Hard work pays off in a comfortable retirement

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.

Q I am a 48-year-old single mother of two (the youngest is 19) and have recently been through a, shall we say, less than amicable divorce. I lost a lot but managed to keep custody of the kids.

I have $200,000 in super, $30,000 in shares, and have just been gifted $25,000 to help me out. Earning $65,000 a year, I’m managing to cover expenses (just). I can’t help but panic that I am slowly going backwards and will have no buffer if I don’t do something soon. How can I rescue myself?

Belinda

A Let’s not call the lifeguard out yet. You need to increase your income in two ways: getting your adult kids to pay their own way and re-skilling yourself to make the next 20 years of your working life really count.

Use the $55,000 as a savings buffer while you study, and then when you get a higher income, plough that money into a home deposit on a small unit. On your current income, you’ll have about $500,000 in superannuation on retirement — but with a higher income it could be much more.

DEBT DECISIONS

Q I’m a 22-year-old uni student who works part-time, earning about $20,000 a year. I’ve been paying for my degree as I learn and have always wanted to graduate without a HECS debt. But now I feel torn.

I’ve managed to save just on $10,000 and I’ve just received a HECS bill for $4500. Should I blow half my savings to pay for it all, or should I be doing something else with my money, like putting it into super?

Neil

A You’re the top of my class, well done.

I’d contribute $1000 into super, which will entitle you to the maximum $500 government co-contribution. That’s money for jam. Though I wouldn’t put any more money into super — remember, you’re locking your money away for 50 years.

It’s a worthy goal to graduate debt free — and if that’s important to you, then go hard and pay it off, possibly by working extra.

However, if it was me, I wouldn’t bother. The bonus for paying your HECS-HELP upfront is in the process of being removed and, given repayment is contingent on your income, I’d be happy at this stage for it to be taken out of your pay. Instead, I’d look to increase your financial education by buying some Berkshire Hathaway (BRK. B) shares via an online broker.

TAX WINDFALL

Q I have been wondering what I should do when my tax return hits. I’m 30, financially clueless and I usually get about $3000. I wanted to know what the smartest thing to do with it is — I have no credit card debts or any loans (but no savings either).

Jess

A I’d do three things: First, lend $25 to a Third World entrepreneur via Kiva.org (check out the Barefoot Investor lending team). Second, spend $200 to shout your three best friends to a night of food and booze. Third, save the rest in a high-interest online savings account (and scramble the password).

DIY HOME LOAN

Q I’m looking to buy a house and have been talking to my bank about a loan. The bank assumed I would be taking a 25-year loan, so when I said I wanted a 15-year loan instead, they told me it’s too risky and that I could struggle to meet the higher repayments. Maybe they’re right, or maybe they’re stringing me along. What do you think?

Helen

A Remember, the bank’s main aim is to keep you in debt for as much as possible, for as long as possible. However, there is a case for stretching the loan out to lower your repayments and provide a buffer, especially if things are already tight. So let me tell you what I did: I got a standard 25-year (variable) loan term, but I calculated my own — much higher — repayments, while at the same time building up a cash buffer.

Originally published as Hard work pays off in a comfortable retirement