Cost of Ownership
It is essential to understand and more importantly appreciate the power of compounding to fully grasp the cost of something, whether it’s a service or software or a one off-cost. Christina from SMSF Investment Strategies left a comment on my Preparing your own Self Managed Super Fund (SMSF) Tax post that she thought you had to use software like BGL’s Simple Fund to prepare your accounts and tax. That reminded me why I choose not to use BGL or any other paid software for my SMSF accounts. The short answer is I am tight-arse, but the real answer is because I look at costs through compound eyes.
I did download trial versions of BGL Simple Fund and MySF and found both to be OK pieces of software. I originally decided to use Excel as I already owned it, already knew how to use it and could get more control and understanding of the reports it produced. Though the main reason for choosing Excel was cost of ownership.
| Year | BGL Software | MySF |
|---|---|---|
| 10 | 8,284 | 4,507 |
| 20 | 33,297 | 17,888 |
| 30 | 110,983 | 59,450 |
| 40 | 352,265 | 188,534 |
Staggering figures aren’t they? I’m not picking on cost of SMSF software, it was simply the impetuous for this post. Cost of ownership applies to everything and it is the compounding that leads to the staggering long term cost of ownership for things that don’t even appear to be expensive.
I prepare my own tax accounts as I found it took almost as much work to prepare them for my accountants and then I had to double check all their work anyway. Throw in the $1600 my accountant charged and I realised that after the forty years or so I planned on running my SMSF I’d have $1.3 million more in my super account and it became a pretty easy decision. I remember a friend, Daz, thinking I was insane to go to the effort of getting to know the tax laws and how to prepare accounts. He thought my time was more valuable, which was nice of him to think so, but I viewed it as an investment in myself and our financial future. Heck people pay to learn this stuff and here I was basically getting paid to teach myself.
At this point I should mention that I’ve been using an annual rate of return of 12%. You can download the cost of ownership spreadsheet and input whatever figures you want. The spreadsheet is easy to use and only has four inputs; the original cost, an annual cost, number of years and your rate of return. The spreadsheet is protected, but it can be unprotected via Tools->Protection in Excel.
I decided not to take into account inflation, as services with annual costs will inflate which will at least in part offset the reduction in the current cost of ownership.
I should also mention that I’m not picking on accountants. A good accountant can be worth more than you pay them, it is their advice that is valuable. Once again if you know a really good accountant in Melbourne please let me know. I’m also sure that preparing your own SMSF tax and accounts is not something many people are actually interested in doing. However, the larger concept here is Cost of Ownership. If you want to be wealthy the easiest way to do so is to ensure you spend less than you earn each year and maximise the rate of return on your saved funds. If you want to spend less than you earn then an easy way to motivate yourself is to understanding compounding and the cost of ownership.
I’ve called this spreadsheet cost of ownership, but it can also be used to highlight the benefit of saving and investing. Most middle class people in a country like Australia should be able to save $100 a week. That $5k a year compounds to $1.2M after 30 years and $3.8M after 40 years!
Let’s look at this topic another way. A dear friend, I’ll call him Henry, once received $100,000. As he was doing his PhD at the time and that was many years ago it was a lot of money, actually it probably still is a lot, but it was a real lot back then. I desperately tried to get Henry to understand compounding and pleaded with him to, at a maximum, only spend the income the money earnt each year. I explained that whatever he did he should not spend the capital. As interest rates back then were around 7%, I showed Henry how he could spend $7k a year and not even touch the principle. $7k was a lot of money to a uni student. I didn’t bother explaining that he should actually spend less to fight against inflation; one step at a time and I was trying to make it seem vaguely appealing.
Henry proceeded to blow the money. He did buy some nice things which no doubt he got a lot of enjoyment from, but he could have bought all those things and still had his $100k now if he’d only delayed his gratification.
One other perspective which is for my good friend Paul. He has asked me a couple time whether I’m earnings more via my investing than if I worked. I’m fortunate that I can actually chose between the two. The reason I’m fortunate is that I followed a very simple plan. I maximised my income, saved as much as I could and invested it well enough to get an acceptable return. That’s a pretty simple path and plan, though strangely I didn’t see many people walking down that path with me. Sorry, I know I ramble and perhaps even rant. This was meant to be a simple post on cost of ownership, but hey all these topics are one in my mind. My short answer for Paul is absolutely not. If I returned to business consulting I’d earn significantly more than I do by investing. The long answer is absolutely yes. Through investing I’ll earn significantly more. I’ve already banged on way to long so I’ll post a spreadsheet and more on that topic in a day or so.
As I’ve highlighted the long term cost of ownership of SMSF software, it would be remiss of me not to provide a solution. GnuCash is an open source accounting package which is free and can be used to manage your SMSF accounts. My only disclosure is that I’d like other people to start using GnuCash so we can share tips and tricks on how best to use it for managing our SMSF accounts.
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Thanks for your contribution.
I have been doing my SMSF accounts and tax return for 3 years.
I’m not an accountant, so it is easy for me to agree that it is not much more work to do it all yourself. However, for all the accountants out there, I am also happy to recognise that that for many, the services of an accountant are of value. Perhaps I get by without needing an accountant only because of a very understanding auditor!
I started off using Excel (or an OpenOffice equivalent), but soon discovered that it was too easy to make mistakes keeping track of everything.
So I too found my way to GnuCash, which although a bit clumsy, is good at making mistakes obvious.
As the super fund accounts seem to require share transactions under “Expenses” or “Income”, to generate visibility of investment purchases and sales I include “Share Purchases” account under “Expenses” and a “Share Sales” account under “Income”.
As I have not found any SMSF GnuCash account setup examples I have made my own up. So, just wondering how you setup your GnuCash accounts?
Regards,
Chris Thompson
Hi Chis, thanks for stopping by and commenting.
This is my first year using GnuCash and I am still working my way around it. I haven’t created separate share purchase and sale accounts, though I can see why you did. For my cash flow statement, this year I created a custom report by modifying the standard transaction report to only contain my bank accounts. I then copied that output to Excel and tagged each transactions with a code and then ran a Pivot report to get the totals. I entered those into my own cash flow report. I hope to come up with a better solution, but wanted to do it that way this year to double check the income report from GnuCash.
I’m still struggling to finalise my accounts and will do a write up when I do. It’s great to know someone else is using GnuCash, so keep in touch.
Dean
Dean
There is are a number of major problems with your argument.
1. If you use BGL software this integrates with the accountant and auditors software saving you thousands in audit and admin costs
2. I seriously doubt you can prepare compliant accounts with all the correct calculation in Excel. The SMSF laws are far to complicated
The result is, that by doing it in Excel, you will actually be paying more in audit and accounting fees and have the risk of your fund being non compliant that would cost you a lot more in tax
Hi Ron
Thanks for stopping by to contribute your opinion. Obviously I disagree:
1. I pay $380 a year in audit fees, and have been quoted $295 by another provider. I decided to stay with my auditor as he’s a nice guy and puts up my spreadsheet and now GnuCash. So there is no money to be saved there. Not once has my auditor or any of the auditors I’ve spoken to said they would provide a discount for BGL software users.
2. The calculations for a simple super fund that invests in basic assets like shares and cash are straight forward. I agree the SMSF laws are unneccesarily complicated and may be too complicated for some, but to assume they are too complicated for all is a poor assumption.
I think a better argument for using off the shelf software is in time savings. It has taken me many days, perhaps even weeks, to implement my systems. While I enjoyed doing that and view it as an investment, for many people it would simply be a waste of time.
If I was time poor I would opt for using package software, preparing my own tax and sourcing my own auditor. I see that as a great compromise in time and money saving. If you use package software for your SMSF, then preparing your tax is straightforward.
The majority of people are probably better off using package software for their SMSFs, but they should also accept the true long term cost of doing so.
Hi Dean
I agree with some of your concepts however how are you getting $8,284 for 10 years of ownership. I am a current BGL user and it costs me $385 per year.
Hi George
The good news is your cost of ownership over the next ten years will be less than $8,284. This picture in the post showed out I got to that figure. You could download the spreadsheet to see your own.
My ten year ownership included purchase cost and a rate of return on the purchase price and annual subscription of 12%. Without the purchase cost, 10 years with 12% is $6,400 and at 10% CAGR it $5,700.
I should add, that there are numerous benefits to using SMSF software. Ease and compliance are near the top of that list.
For those looking for an alternative then
GIMPGnuCash does the job admirably, perhaps with a little Excel support to ensure capital gains is easily calculated. The price tag is certainly appealing to a value conscious guy who implemented complex business software for a crust.Hi Dean,
Your inputs on SMSF (through which I found my way here) are really appreciated by a “noob” to SMSF like me. Thanks! With that last comment on GIMP(5 November 2009 at 2:57 pm), did you mean Gnucash? My cursory search on GIMP indicated it to be graphics manipulation software…?
Thanks Michael
You got it in one. Gnucash is right. Gimp is my image editing software and another great program.
Good luck getting up to speed with your SMSF, feel free to ask any questions.
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