Credit card crunch: Drowning, not saving
DROWNING in credit card debt? The Barefoot Investor has got a way out, plus ideas on super and some investment inspiration.
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IT’S time to get to the Consumer Credit Legal Centre for help if you are drowning in credit card debt.
JANE: My partner is a financial planner who seriously cannot save a cent. I was a stay-at-home mum for seven years but have recently returned to work and am earning about $34k a year. I have $5k in a savings account and $70k in credit card debt. I know you’re going to tell me to pay off my credit card but, Scott, this is the most money I have ever saved and I don’t want to part with it. Is there any way I can invest it?
BAREFOOT SAYS: The mind boggles. No, I’m not going to advise you to pay off your credit cards. You’re a special case. I’m assuming the credit cards aren’t solely in your name — I can’t imagine that a low-income earner could have a $70,000 credit limit. Therefore I’m guessing this mess must have something to do with your financial planning partner. And I don’t know anything about his income or assets, which makes things more complicated. I’d suggest you and your partner talk to the Consumer Credit Legal Centre, pronto. Well done for saving $5000 — that’s what you call Mojo. It comes in handy when you’re in a crisis situation, which for you is right about now. Hold on to it with all your might.
NERVOUS INHERITANCE
ROB: I’ve just inherited $450k and I need your advice. We’re in our 40s and I earn about $80k a year while my wife earns about $20k working part time. We have a $94k mortgage and a $2k credit card debt. Making it more complicated, I’m being treated for a melanoma, and the truth is I’m not sure what the future has in store. I’m nervous about getting this wrong, after seeing my parents receiving very average advice from a “reputable firm”. What’s the best thing to do with this inheritance?
BAREFOOT SAYS: Your money problems are solved — which will allow you to direct your attention to your health. If I were in your shoes, I’d pay off the mortgage and the credit card. Then I’d put $15,000 in a high-interest online savings account (Mojo) — add more if you believe you’ll need costly specialist medical attention. Then I’d take a holiday, and put some money into honouring the legacy of the person who left you the money. With the rest of the dough I’d make an after-tax contribution into a low-cost superannuation fund, making sure you’re invested in growth assets and that you have completed binding nomination forms. Your question gave me the kick-along to call my doctor for my annual skin check-up. Hopefully it has the same effect on other readers.
GIVE THE GOLDEN DOG A JUICY BONE
JEN: I’m really worried. Last year my husband was diagnosed with a mental illness and for the past 12 months he’s been unable to work. Unfortunately he let his insurance lapse, medical bills are expensive, and not everything is covered by our health fund. Still, we are very lucky that I earn $215k a year. We have a $290k mortgage, $340k in super, a share portfolio of $85k, and $12k in Mojo. We also have two teenage kids to get through high school. Scott, should we be starting a family trust or SMSF to keep ahead?
BAREFOOT SAYS: Let’s say on the first of each month your dog arrives on your doorstep with $11,637.67 in cash in his mouth. Wouldn’t you give him a juicy bone? Make sure he was locked up at night? Take him to the vet whenever he so much as spluttered? Well, that’s what your job provides (plus $1702 in monthly super contributions). And as the sole breadwinner in your home you need to protect it like you would Lassie the golden dog. So your most important investment right now is income protection insurance. Also, on your income it makes sense to salary-sacrifice into superannuation up to the cut-off ($30,000 if you’re under 49 on the 30 June 2015, or $35,000 if you’re 49 or over. Remember this figure includes the $19,307 your employer has to pay throughout the year). It’ll slash your tax by 66 per cent! Focus on beefing up your Mojo, knocking off your mortgage, and looking after your family. Leave the SMSF and the family trust until you’re both back on your feet.
THANKS FOR THE LIGHT-BULB MOMENT
DARREN: I had to write to say thank you for the inspiration — your comment to Harry that at 52 he still had 20 years to build a significant estate was truly a light-bulb moment for me. For those of us who feel we’ve missed the boat wealth wise, your comment inspires optimism about the future. Powerful stuff — it’s not too late!
BAREFOOT SAYS: If you can live on one wage in your 50s (once the kids are out of your hair), it’s not unrealistic for an average-income-earning couple like you to boost your superannuation by as much as $500,000 through your 50s, and then turn around and draw on it tax free. The key is to make it your number one priority. You’re right — it’s not too late. In fact it’s prime time. Game on!
Originally published as Credit card crunch: Drowning, not saving
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