Paul Clitheroe’s answers
Answering money questions seems to have occupied quite a bit of my life. I started doing talkback radio in the mid-1980s, then the Money program on Channel 9 and, of course, the past 18 years on Money magazine. Along the way I also find myself answering money questions on planes, at dinner parties and even barbecues! “How about a hot tip?” is common. This is easy to answer. I don’t have any “fast money” tips, mainly because they don’t work. As you can imagine, if indeed I did possess any such investment miracles to achieve instant wealth I’d use them myself. In terms of what I would call “serious” questions, property, shares, super and debt reduction are the recurring themes. These are what I would call “getting ahead” questions. A selection of Q&As from the past three years feature here and you’ll see that the advice is still solid. What is really noticeable over the past decade, in particular, is how well many young people are doing with money. Many Money readers in the 27 to 35 age group are in a really strong financial position and looking to grow from there. Property is clearly Australia’s favourite investment – no surprises there given our home is a tax-free asset when we sell. And, of course, there’s negative gearing into investment property. Superannuation was seldom mentioned 30 years ago but now it is nearly always a part of readers’ questions. Consumer debt, and how to get out of it, is also a key theme. The thing that really gives me pleasure, though, is the amount of thought people are giving to their money. Thirty years ago questions really were pretty simplistic. Today they are much more thoughtful and forward looking. Most are based around becoming financially independent in the decades to come. This is great news, as the key to money success is to do small things on a regular basis. Hopefully, the Money TV show, radio and this magazine have made a small contribution to the evolution of people in having a deeper understanding of money issues.
1. MAXIMISE WEALTH
QMy partner and I are 26 and 27. We bought an apartment recently for $490,000 and have a $440,000 mortgage. We earn a combined amount of $180,000 a year and have $40,000 in an offset account and no credit card debt. I have an additional $6000 in shares. We save $1000 a week between both of us. What should we do with our money to maximise our wealth? Robyn
Hi Robyn. Congratulations on taking the big step and buying a property. Despite the high price of property in Australia, I remain very keen on the principle of home ownership. Real estate agents may like to disagree with me, but my logic is not that property is necessarily the best-performing investment. In fact, if serious wealth is your vision, then it is business where the money is. This may well be the business of owning and developing property, mining, the services sector or wherever your personal skill set is, but the fact is that property ownership is a secondary asset to business.
Business generates jobs, which gives individuals the capacity to rent or buy a home; business also leases property and creates demand for property. Owning and paying off a property, while a really sound strategy, is a proven “get rich slowly” strategy. Take a look at the various “rich lists” from any economy – you will see that those who make the list are in active businesses. Sure, some like the Lowy family here in Australia may have created their wealth from property, but it has been the active development and management of commercial and retail property, not passive home investments, where their billions comes from.
Don’t get me wrong – owning a property and paying it off is a terrific plan. We followed this plan ourselves, buying our first home, a tiny semi, back in 1983. As children came along, we sold and used the increased equity to buy a bigger home. Some 20 years later, in 2003, we were very excited to own our home debt free. Now this in its own right was a great plan, but what does reinforce my point is that at the same time we used around $20,000 as a deposit to buy the semi we risked the same amount to start my business ipac.
This was a big issue for us. We were pretty much the ages you are now. Putting the extra $20,000 into the mortgage would have been a really sensible move and we realised we could lose it by starting a new business.
But we did have a good grasp of risk and return and felt a business was the best option for us. It certainly proved to be correct. Property has done very well for us, but our $20,000 put into our own business has just been an outstanding investment.
That said, a lot of businesses fail and many never really generate decent returns. So I need you to think about your goals, objectives and in particular your skill sets and attitude to risk. There are a number of paths you can follow. Here are a few broad thoughts:
1. The straight and certain
You clearly have good money skills and good jobs. You could pour your savings into your unit – I suspect you would pay it off in six or seven years given your pay is likely to increase. You could then rent it, or sell and upgrade to a bigger home with a very manageable debt. By the time you hit 60 I think, along with your employer superannuation, you would be financially very comfortable.
2. Add a bit of risk
You could buy your next property now. In other words, you could buy a bigger place, maybe a free-standing house, today. Borrow to buy it using your current equity to support the loan. Rent the place and then get a tax deduction (negative gearing) on any losses. Equally, you could borrow to buy a share portfolio.
3. Go your own way
Depending upon your skills and determination, you might choose to go into business yourselves and
risk your savings in this area. But be warned – do not even contemplate this without a very realistic business plan.
The great news for you is that you have the key pre-condition for wealth creation – surplus income. From here it is really up to you to decide what life you want. Maybe it is a family where one of you stops work, or children may not be in your plans. You may wish to work overseas, or you may not.
My advice is to firstly think about what is really important, and the life you want to lead. Once you sort that out I think the investment path you choose to follow will become clearer. If in doubt, though, keep doing what you are doing right now and get that $1000 a week into your offset account. This is a brilliant plan. Your savings effectively earn the rate of interest you are paying on your mortgage tax free and risk free. Every dollar is available to you if you decide to buy another property, shares or even start a business.
As a final thought, though, the time to take some sensible investment risk is when you are young.
2. PAY OFF THE MORTGAGE OR TOP UP SUPER?
QI am 30, earning $50,000, with $26,000 in super. My husband, Ben, is 31, a sole trader with a taxable income of $60,000 last financial year and has $8000 in super. We have three young children, with a home valued at $900,000 (mortgage $280,000). Last year we purchased an investment property, borrowing the whole amount (mortgage $410,000).
We originally bought the investment property as my husband did not contribute to super. Should we continue to pay off our investment and will it be enough for his super? Or should he think about contributing to his super fund or setting up a self-managed fund? My husband strongly believes he should be paying off his family home rather than putting money into super. It would be nice to know if we are on the right track or not. Tennille
Hi Tennille. I reckon that life must be really busy for you two. I had to laugh at myself. I was about to say “you guys”, which I do tend to use as an “everyone” sort of thing, but I remembered our Australian of the Year and former army boss, David Morrison, saying that this is gender based and “inappropriate”. While I hope I use it in an inclusive, affable and casual way, he did make a fair point when he said that few say to a mixed group “hi girls”, so fair call. “You two” it is.
Anyway, back to you two. Life must be hectic. Vicki and I had three kids, now all adults, and it was a super-busy time. With the demands of a young family, your job and your husband’s business I am mightily impressed you have time to think about your finances.
I am going to go with your husband’s view, and this is not a gender bias! You are just 30 and your husband 31. Your incomes are solid but not at a level where you are highly taxed. So the 15% tax on money salary sacrificed into super is not really a huge tax saving for you.
Equally, you have at least 35 years to retirement. I have no idea what will happen to super over several decades, so in your shoes I’d take the more certain route and pay off the home. Interest rates are really low and likely to stay that way for a while, so it is a great chance to get rid of your loan’s principle.
It is very much like Vicki’s and my situation going back 30 years. Our incomes were not that high, so our tax rate was low, making super less attractive. We worked at clearing the mortgage and were just delighted to put the title deeds in our safe once it was paid off. By that stage our tax rate was much higher – we do tend to see peak earnings as our career and business skills develop – and we started focusing on super. It gave us a significant drop in tax paid but, just as importantly, we were much closer to retirement.
The other advantage of clearing your home debt is that you build a tax-free pool of equity. This can be used if you sell to upgrade or – cautiously – to support an investment loan to buy other quality assets.
I have no doubt that, in time to come, super will be a key part of your planning. But this is not the time – due to your tax rates, the flexibility of keeping money out of super and the decades of possible government changes to the super rules.
Right now your wealth is pretty much 100% exposed to property and your husband’s business. But at such a young age that is fine. In the longer run super will be a great place to build exposure to local and international shares, along with other assets such as infrastructure and commercial property.
All that is in front of you. What is fantastic is that you are on a great track. You have more than $600,000 in equity in your home and an investment property. Over time you should spread your risk and diversify, but I am very happy with where you are right now.
Enjoy your young family, and if your husband
looks pleased that I support his views on super, tell him he owes me a beer.
3. PROPERTY V SHARES
QMy wife and I are both 35 and work as parttime teachers. I am on $45,000 and my wife is on $31,000. We have paid off our house, valued at $410,000, and have $185,000 in international shares. We have two small children, aged two and four, and have combined super of $140,000. We are having heated discussions about our next financial step. We live in country Victoria and my wife thinks we should buy a two-bedroom unit in Melbourne – Prahran or Hawthorn – to hedge against rises in the city market. She feels that we might be priced out of the Melbourne market because regional property appreciates slower than city property. However, I would rather invest in more shares or a real estate trust to get exposure to commercial property. Can you please arbitrate for us? David
Hi David. It’s really good to see that you’ve been able to pay off your home while having $185,000 in shares and $140,000 in super. It’s a strong position for a couple in their mid-30s and creates a solid foundation on which to build wealth. I do note that you’re both working part time at the moment. This may well be a lifestyle choice for you to spend more time with your young family but you should keep in mind that you’re in your prime earning years and moving to full-time work would substantially boost your capacity to save as well as build your super when the time is right.
After 32 years in a happy marriage, I am going to stay well clear of arbitrating between your investment choices! But I am happy to look at the differences.
Yours is conservative as it involves no debt and sees you going with an ungeared and relatively liquid investment, perhaps shares, managed funds, real estate investment trusts, exchange traded funds or similar. This is a perfectly valid strategy. Your wife is equally correct. Prahran or Hawthorn will do just fine over the long term. But you need a deposit – I’d suggest more than 20% to avoid lenders mortgage insurance. I imagine you’d need to borrow $500,000 or so. Risks are a property downturn, inability to rent in a recession or interest rate rises. The gearing, however, should work for you in the longer term.
So what we have here is a risk-return moment. The geared property really should do better, but you must plan for a few bumpy years at some stage. Property will not always go up and you do already own property. Move forwards 20 years and I have little doubt the geared property will do much better than ungeared investments.
So do your numbers and build in an economic drama, rising rates or a recession. If you can survive that, geared property should deliver return for your risk. If in doubt, why not go the “get rich slow” route, which is working so well for you now. Maybe a geared property is better as the kids grow – and you could both be on higher incomes. Over to you!
4. BOOSTING SUPER
QI am 44 and my husband is 51. We are both teachers. I work part time earning $50,000 and my husband earns $80,000. We have three kids aged 14, 12 and 10. We owe $45,000 on our residence ($450,000 value) and currently pay $2000 a month towards it. We have an investment property with an interest-only mortgage of
$160,000. It is valued at $230,000 and earning $280 a week rent (positively geared but as it is in a regional town we don’t expect much in the way of capital growth). To help our super along I am salary sacrificing $300 a fortnight (I have $50,000 in super) and my husband $600 a fortnight (he has $60,000).
How can we set ourselves up for the future and retirement? Miranda
Hi Miranda. The good news is that you are well on the way in terms of setting yourself up for the future. Right now you are in good shape, but in the very near future things start to look very bright as you will clear your mortgage in mid-2018.
Being mortgage free is a big deal. When it happens, you should take a bit of time out to enjoy the moment. But the really important bit is that all of a sudden the $2000 a month you pay to the mortgage will be freed for investment. Even better, your budget and lifestyle have been established without that $2000 a month. And the most critical step is to not get used to spending it!
I see this so often. It is really easy to stop putting your mortgage repayment aside and to leave it in the family account – and all of a sudden your savings discipline disappears and the $2000 a month is never seen again.
So the moment your mortgage is paid off, keep saving the $2000 a month, preferably in a separate account from your day-to-day money. If invested, not spent, the power of this $2000 is just extraordinary.
Let’s give you both another 15 years in your working lives and a good chunk of the $2000 a month, once your mortgage is paid out, could be used to invest in a number of ways.
You could put it in a high-interest bank account, use it to build a share portfolio, put it towards a deposit for another investment property or add to your super via salary sacrifice.
Saving for 15 years into a cash account is, while safest, my least favourite. Here I can only assume you’ll average a rate of about 2% after tax. A projection on an investment property is all too hard as I can’t guess how much you would borrow, but that amount put into a decent share portfolio would historically be likely to show some 7%pa. This is pretty conservative and includes about 4% in dividends and 3% capital growth, and while this is a guess based on history it is not a silly one.
I do think salary sacrifice into super will be powerful as your contributions going in are taxed at only 15% and so are your earnings. With super rules being debated and changed, I would want you to go to a super calculator such as the one on the SmartMoney website and do your own numbers but, as you are saving $2000 a month after tax, you can save more with before-tax contributions.
Looking at your tax rates and current rules, between you and your husband I reckon there is a tax advantage of about 15% to 20% in going the salary sacrifice route for part of that $2000 a month.
You will also need to look at your contribution limits at that time but, just as an example, it is pretty safe to assume this super strategy may mean you can add some $2300 a month to super. Super funds have averaged some 7% to 8% a year over the past few decades.
I am not trying to dictate strategy here as a heap will happen in your lives – pay increases, promotions, longer hours at work. I would not ignore the tax advantages of super and I feel continuing to save that $2000, on top of your home, compulsory super and rental property, will give you a financially secure future.
5. OUR FIRST PROPERTY
QMy partner and I live in a remote area in north-western Australia. I am a 26-yearold female earning $59,000 a year and my partner is a 24-year-old male earning $180,000pa. We have no debt, no assets and own our car outright. Work pays for most of our expenses and we spend only about $1500 a month. This gives us the ability to save $10,000pm. Since moving here nine months ago, we have saved $115,000 in a high-interest account and are awaiting our tax refunds of $14,000.
We would like to invest in the property market in our home state of Victoria but we are not sure where to begin, who to speak with or whether it is a good time to buy. This will be our first property (of many, we hope), so we are unsure how to structure our loans and whether to buy for capital growth or cash flow. We hope to invest for the long term so we will be able to retire early and have the choices in life to do the things we love, such as travelling. Teri
Hi Teri. I am delighted to see that you have a sound long-term plan to create wealth early so you can do the things you love. Shortly we'll have a minor argument about whether a property-only strategy is the way to go but the key issue for me is that you do have a plan and your savings put you in a position to make this plan happen. I suspect that working in the remote north-west is challenging and lifestyle options are pretty limited. But the big plus is that you can really save, and $10,000 a month is just terrific – good on you both!
My advice is to ignore a lot of the stuff you read about: salespeople push positive cash flow properties, others push capital growth potential. But property is a common-sense asset and I would really like you to do your own research. In particular, avoid property seminars like the plague. They are run to benefit the promoters, not the attendees, who all too often end up buying overpriced properties in poor locations.
So let's go with common sense. Australia's population will continue to grow, hence the demand for property in areas with jobs, public transport, modern facilities, schools, healthcare, a nice community feel and decent coffee will do well. If you use these characteristics to choose where to buy, I do think you'll end up looking at established, nearcity suburbs. So you won't get a bargain, nor will you get high rental returns. Most sensible people also go for the obvious, so well-located properties sell for pretty much market price. The good news is there will be plenty of properties to look at and lots of recent sales, so you will have genuine market data about real selling prices.
Start looking online to get a feel for prices in the suburbs that appeal to you. I always recommend buying property you would live in – if you'd live there chances are it will rent well and, if needed, sell well. Now is not a bad time to buy. Sure, prices are high and, while I don't see a collapse, I do think this boom has started to slow. Prices may go back a little but if you buy good property in a good location, don't overborrow and are prepared to hold for the long term, it is hard to see how you can go badly wrong. Mind you, it is important that you spend time looking at properties – the internet is a great guide but don't buy sight unseen.
I am perfectly happy for you to build a property portfolio – but with a couple of reservations. Borrowing is a good plan but be very careful about basing your borrowing capacity on your current level of savings. The longer-term job prospects for you and your partner are critical when it comes to supporting debt.
Also, at some point rising interest rates will push the market backwards. You need to make sure that you can hang in and meet your repayments. Gearing looks great as markets rise but on the way down it magnifies your losses if you have to sell.
Equally, over time I really would like to see you both build your super. This is typically invested in shares, infrastructure and commercial property by professional super managers. This spreads your risk and gives you diversification.
6. SAVING FOR THE KIDS
QWe are trying to save for our two children, aged 2½ years and nine months. We plan on allowing them to use the money once they are over 18, for either university fees or a home deposit. So far we have $7000 in Medibank Private shares in my wife’s name and $10,000 in a highinterest saver account. We are able to contribute $200 a
week to the account. Where should we put the money to get the best return? Mitch
Hi Mitch. It’s great that you’re planning ahead for your children. Putting aside a little bit of money on a regular basis can add up to a substantial tally over 18 years. That said, it can be problematic saving in the name of your children directly. Children don’t pay any tax on the first $416 of “unearned” income but the tax rate can be as high as 68% beyond that amount. As such, it’s not really practical to save in their names directly in most cases.
You will find that you can hold many investments such as shares and funds in your name as trustee for your children. At 18 you can transfer this to them with no capital gains tax as the kids were always the “beneficial owners”.
Part of the benefit of saving for the kids is getting them interested in money and building good habits, so I do like investments held in the kids’ names with you as trustee. You could consider an investment, such as a managed fund or an ETF, with an automatic direct debit of, say, $100 a month for each child.
Personally, my wife and I bought well-known Australian shares “as trustee” for our three children. Over time the investments did well and the kids did get interested as they got older. Blue-chip shares such as those of the banks, Woolworths, Wesfarmers (the owner of Coles) and BHP Billiton really made the money grow over a couple of decades.
7. HOW TO PLAN FOR RETIREMENT
QI am 49, earning $120,000; my wife is 55 and works part time, earning about $30,000, 50% of which is salary sacrificed. Our $600,000 property is fully owned. However, we have just redrawn $32,000 for a new car. This loan is fully offset and serviced from my wife’s salary sacrifice. We have combined super of $596,000 via three policies. We each contribute a voluntary 10%.
In managed funds, listed investment companies and shares we have $282,000. I have a margin loan of $250,000 drawn to $43,000 (not making any repayments). Including the offset account we have $102,000 in savings.
My focus has always been super for our retirement but I am wondering whether I should be considering purchasing an investment property, which we could convert to our owner-occupied home in, say, 10 years, after it has been paid off. Or should I just ramp up the savings into super. I am employed in the financial industry so should I be considering a self-managed super fund (SMSF)? Given my wife’s age, I’d like to maximise the benefits of a transition to retirement (TTR) pension. Paul
Hi Paul. You have given me plenty of detail, which is really helpful. But what I think is critical is the big picture. First you talk about super for your
retirement. This is a key issue for all of us. I turned 60 recently and the two fundamental issues for Vicki and me are our life plan and how we fund it. We think it will be best for us if I work around halftime up to at least 65. The idea of working 20 hours a week every week would drive me nuts so I would prefer to work fairly solidly for about eight months of the year and have four months off. This also suits Vicki as we can travel together.
With this big-picture plan we can then work backwards. We have a budget to live that life. This then leads into the assets that fund our lifestyle and also, of course, the income I generate from work. This income will greatly extend the life of our assets as our drawdown is lower while I am working.
So I would really like you to have a clear life plan for retirement.
Then there’s the possible purchase of an investment property, which would become your home in a decade. That causes me to think that retirement to that property when you are 59, and your wife 65, is on your mind. So it seems to me that another 10 years of work is likely. This makes sense. Your asset base is around $1.5 million, including your house but deducting your car and margin loans. Clearly you are saving on a regular basis.
If we move to retirement assets, then that is less your home, so we are looking at $800,000. Your life expectancy is about 30 more years and your wife’s around 28, so close enough to three decades. The trick now is to maximise your savings capacity for the next decade.
As for a TTR pension for your wife, I’m not so keen. From July 1, 2017, the earnings will no longer be tax free and will be subject to a 15% rate, so this strategy has lost much of its appeal.
On her salary of $30,000 she pays no tax up to $18,200. She then pays 19%, plus the Medicare levy of 2%, up to $37,000. It is worth putting her salary above $18,000 into super. At 15% tax it gives her an advantage of a few percent. But where it is really worth making contributions is on your salary. From $80,000, the tax rate is 37% plus Medicare. For you to be maxing out deductible contribution via salary sacrifice is a no-brainer. I’d like you to pay 15% tax, not 39%.
An SMSF is a good thought. With $596,000 you have enough to justify the fees and charges. If you were going to use the fund to gear into a good investment property, it makes sense. But don’t forget these days big super funds give members excellent choice, often with incredibly low fees. I’d check this out before leaping into an SMSF.
An investment property is interesting. If the idea is that you buy something today that you’d love to live in later, I am supportive. But only if the property is in a growth location. If it is a quiet beach house, you may not get decent capital growth.
You are in a great position. My advice is to grab a bottle of red and have a long chat with your wife about your life plans. Once you have them mapped out, money planning becomes a lot easier.
8. BUILD UP SAVINGS FOR A HOME DEPOSIT
QI’m 26 and renting with my girlfriend.
I have $35,000 in an online account, which I contribute to fortnightly with a regular savings plan, and a small share portfolio worth $18,000. What do you see as a suitable investment option to maximise my savings as I look towards putting down a deposit on a house in five years? Hugh
Hi Hugh. When deciding between different investment options, one of the main issues to consider is the time horizon. As you’re planning on purchasing a home in around five years, it’s probably too short a time to build a substantial equity investment.
Over longer periods, equities tend to have a higher average return than fixed interest, cash and most other investments but they also tend to have higher volatility in the short and even medium term. For a 26-year-old, if you were considering how to invest your super for retirement in 40-odd years, I would be encouraging you to invest in growth assets such as equities. However, considering you want to use the money in five years you’ll need to think carefully about how you invest. In this time frame, you’re safest continuing to build savings through a highinterest online savings account or term deposit.
A possible strategy is to save half in interest-bearing investments and half in your share portfolio.
9. WHAT TO DO WITH AN INHERITANCE
QI am 46, separated with one dependent child. I have been with the same employer for 25 years and belong to a defined benefit super scheme. I have multiple investment properties with about a 45% loan-to-value ratio (LVR). I have no non-deductible debt. Apart from a couple of businesses along the way, I have always chosen property as it seemed to be the simplest and safest investment/ wealth-building path.
I will shortly receive an inheritance of about $350,000. I would now like to continue my wealth building outside property. I don’t want to be constantly share trading and trying to outdo experts in this field. I would describe my investing style as “passive”. I would like to hold some of my inheritance in an offset account (so I can live a little for a change) and invest the rest. Your thoughts, please. Rob
Hi Rob. Yes, it is time to rest up a bit. You have done the heavy lifting and thanks to the $350,000 inheritance you most certainly can start to live a little. In fact, I hope quite a lot.
Even without the inheritance, your finances are in good shape. The defined benefit fund is a real bonus. Most readers – and I fit into this category – will have an accumulation fund. These are very simple. Whatever we put into super is what we have. Investment performance and fees are critical. Accumulation fund members also have to plan how long the money will last when we stop work. This is never easy, in particular with very low interest rates and investment markets bumping up and down. The older defined benefit funds, generally government, are just rippers. When they were established, it never occurred to policymakers that many people would live well into their 80s and beyond. So a 60-year-old today can retire on close to 100% of their salary, linked to inflation and government guaranteed. How good is that!
You are younger so your defined benefit fund may end up being a multiple of your final salary and be paid as a lump sum, which puts you in the same situation as an accumulation fund member at retirement. But either way I suspect that if you work to 60 or beyond, your super will give you a great start in terms of the income you need.
But I am very pleased you have not relied solely on this and built a property portfolio outside super. I do agree that property is a simple asset. If you buy well in a growth area and our population continues to grow, as it will, in the long run property will do just fine. You mention you have several properties with an LVR of around 45%. With rates at historical lows, I have no doubt that with this quite low percentage of debt your properties are income positive – that is, the rent you receive covers all expenses, meets mortgage payments and leaves you with some surplus income.
This is pretty important. The cost of your loans, by which I mean the interest rate, is the key driver as to how you invest the inheritance. Basic variable interest rates are pretty close to 4%, so check you are on a competitive rate. If I assume 4.5%, then if you put the inheritance into an offset account, in effect you are earning 4.5% on it. This is pretty good when term deposits are 2.5%, but even at 4.5% you are just standing still after tax and inflation.
So would you earn more than 4.5% on a share portfolio? History says you will. Returns, including the dividends, over long periods are on average in the region of 8%-9%. This usually consists of around 4% income paid as dividends – often fully franked, meaning they come with a 30% tax credit – and 4%-5% annual growth.
As a passive investor – I am the same, incidentally – I’d suggest you look at exchange traded funds (ETFs). People such as Vanguard can give you access to an indexed fund of Australian or global shares for a tiny fee. There are a lot of good ETFs available. You could buy your own portfolio of stocks or a managed fund. I’ll leave this choice to you.
10. GET OUT OF DEBT
I’m 32 with no dependants and earn around $70,000 gross a year. The only assets I have are my vehicle, jewellery and electronics. My super is $86,000 and I have a HECS debt of around $26,000, and around $30,000 of personal loans and credit card debt combined. I’m not sure which direction I should go to better my finances for the future. Should I just concentrate on paying off my debt and not worry about putting money away for savings or towards super? Nicki
Hi Nicki. This is always a great way to start a fight with my wife and her friends, but I think anything shiny and sparkly bought via a high-margin retail store is not an asset. Mind you, as long as jewellery is bought with cash and not a credit card at high interest, I have no problem with owning it as you would clothes – it’s a lifestyle thing.
Trouble is my wife is always on a winner when I mention my sailing boat is an asset. As she, sadly and correctly points out, not only is it also a lifestyle thing, it depreciates rapidly and costs a heap to run.
Anyway, let’s put boats and jewellery aside, along with your electronics. They depreciate faster than my boat. Your car I am happy to call an asset but it is a depreciating one and will cost heaps to run and maintain. But it does have resale value, which is handy when you trade it in.
Let’s finish with the last of the bad news. Debt comes in three varieties: good, bad and terrible. Good debt is low-interest money you borrow to buy a property or other sensible investment. It is good debt because interest rates will be lower than for other debt and you are buying an asset that over time should grow in value and pay rent or dividends. Bad debt is a car loan. It is a necessary evil for most of us but interest rates are higher, usually around 10%, and the car depreciates. Terrible debt is high-interest credit card debt.
HECS/HELP is interesting. I argue it is good debt. It only grows with inflation, no interest is paid and you pay it back once your salary exceeds a pretty high $54,869 for 2016-17. As you are on $70,000 you will only be paying back several hundred dollars a year. My advice is not to worry about it and just let it be paid back over time while you are working. I would love some no-interest debt!
So the best way for you to go is to get stuck into your $30,000 worth of personal loans and credit card debt. Make a list of these debts and their interest rates. From here it is easy: just pay down the highest-interest debt first. Once you knock that off, move to the next highest and keep going until you hit zero!
The logic here is very compelling. You are building super anyway via your employer’s contributions. If you save money with the bank you’ll earn less than 3%. The typical super fund is averaging around 8% to 9% each year over the past few decades. But your credit card debt is likely to be more than 18% and your personal loans more than 10%. So get them paid off first.
Once you have done this you can really save and I do like the idea of building savings in your name. The problem with super is that you can’t access it until you retire, which for you is more than 30 years away. And while you are building all these great money habits, do yourself a big favour if you have not already done this and go to the government’s MoneySmart website and use the planner to do a detailed budget.
At 31 with no dependants, a good job and money building in super, things are moving in the right direction. The trick now is to get your money under control via a budget, clear that high-interest debt and start building wealth. Age is very much on your side but it is really important you develop good money habits now.