Don’t blow a windfall - use an inheritance wisely
COMING in to a significant inheritance can be an opportunity to clear the deck on your debts and save for the future. Just don’t waste it, writes Barefoot Investor.
Barefoot Investor
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COMING in to a significant inheritance can be an opportunity to clear the deck on your debts and save for the future. Just don’t waste it.
MARV ASKS: I’ve recently received an inheritance of $200k. My partner and I have $60k in debt due to his past job loss coinciding with my maternity leave. What should we do regarding the debt repayment of $60k, creating a Mojo fund and preparing to buy a house? I have some hardship agreements with closed credit accounts at 0 per cent interest — do I repay these? And can I negotiate a lower figure to pay out my debts without damaging my credit rating for future lending? It’s hard to get a straight answer from the banks!
BAREFOOT REPLIES: The first thing I’d check is whose names the debts are in. If they’re in your partner’s name, and the inheritance is in your name, you may be able to cut a deal with the banks. However, part of being a grown-up is honouring your debts. If I were in your shoes I’d repay the debts in full, regardless of whose name they’re in. It’s the right thing to do. Next, I’d open up an online saver account and deposit three months of living expenses in it ($12,000), so that you have a sense of Mojo in your life. Then, I’d deposit the rest in another high-interest online savings account and label it “deposit”, and continue to add to it for the next two years (even if you can afford a home right now). In the meantime, I have a challenge for you. Over the years I’ve helped a lot of people who’ve come into large amounts of unearned money. Most of them end up blowing it — especially people like you, who have a track record of spending more than they earn. Please prove me wrong!
POSITIVE ADVICE
DONNA ASKS: My husband is out of bankruptcy in March 2017. He now looks after our three kids while I work full time, earning $120k. I have a $200k home loan (value $850-900k), credit card/car loans totalling $20k, and $90k in super (my husband has $75k in super). Is it as simple as paying off the debts and investing $30k in super (pre-tax)? What about positively geared property? My accountant tells me I have to negative gear, but I want security!
BAREFOOT REPLIES: If you want security, you should do the following: First, open an online savings account and deposit $2000 into it — this is your Mojo account. Second, pay off your credit card and car loans — that’s the best return you’ll get on your money. Third, increase your pre-tax contributions (to your ultra-low-cost super fund) to $18,000 a year. Fourth, boost your Mojo account to three months of living expenses. Fifth, sack your accountant.
DON’T BANK ON IT
PETER ASKS: I read your column in the Herald Sun on Saturday (“NAB-MLC Super Funds”) and became alarmed! My super fund is with MLC (Super Fundamentals, Horizon 6 — Share Portfolio), which, it seems you were saying, has one of the highest fee structures (in relation to NAB). I have around $100,000 in super — not much, I know. Should I change it to another fund and, if so, could you suggest one or two? Thank you.
BAREFOOT REPLIES: The NAB, via their MLC brand, has the biggest retail super fund in the country — but they’re a very long way from being the best. As I mentioned in my “road test” of their super offerings, they’re the Holden Cruze of the financial world: average in almost every way — except for their fees, which are way too high for my liking. Then again, what else would you expect from a bank? I’d draw your attention to the latest super league tables, which show that the top 10 performing super funds are all not-for-profit industry funds. SuperRatings data shows that industry super funds have outperformed bank-owned retail funds by more than 2.2 per cent over 10 years. That’s not necessarily because they’re any smarter — it’s because they charge less fees.
SELF-DEFENCE LESSON
JENNY ASKS: We’re in our late 30s with three kids (16, 14 and 5) and a household income of $220k. Here are our assets: home $350k (owe $190k), holiday cabin $40k, boat $55k (owe $20k), Mojo $10k. Our accountant is recommending we buy an investment property from Defence Housing Australia — taking out a $400k loan and only paying $100 a week. He says we will get a bigger tax refund and set ourselves up for retirement. I want to pay off our home ASAP and then invest. My husband says I am harming our retirement success. What do you think?
BAREFOOT REPLIES: First, you shouldn’t invest solely for tax reasons — though some accountants do, which is why so many of them got their clients caught up in those awful Managed Investment Schemes (MIS), which wiped out the life savings of thousands of retirees. Anyway, if I were looking at your situation, I’d knock off the boat debt first and then salary sacrifice into super at $25,000 each. Then I’d aggressively pay down the mortgage. If you want to invest in a property thereafter, you should buy a quality family home in a good area, from a local real estate agent. Steer clear of packaged “investment opportunities” like Defence Housing Australia (DHA). Why? Because they’re too expensive. Generally you’ll pay anywhere from a 10 to 15 per cent premium for a DHA property — and the areas they build in may not be high growth. Plus, DHA charges a nosebleed 16.5 per cent management fee each year of the lease. Tell your husband that I’m on your side.
WEIGHT OFF HER MIND
BEC SAYS: A few years ago I had the pleasure of chatting with you on your radio show. At the time, both my partner (now ex!) and I worked in the mines, had a mountain of debt, and drove a VE Calais costing us around $1000 per month. I am pleased to inform you that I have lost 87kg (the ex) and am now virtually debt free (all paid off in cash) AND I currently have a balance of $48,000 in MY savings account. Thank you!
BAREFOOT REPLIES: Congratulations on your weight loss, and getting some real security behind you!
The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice
Originally published as Don’t blow a windfall - use an inheritance wisely
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