Fo­cus on pay­ing off mort­gage

Money Magazine Australia - - ASK THE EXPERTS - JONATHAN PHILPOT Jonathan is a fi­nan­cial plan­ner and wealth man­age­ment part­ner at HLB Mann Judd, Syd­ney.

Iam very sorry to read of the loss of your hus­band. It would have been a very dif­fi­cult time for you and your daugh­ters. Now is the time to get some ad­vice. You will need to speak with your hus­band’s su­per­an­nu­a­tion fund to re­ceive de­tails about whether part-time work would af­fect pen­sion pay­ments, al­though I sus­pect they will not. You should also un­der­stand the tax treat­ment of the pen­sion, which the fund can as­sist with.

I would be very cau­tious about com­mut­ing his de­fined ben­e­fit pen­sion into a lump sum. The great ben­e­fit of a de­fined pen­sion is that it is guar­an­teed in­come, usu­ally in­dexed, for life. They are gen­er­ally good pen­sion in­come lev­els, and if taken as a lump sum it may have to gen­er­ate a re­turn as high as 6% or 7% a year to be ahead. This is gen­er­ally not worth the risk, so I would be very hes­i­tant to take a lump sum.

With putting to­gether a bud­get, sim­plic­ity is best. Ei­ther on pa­per or in Ex­cel, cre­ate monthly col­umns, with in­come up the top and ex­penses be­low. The key is to un­der­stand where the money is spent, so you will need to go back over the past three months, say, to cat­e­gorise ex­penses.

A good bud­get is about un­der­stand­ing where you spend your money and when you have higher quar­terly or an­nual bills. It is im­por­tant at the end of each month to go back to your bud­get and put in the ac­tual ex­penses.

The big­gest change to your fi­nan­cial po­si­tion will oc­cur when you go back to work. You will be in a po­si­tion to start fo­cus­ing on mort­gage re­pay­ments. On an av­er­age house­hold in­come you should be able to put about a third of your af­ter­tax in­come to­wards mort­gage re­pay­ments. I would en­cour­age you to fo­cus on re­pay­ing the mort­gage over the next 10 years. I cal­cu­late this would re­quire monthly re­pay­ments of $1969 (as­sum­ing an av­er­age in­ter­est rate of 4.5%).

You have in­di­cated that you have an emer­gency cash fund. Ide­ally this should be sit­ting in an off­set ac­count with your mort­gage, so your in­ter­est on the loan is re­duced by the off­set bal­ance. You may need to ac­cess these funds while you are not work­ing, which you can do with an off­set ac­count.

It is great that you are help­ing your daugh­ters so they can con­tinue study­ing but it is im­por­tant to get your own fi­nances sorted out first.

I am sure that within a few years you will have the mort­gage well un­der con­trol and you may even have a few thou­sand dol­lars left over each year.

The best place for this would be to make ad­di­tional con­tri­bu­tions into su­per, par­tic­u­larly if your in­come lev­els are above $37,000 a year, as you can claim a tax de­duc­tion for the su­per con­tri­bu­tion, which will re­duce the amount of tax you pay at the 34.5% tax rate (in­clud­ing Medi­care levy) and build up more sav­ings for your own re­tire­ment.

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