Can you solve a year 12 personal finance exercise?
Financial literacy may be lacking in Australia but one group of year 12 students are attempting to solve for a scenario that many Australians face.
In a recent article I made the following statement, “As a society we have continually put more of the onus on individuals to sort out their own financial future without providing basic education in how to do that. And unsurprisingly we have a financially illiterate society.”
On an aggregate basis this is certainly true. There have been countless studies of working age Australians showing that many people are unable to answer basic questions related to their finances.
However, this doesn’t mean that this is a universal issue. I interact with members of the Morningstar community who have educated themselves thoroughly on financial concepts. And there are countless free resources – including Morningstar - available to gain the knowledge needed to successfully navigate a financial system that puts more of the responsibilities on individuals for their own outcomes.
In response to my statement in tje article I heard from a mathematics teacher who kindly shared part of the curriculum his year 12 students take in their General Mathematics class. To say I was impressed is an understatement. What I liked about the exercise is that it touched on real life financial decisions that many Australians face.
What I also appreciated about the exercise and the inclusion in a mathematics class is the inescapable truth about personal finance – the maths matter. I understand the reluctance for many personal finance commentators to ask anyone to calculate anything. It scares people away.
The maths doesn’t always lead to the right course of action. Our personal circumstances influence what is best for each of us. But if you don’t do the maths you can’t make an informed decision and don’t have the basis for figuring out what is best for you.
With that commentary out of the way I leave you with the question asked of the year 12 students.
The question from the year 12 exercise
Introduction
Taxpayers will be paying less tax from July 1 this year when the Stage 3 tax cuts come into effect, which also coincides with the superannuation guarantee rising to 11.5%. Workers who choose to invest the money freed up by the tax cuts will be thousands of dollars better off in retirement compared to those who spend it.
Nick is aged 30 and will settle on his first home on July 1, 2024, taking out a mortgage for $x at 6.5% p.a. compounded monthly over a 30-year term.
He plans to retire at age 60 and hopes to have a significant amount of money saved in superannuation, which currently has a balance of $y.
Nick’s annual income is $z and his employer will pay 11.5% superannuation monthly into his superannuation fund which returns 6.5% p.a. compounded monthly.
In this Investigation you will need to model Nick’s expected financial position at age 60, with the aim of providing advice on how he best uses the extra income from the Stage 3 tax cuts.
Part A: Baseline Figures
Make assumptions on the values for x, y and z above using the following guidelines:
Home Loan ($x): $400k-$600k
Super Balance ($y): $40k-$80k
Annual Income ($z): $80k-$120k
Question 1: Calculate Nick’s minimum monthly repayment on the home loan.
How much interest will he pay over the 30-year period?
Question 2: Calculate the monthly amount deposited into Nick’s superannuation fund by his employer net of contributions tax (15%).
Question 3: Calculate the total amount he will save in his superannuation fund by age 60.
How much of a return is generated over the 30 years?
The above calculations can be done using a financial calculator but the results should be confirmed and illustrated using an Excel spreadsheet.
Part B: Tax Cuts Prediction
Use the Stage 3 tax cuts calculator https://www.abc.net.au/news/2024-01-25/stagethree-tax-cut-calculator/103387580 to calculate Nick’s annual tax savings.
Convert this to a monthly amount that Nick can use to either boost his superannuation savings or pay down his mortgage.
Question 4: Make a prediction as to which option (boost superannuation savings or pay down the mortgage) will put Nick in the strongest financial position when he retires at age 60.
Question 5: Explain the reasoning behind the formation of your prediction.
Share your answer with me at [email protected]. I will publish a follow-up article with some considerations and free tools that can be used to help answer the questions.
