Focus on paying off mortgage

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.