Debt level shows bankruptcy risk but don’t sell the family jewels

If you have a burning money issue, or you want to win a fight with your spouse, put your questions to Barefoot Investor.

06/02/2009 BUSINESS: Scott Pape. The Barefoot Investor. HWT staff.

QUESTION My husband and I have a $395,000 mortgage, a $45,000 car loan, two personal loans at $20,000 and $100,000, and a credit card bill of $6800. We earn $7200 a month combined and save $540. I was thinking of doing a zero per cent transfer on my credit card for 12 months, and selling some jewellery to pay the car loan. We don’t splurge on any personal expenses, and always cook our own food. We take lunch from home. Where do I start?

Nicole

 

ANSWER You may as well get a job at a bank — because you’re effectively working for them with all the interest you’re paying. The truth is you’re already broke, but if you keep going you’ll probably go bankrupt. Honestly, the only way you’ll dig yourself out of this mess is if you and your husband finally get to the point where you scream: “We’ve had enough!” Then, it’s time to take radical steps, three in fact: First, sell your car (and anything else of value), pay down the loan, and buy a $5000 Toyota Camry. Get a second (or third) job and devote that money to first building up a $2000 cash buffer, and then to domino your debts from the smallest to largest. Finally, talk to your bank’s hardship department to see if you can negotiate a payment plan on your debts. A good ally in this is a not-for-profit financial counsellor. Call them on 1800 007 007.

 

SUPER IDEA FOR RETIRED COUPLE

Q Both my wife and I are retired in our early seventies, and are drawing a pension. We have just sold an investment property, and wanted to know if we could put the proceeds ($140,000) into superannuation?

Marg and Trevor

 

A In order to contribute to superannuation once you’re over 65, you need to satisfy the government’s work test: you have to work at least 40 hours of paid work in one 30-day period. Here’s the fine print: so long as you’re getting paid a fair market rate it can be anything: babysitting, mowing lawns, deejaying at the local nightclub — it doesn’t matter. Better yet, you only need to satisfy the work test once a financial year. So my suggestion would be to satisfy the rule, and then make the contribution to super.

 

MAKE THE GRADE IN SHARE TRADING

Q My 14-year-old works as a karate instructor, and has decided to invest some of his savings in shares. How can he get started? I try to discuss it but only get the typical teenage rolling of the eyes!

Lee

 

A Your problem is that teenagers know pretty much everything, so let’s bring out the big guns.

The world’s best investor, Warren Buffett, has partnered with a website called The Secret Millionaires Club, which you should get your son on to (www.smckids.com). It’s got videos, games, and a lot of honest, commonsense financial advice. From a practical perspective, I’d open an international share trading account in your name, and put your son’s name in the account designation (legally, minors can’t own shares). Leave it up to him as to what he buys — though let him know that he can buy some B-class shares in Warren Buffett’s Berkshire Hathaway.

 

BUDGET COMES BEFORE POSTCODE

QI am a mother of two kids who just landed a $140,000-a-year six-month contract. My hubby is a self-employed tradie and earns $40k a year after tax and materials (nothing in super), and looks after our kids two days a week. We are in our early 40s, have no debt, are renting and have $100k in savings. We want to live in inner-city Melbourne but cannot afford a $1 million house. Is buying a $400k investment property in the suburbs a bad idea instead?

Liz

A If you want to buy a home to live in, don’t stuff around with an investment property. Go buy a bloody home — but who says you need to spend a million bucks? If I were in your shoes I’d buy something a little smaller, and a little further out, for $600k. However, I’d do it next year when you’ve saved up a 20 per cent deposit, and you’ve grabbed your husband by the ear and told him to start lifting his game and earning more than $40k a year.

 

MAKING A CRUST IN A FRANCHISE

Q My husband and I are in our early 30s and have been chatting about buying a franchise. We would one day like to run a bakery in the style of those found in my husband’s home country, but we have no experience whatsoever in this field. I wondered whether a good first step would be purchasing a bakery or similar business. Is it less risky to buy a franchise (if you buy a good one) and learn the ropes that way?

Jenny

 

A Franchises are a bit like going to a singles bar on a Saturday night — there’s some good catches, but also a lot of sketchy characters. The best franchises are the ones that have been around the longest, and that have strong brand names that customers will pay a premium for.

Even though franchises bill themselves as a turnkey solution, and promise to give you all the training, I’d still recommend doing two things before you go into any franchise. First, take a quick small-business TAFE course, so you get a bit more knowledge of the nuts and bolts of just how hard the government burdens small business. Second, do the dirty work in someone else’s franchise for six months before you sign up for anything.

 

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Originally published as Debt level shows bankruptcy risk but don’t sell the family jewels