How to start over after house horror

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 I built a house and was taken to court. I won the case but was left with the house repairs, bad debt and a $157,000 lawyer’s bill.

This has put me $500,000 in debt (with $120,000 in a loan at 10 per cent).

I could sell the house, but I would walk away with only $50,000.

Considering I earn $2000 per week after tax, am I better off cutting my losses and starting again, or paying down as fast as I can?

 John

Answer Hey John,

Wow, it sounds like you’ve gone to hell and back.

I don’t like the sound of paying 10 per cent interest on a $120,000 debt.

So if I were in your shoes — and I couldn’t consolidate that debt down to under 5 per cent — I’d sell the house and walk away with six months of Mojo (living expenses).

If you’re able to save 50 per cent of your income, you’ll have a 20 per cent deposit in a few years.

 

NURSE PLANS FOR A LONG, HEALTHY LIFE

Q I’m 23 and in my second year of working as a full-time registered nurse. I receive $65,000 gross a year and I salary-sacrifice up to the cap per year (about $9000) for rent and living expenses. My question is, should I salary sacrifice more into super above the compulsory contributions? Or should I invest it on my own? Another note ... no one in my family has ever lived over 81 years (might be relevant).

Sheridan

A Hi Sheridan,

You could plan to conk out at 81, but I wouldn’t recommend it. As a healthcare professional you should know that in Australia you’ve got every chance of living into your 90s!

However long you plan to stick around, though, you need to start turning your income into assets. But I wouldn’t be putting extra into your super at your age, I’d be building savings outside of super.

Set up three savings accounts: one for your Mojo (three months of living expenses), one for your house deposit, and one with an online broker (I’d encourage you to regularly buy $1000 lots in listed investment company Argo Investments). Here’s to a long life!

 

HELP, I’M 52 AND DEAD BROKE

Q I’m 52 with no assets except my old car, as well as $40k debt in loans and credit cards. I earn a good wage and have been working at the same company for 21 years. I was divorced about five years ago and have a dependent child I pay maintenance for, who stays with me every second weekend. I now live with a de facto, to whom I pay rent and half of bills. Should I try to consolidate my loans and cards or put all my money into paying them off individually?

Mick

A G’day Mick,

I doubt you’ll be able to consolidate your debts, because you have no collateral. So you’re going to have to get rid of them the old-fashioned Barefoot way: ‘Domino your debts’.

Get a piece of paper and write down each of your debts from the smallest to largest. Then (while continuing to pay rent and bills) focus on knocking over the smallest one, then the next, and so on. Live like a monk for a couple of years (devoting $400 a week to this plan) and you should be debt-free. Then keep going — but now put that money into super. Then you can really start building assets.

MILLIONAIRES FACTORY?

Q I’m a 63-year-old formerly self-employed married man.

We have a home worth $590k with a $200k mortgage, and an investment property (a factory) worth $1.25m with an interest-only loan of $530k. It’s rented out at $78k a year for 10 years, with 4 per cent yearly increases.

As I’m finding it difficult to get employment, we’re thinking of selling our home to buy a $400k place, and are wondering whether to sell our factory and invest the money or keep it and live off the rent ($49k p.a. after interest). What would you do?

Phil

A Hi Phil,

You’re on the right track — downsizing is a good way to pay off debt. But you might want to wait until you get a concession card, which will save you thousands in stamp duty.

If I were you I’d sell the factory, pay off the loan, and put the proceeds into super (both yours and your wife’s). The limit for after-tax contributions is $180,000 each per year, but you could bring forward the next two years’ worth and invest a lump sum of $540,000. Why? Because by investing in super you can receive a tax-free pension in retirement, while still being eligible for a part age pension.

 

SET YOURSELF UP FOR THE FUTURE

Q I just landed a FIFO (Fly In Fly Out) job earning about $160k, with possible 18 months of work. I’m 27 with about $10k in a savings account, no debt, and no assets (apart from a s---box car). And I’ve never earned this kind of money. My end goal is to be self-employed, with a paid-off house. What is the best way to make this money work for me?

Rick

A G’day Rick,

Here’s a tip: don’t look at your monthly pay packet, which will be about $10,150 after tax. It’ll risk turning you into a CUB (Cashed Up Bogan) and you could start buying jet skis, hair foils and Holden Maloo utes.

Instead, think of it this way: after 18 months of hot, sweaty, smelly conditions, you’ll have earned about $180,000 after tax. Less your living expenses, less if you take time off, and less if the work dries up early.

Bottom line: you want to make it pay. So I’d suggest you spend the money in advance — probably by buying a house in the first year and ploughing at least $100,000 into the mortgage (kill the redraw). Just make sure you can cover the repayments.

Originally published as How to start over after house horror