If the old, superseded gadget is still working it seems a waste to just throw it in the bin. Give it a second life by recycling it and get some money into your pocket.

Another idea could be to re-purpose your old gadget.

In December I upgraded to a new smartphone when I re-contracted. My young children love playing music and taking crazy self-portraits on my wife’s iPhone but they are pretty rough with it. So, over the holidays I reset my old smartphone and set it up as a music player and digital camera.

Gee, was I the best Dad ever! (Well, I got to bask in glory for a few minutes anyway.)

To protect them and me there is no SIM in the old phone and I haven’t set up the wireless internet access codes.

If they eventually break it then that’s ok – I’ll recycle the broken phone for spare parts and hopefully get a few bucks into my pocket.

It’s very alluring – the opportunity to make loads of passive income, working from home running an online business that works for you 24 x 7.

Internationally respected business thought leader and entrepreneur, Seth Godin just published an excellent list of 21 points about How to make money online.

It is an essential read for anyone caught up in the wonder of the money made by the handful of people who did make money online.

I recommend that budding entrepreneurs also subscribe to Seth’s blog and regularly read more of his thought leading ideas.

“That’s interesting”, I thought, ” I might write an article about that”.

Then two days later while rummaging through old computer cables I found a 5 year old mobile phone that I’d forgotten I had. Bingo!

I quickly visited the website on the flyer and discovered they were willing to buy it. So instead of dropping it in a mobile phone recycling bin (for free) I could recycle the phone AND make money. Score!

The process was simple and quick.

1. Find the model of your old phone
2. Register your details
3. Print the postage paid label (cool!)
4. Send the gadget
5. Get paid (by PayPal or EFT into you bank account)

Through the process I received a couple of e-mails to keep me informed of progress, which I appreciated.

How much can you sell for?

Since my old phone was quite old and only partially working I received $9. That might not sound like much, but it was actually less effort than remembering to take the phone next time I go to a shopping centre.

Better still, when my current phone contract expires in 4 months I’ll be able to sell my current smart phone for $110. That’s helpful if I decide to re-contract and/or upgrade my handset.

There’s no need to have an old phone sitting around creating clutter, especially if it still works.

I used Cash A Phone because that was the flyer I saw and they were willing to buy my 5 year old phone,  but they are not the  only company that buys old phones.

Reduce, Re-use, Recycle

Another important bonus for me is that I have the knowledge that my old phone may be refurbished and re-used in a developing country or recycled. Good news all round!

If you can’t sell your old mobile phone then I encourage you to recycle it. Mobile Muster is the official recycling program of the Australian mobile phone industry.

Sell your old gadgets too

One other part that impressed me is that Cash A Phone will also buy or recycle your old gadgets, including:

• iPods
• iPads and other tablet computers
• Laptops
• Digital cameras
• Game consoles
• Sat-Nav (GPS)

So next time you upgrade a gadget act quickly to see how much money you may be able to make from it.

First a word of caution

Only tax accountants and tax lawyers are legally allowed to provide you with specific tax advice. This article is an introduction to some key concepts of reducing your tax from a big picture planning perspective. And of course at the fringes there are some special cases. Start by understanding the key concepts before delving into the fringes.

Speak to your tax accountant for personal tax advice. And if you don’t have one – maybe you should get one as part of your financial team.

Key ways to reduce tax

Four key ways to reduce your tax are:

1. Spend money in the production of taxable income
2. Spend money where the Government wants you to
3. Give money away charitably
4. Park your money in a lower tax entity (e.g. superannuation, company, trust, partner’s name)

Note that the first three ways listed above involve you giving away or losing money as a way to reduce your tax.

Key concept: you don’t get everything back

A common misconception is that a $1 tax deduction saves you $1 in tax. That is not correct.

You don’t get everything back.

For an individual tax payer you get back the equivalent of your marginal tax rate. The majority of Australians have a marginal tax rate of 30% (excluding levies). So they get back only 30% of what they spend on deductible items.

An example

You give away $10 to charity. At the end of the financial year you claim the donation as a deduction and the tax on your income is reduced by $3 (what you ‘get back’ when your marginal tax rate is 30%).

Your net cash flow has however reduced by $7. That’s $7 less you could repay off your mortgage, invest or spend.

Spending money in the production of taxable income

Spending money in the production of taxable income is probably the primary source of higher tax deductions and thereby a reduction in your tax payable.

Conceptually you can split it into deductions related to active (personal exertion) income and those related to passive (investment) income.

Save tax on active income

As you may already be aware you can claim some expenses relate to your job, including these common categories:

• Self-funded work-related education
• Uniforms
• Some travel
• Some car expenses (not a full deduction as it is subject to some fringe benefits tax)
• Retirement savings (i.e. before-tax contributions to superannuation often through ‘salary sacrifice’)

The Australian Taxation Office (ATO) publishes guides for specific industries and occupations. Check them out to see if there is a guide relevant to you and consult with your tax accountant.

One easy deduction you may not be aware of is that of your income protection insurance premiums. Most insurance is not tax deductible but income protection is because if you later need to claim then the benefit will be taxed as if it was your employment income.

Save tax on passive investment income

In general if your investments earn income each year you can claim a tax deduction for expenses related to those investments, including for:

• Interest paid on money borrowed to invest
• Expenses related to maintaining the investment

In Australia you can also use investment related expenses to reduce your taxable income from your job.

That aspect gets many people salivating so much that they overlook key financial principles.

• If through investing your investment income is higher than your investment expenses you will actually increase your taxable income and pay more tax.
• When your investment income is less than your investment expenses your investment is losing money.
• Your net investment loss may reduce your tax payable on your wages income but you don’t get all of the loss back (remember). So you still have an after-tax net income loss.
• When you’re making a net income loss on your investment you need to make it up in additional capital gain so that overall you get an acceptable return on investment.

Save tax on investment gains

When you sell your investment you realise your capital gain. In Australia the capital gain is included in your taxable income for the year.

You can reduce the tax payable on your capital gain through:

• Holding the investment for over 12 months so that only half of your gain is taxable
• Deducting capital expenses such as transaction costs and stamp duty
• Offset prior realised capital losses

Tax rebates and offsets

The Government really wants you to:

• Keep working and earning money
• Raise future tax payers (so they earn more tax)
• Look after yourself in retirement (so they spend less tax)

So the Government gives you an incentive to do that by rebating some tax to you for ‘expenses’ related to their goals. Current examples include:

• Child care rebate
• Education tax refund
• Spouse superannuation contribution tax offset

Along the way there are other rebates that come and go depending on what behaviour the Government wants to incentivise at the time.

The difference between deductions, rebates and offsets is the way the Government calculates what you ‘get back’.

The key is to stay aware of what is out there and then delve into the detail for those schemes that may apply to how you live your life. Your financial planner and tax accountant are a great help in keeping you aware.

Park your money in a lower tax entity

I believe tax management needs to be looked at broadly across the total tax you pay on all of your money.

In my opinion one of the best ways to reduce your overall tax payable is to reduce the tax rate that applies to the income you earn. Primarily you can achieve this by holding your money in different legal entities, since each class of legal entity can have a different tax rate. (Think of a legal entity as a big tank which can hold financial stuff.)

Examples of legal entities are:

• You
• Your partner
• Superannuation trusts (commonly known as ‘super funds’)
• Discretionary trusts
• Companies (e.g. Pty Ltd and Ltd)

The tax rate for individuals such as you and your partner is based on a sliding scale related to your taxable income. The top marginal tax rate is 45% (excluding levies). As mentioned earlier the majority of Australians have a marginal tax rate of 30%.

Companies pay a top tax rate of 30%, whilst superannuation trusts pay a top tax rate of just 15%.

So the majority of Australians could reduce their total tax bill by investing through superannuation rather than in their own name. Your individual tax payable may not reduce but your total tax will reduce and therefore your net wealth will increase.

Another simple way to reduce tax is to hold your investments in the name of the partner with the lowest marginal tax rate. For example keep your cash savings in a bank account in their name. (Better still keep your cash savings in a mortgage offset account – but that is another article.)

High income earning Australians (those with a marginal tax rate above 30%) could reduce their tax by investing through entities such as companies and discretionary trusts. But the tax saved could be offset by the cost burden of establishing and maintain the entities. Plus there are other really important considerations, which you should first discuss with your advisers.

Putting it all together

As I said earlier I believe tax management needs to be looked at broadly across the total tax you pay on all of your money.

More importantly for most people tax reduction should not be your primary driver in selecting financial strategies. In my experience most people have much bigger financial fish to fry.

The ultimate purpose of managing your money is to ensure you have enough money for what you need when you need it.

Yes, reducing your overall tax will increase the money you have.

But there are some non-tax saving strategies, like repaying personal debt, that will increase your wealth and lifestyle faster, easier and more sustainably. Learn about those strategies too.

Following is a checklist of important items to promptly address to ensure you keep your financial well-being on track.

Cash Flow

• If your pay date will change then consider resetting the automatic transfers that support your smart budgeting techniques
• Revisit your budget to accommodate changes in remuneration. If you’re going to be paid more also see the wealth creation tips below.

Use free online calculators, like those from the ATO, to help you work out your new net (after-tax) pay.

Wealth Creation

All pay rises are terrific opportunities to accelerate your wealth creation. I suggest you put at least half of your pay rise towards a combination of the following:

• Higher loan repayments.
• Increased allocation to long term investment. For example you could boost your salary sacrifice to superannuation, which will soften the tax blow on your pay rise whilst making you wealthier.

Plan in advance and be ready to adjust your automatic transfers as soon as you start your new job.

Employer share plans

Do you have an employer share loan you need to repay upon leaving employment? If so, a common way to repay the loan is to sell some or all of the shares. If you don’t have a broker then read this article to discover how to sell shares without a broker.

Superannuation Fund

Don’t:

• Blindly nominate your previous employer’s fund to receive contributions ‘just to keep things easy’. Your new employer may have a cracking deal on offer.
• Blindly accept the default fund offered by your new employer. It may be a shocker compared to your old fund.
• Blindly roll your old fund into your new employer’s fund. When you rollover you automatically lose your insurance cover. “So what?“, you ask. Well almost all Australians don’t have enough cover, so odds are you probably need to keep what you already have.

Do:

• Promptly investigate what happens to your balance and linked insurance when you leave your employer. Do this before your last day in your old job.
  • Is the balance automatically rolled to a new ‘holding’ fund within a certain number of days?
  • Is some or all of the insurance automatically cancelled? If so, can you apply to have it continued? (If a continuation option is available you usually have around 30 or 45 days to apply.)
• Complete a comparison of your new employer’s fund to your previous fund to ascertain which is better for you. I recommend you also consider some off-the-shelf funds in that comparison.

Employer Funded Insurance

One great thing about employer group insurance policies such as group salary continuance is that you probably didn’t need to disclose anything about your health to get it. So you can potentially be a basket case and still be covered.
The older you get the more likely that is.

Keeping that cover is therefore a golden opportunity.

Group insurance policies often have continuation options that allow you to retain cover under a personally owned policy without medical underwriting. However you have to apply quickly – usually within 30 or 45 days of leaving your employer.

In my experience it helps to contact HR before your last day. They’ll usually refer you to the adviser appointed to the group policy who will then guide you through the process.

Call your adviser

If you have previously worked with a financial planner then a job change is one of those moments you should proactively contact them. Changes in income can trigger tweaking of your strategy. Also job changes sometimes occur as a result of the natural evolution of what you want in life. Your financial well-being strategy needs to evolve with you.

Your financial planner will be able to guide you through all of the above and alert you to anything else you should think of.

Nacie Carson, founder of The Life Uncommon, a career transition and entrepreneurship community has written an insightful article examining the truth and myths of passive income. Carson draws on her own experience to highlight common delusions as well as frame some realities.

The first time I read through their information, I interpreted their material as “passive income is easy and effortless, all you have to do is set it and forget it.” When I revisited their material, I understood that their actual message is “passive income is a great revenue source that is earned from persistent, ongoing cultivation.”

The context of Carson’s article is online entrepreneurship however I think her observations are relevant to the pursuit of easy money and passive income in traditional investing.

You don’t just get rivers of golden passive income for life just by buying any old property or share, or starting a business. Wealth accumulation takes “persistent, ongoing cultivation”.

Other nuggets from Carson include:

So what’s the truth about passive income – is there such a thing, or is passive income a myth that marketers tell to line their own pockets?

From my own experience, I say there is such a thing, but it’s a nuanced thing.

…[my] passive income triumphs required a significant up-front investment of time, effort, and tinkering on my part, and in many ways I see them more as delayed payment or ongoing dividends.

[I] would tell any fledging entrepreneur that the simple truth of passive income is this: passive doesn’t mean effortless.

Carson’s comments echo comments I frequently make about the Do It Yourself approach to wealth creation. It takes a significant up-front investment of your time and energy to first acquire the expertise you need.

Then it takes additional time and effort to apply the expertise before you earn a decent return on investment for your money.

You then have to consistently apply that expertise to get a return for the up-front time and energy you invested.

Don’t worry – I’m not dragging out my dusty crystal ball and predicting an imminent recession.

Which is why now is the perfect time to make plans for if you do lose your job at some time in the future.

Waiting until gloom is upon us often leaves not enough time to squirrel away your chestnuts.

That is what happened pre-GFC. People had been:

• Borrowing up to their eyeballs expecting continuing pay rises and asset price increases to keep them cosy
• Spending everything they earned and more

Then the GFC hit and many people were stressed about how they would survive if they were retrenched. Many who did lose their jobs struggled to survive and had to rely on selling assets and the generosity of others.

That kind of financial and personal stress wreaks havoc on your quality of life and relationships.

But it doesn’t need to be that way. When you have your financial affairs in order losing your job can be just a blip on the journey.

How to prepare for retrenchment season

Last night in my DIY Wealth Creation course we talked about risk management. Two ways to manage risks are to minimise the likelihood and to minimise the consequences.

Emergency savings minimise the financial consequences

If you have plenty of easily accessible savings then you can use these to keep food on the table and avoid the bank knocking on your door about missed mortgage repayments.

I recommend having at least three months’ worth of total expenses squirrelled away for emergencies. If in your line of work you think you could be out of work for longer before getting a job then put away more.
By total expenses I include everything: all loan repayments including credit card as well as your lifestyle expenses.

That recommendation assumes you know your expenses. So if you don’t know how much you spend then start working that out. The knowledge will both help you plan and also help you survive if misfortune strikes.

Keep the savings liquid

You need these savings easily accessible and cash is the most liquid. But if you have a home mortgage then your cash could work harder if it was reducing your loan interest. After all you don’t expect to use this amount – only if a true emergency arises.

So I recommend saving your three months’ worth of expenses and making an additional loan repayment. Then if misfortune strikes you can redraw that amount. Don’t see the available redraw and be tempted to use it for a holiday!

If you don’t have any personal debt then a high interest online savings account is a great spot. Have a separate account for emergencies than for your other savings (such as holidays).

Whilst shares and many managed funds are liquid the economic situation that may lead to your retrenchment may also be a time when you don’t want to be selling investments. So I suggest you don’t invest you emergency savings.

Professional development minimises the likelihood

You can minimise the risk of retrenchment by ensuring you are very employable.

You can do your best to ensure you are so valuable to your employer that you are one of the last to be let go.

But if your company or project closes then retrenchment may be unavoidable. In that case you want to be one of the first people snapped up by other employers.

Professional and personal development is essential in today’s world to ensure you continue to be very valuable to your employer and your industry. Is it time to brush up on your expertise or even expand it? Maybe your networking and relationship building could be polished? Those networks could help you get your next job.

Professional development also makes sense for wealth creation. It should help you increase your actively earned income, which you can then spread between increasing your lifestyle and your investment.

Don’t max yourself out

You can also minimise the consequence of losing your job by not maxing yourself out in the first place. Stress test your major lifestyle and investment decisions before committing to implement them.

For example: don’t borrow the maximum amount the banks will give you. Leave yourself a buffer both in interest rate increases and other costs.

Need help saving?

If you need help saving up for emergencies like this then talk to me about cash flow coaching.

One of Seth Godin’s colleagues on The Domino Project has just published a nifty free e-book collating 50 anecdotes of people who’ve had an idea and are now turning it in a business.

If you dream up lots of ideas but are nervous of the risk of trying them out then I recommend you read the anecdotes.

Read more and download “SXSW Pokes” here.

If so check out this report from industry researchers IBISWorld Australia for their predictions of the best and worst industries for start-up businesses in 2011.

…the news is positive for trades and professional services, [but] the picture is not quite as optimistic for service oriented businesses.

In my experience of working with people many want to start their own business. But their traditional education and employee experience often has not given them the toolkit to succeed.

In the video below Cameron Herold argues that we need to be teaching kids how to be entrepreneurs. Herold has been an entrepreneur since childhood and for the past 20 years has been coaching other entrepreneurs.

The presentation was recorded at TEDxEdmonton in March 2010. TED is an organisation devoted to “Ideas Worth Spreading” and includes many wonderful presentations of ideas that inspire you to learn more and take action.

In his presentation to TEDxEdmonton Herold shares some of the lessons he learned from his childhood jobs and business ventures that are important entrepreneurial skills. He also summarises some key entrepreneurial traits to teach our kids. Both will spark ideas in you that you can being to implement at home with your children of any age.

One idea that may challenge you is Herold’s attitude to paying children an allowance, or pocket money as we say in Australia. Watch below and find out his suggested alternative.