Paul’s verdict
I'm 34 and earn $100,000 a year. We currently have a one-year-old baby and my wife (30) is a full-time mum. We have combined super of $160,000 and currently owe $440,000 on our mortgage (two years into repayments) with the house being valued at around $700,000, leaving us $260,000 equity with minimal savings (and no other debt). My wife is looking to go back to work, where she would earn about $70,000pa.
We are just wondering what our next best move would be at this stage. We are looking at the options: buying shares, or should we prioritise the mortgage, or place cash aside for the baby's future expenses? Would a self-managed super fund be a sensible option? David
Congratulations on the birth of your first child. Enjoy every moment. One of the best pieces of advice I have ever received is that time with the kids goes in a flash. When I was given this advice, Vicki and I had a new baby, a four-year-old and a six-year-old and I thought it was nonsense. But as I recently went to my youngest daughter's graduation from a four-year degree and we look forward to our 30-year-old son's marriage at the end of the year, I realise that the advice I was given was spot on.
In line with this, it is terrific that you are looking forward in terms of your financial security. Money miracles are not something I believe in – in fact, they are always a scam. But I do believe in regular saving, investing and compound interest over time.
Clearly, your wife's return to work is the key factor here. A new baby does involve expense, and I expect there is not a lot of surplus in your budget.
The key money issue for you and your wife is around your family plans. If you are thinking about another child in a year or two and your wife would then stop work again, it would be silly of me to propose an investment plan that involved gearing if your wife's salary was the source of income to meet gearing costs.
At your age, I do think that debt used sensibly to buy either property or shares is technically a good plan. You probably have some 30 years in the workforce to create wealth, and while I have no idea what share or property prices will do in the short term, it would be a pretty unusual prediction to say that prices of either would be lower in a few decades. Vicki and I look back at our first property purchase with fondness. We bought a small semi on a busy road in the Sydney suburb of Artarmon for $90,500 in 1983. It was more money than we could imagine and our mortgage felt terrifyingly high.
But as our second child came along it had risen in value. We took our equity and bought a three-bedroom house in the same suburb for $356,000 and then a few years later, as our third child was due, we moved to a four-bedroom house, which we paid $535,000 for in 1993.
Once all the kids were at school, we bought a house closer to the school. The numbers seemed scary back then but I suspect that the $535,000 house we bought in 1993 would now sell for some $3.5 million. Such is population growth and inflation!
But back to you. Right now I would not go with the DIY super fund. Advisers love setting these up because they generate very juicy fees every year. When your super balances grow to, say, $300,000 or more I would be OK with it, but right now so many of our huge retail and industry funds offer some excellent, super-cheap options. You will find that you can invest in growth options with global exposure for next to nothing. I would go that way until you build your super balance.
In terms of investment, while it is pretty dull I really would suggest you look at popping any excess into an offset account attached to your mortgage. That way you are building funds to make a move once your family is a bit more established. I know you could do a tight budget and stretch yourselves into a geared property or share portfolio, and even have a conversation about deferring a second child to keep your wife's income, but I hope you don't.
Money is good to have as it brings choice, but that is about it. You are young and have decades in front of you. You already have a home with excellent equity, a very good base in superannuation, a good income and a long time in the workforce. Your base is there. My advice is to be conservative, build cash reserves to make future investment decisions and really enjoy the wonderful stage of life you are now in.
My very best wishes to you both and, of course, your young child.
Paul’s verdict: Don’t stretch yourselves – just enjoy this wonderful stage of life Build cash reserves for making future financial decisions