacrifice $18.62 (72.60*100/15/26) or $19 per fortnight in order to recover my losses.

I have explained this concept to some people who are very sceptical. The most common counterargument people give is as follows: "If you can just print money out of nowhere by salary sacrificing into your super fund, why don't you just salary sacrifice everything?" The answer to this is simple: there is a $25,000 limit on how much you can salary sacrifice into your super. If this is the case, why don't I simply salary sacrifice to the limit? The answer is because that would have a massive impact on cash flow and current spending. Although money you put into your super fund is taxed concessionally, the downside is that you have to wait until you are around 65 years old to take it out. For me that means waiting over thirty years to access the money. If I salary sacrificed to the max, my present income would drop considerably and although my retirement thirty years from now would be brilliant if I salary sacrificed to the max, it would come at the severe detriment of my youth. Therefore, I make it a policy to sacrifice a token amount of $100 per fortnight into my super fund and increase it bit by bit as I receive parking or speeding fines. If I were to increase the amount I salary sacrifice by only $20 in order to recover the costs of a parking fine, this would have a negligible impact on current cash flow and current spending. I would barely notice it. It follows then that this system of getting a reimbursement on your parking fines by salary sacrificing only works if you don't get fined every day. If this happens, your current income would decrease sharply and you will definitely feel it.

The parking fine I received today was from a private operator, but most fines are from the state government. If you salary sacrifice into your super fund, the tax concession you get is your gain at the expense of the commonwealth government. Effectively you have transferred money from the commonwealth government to the state government. However, much of state government revenue (around 50 per cent) is in the form of commonwealth government grants. By taking away money from the commonwealth, there is a good chance the commonwealth will cut back on the amount they give to state governments. Therefore, if you are fined by the state government and recover your money by salary sacrificing into your super fund, you recover your money from the commonwealth government who in turn recover their money from the state government. Therefore, when the state government fines you and you salary sacrifice, you hand over your money to the state government who then gives it back to you. There is no net effect.