Looking wealthy or being rich? Real millionaires save diligently

RESEARCH shows real millionaires tend to live in working class suburbs and save religiously, diligently focusing on building share portfolios, says Scott Pape.

Looking wealthy or being rich?

QUESTION: We are a hardworking professional couple in our 40s, with three small children, one in school with high childcare and nanny costs. We have a combined income of $450,000. We have a $1 million mortgage on a house worth $1.6 million, in an inner suburb by the beach. We are improving it, and are fortunate as the area is rising in value. We also have $14,000 in credit card debt and $20,000 on a car loan. The debt seems insurmountable. Help! Kym

 

ANSWER: Your debts aren’t insurmountable on a $450,000 combined income. You can easily afford it. Yet that’s also your problem: you’re so comfortable that you don’t need to worry about where it all goes, right? Wrong. So let’s get you uncomfortable. You’re earning a whopping $8600 a week before taxes and super ... but you can’t even live on it. That’s why you’ve got $35,000 in loans. Your home is an asset but it’s not an investment. It generates no income, and costs you money to maintain. The best-selling book, The Millionaire Next Door, profiled people like you: those with big incomes, big houses ... and big credit card debts. Yet when the authors dug deeper, their research found that real millionaires tended to live in working class suburbs (in homes they owned), drove Toyotas (that they bought second-hand), and they saved religiously, diligently focusing on building up share portfolios. You have a choice. Do you want to look wealthy? Or do you want to be rich?

 

TIME TO MOVE ON BUT WHAT CAN I GET?

Q: I’m 28, and I’ve been with my partner for five years (and living together for two). No kids. Separate finances. He runs a successful business which makes him about $250,000 a year. I’ve supported him from start-up to where he is now, though never in a formal, or paid capacity. I’ve decided that I’m going to end the relationship. However, before I do, I want to know what I am entitled to in the settlement. We’ve never signed any agreement. People keep giving me conflicting advice. What’s your advice? Amy

 

A: You can break it off now, because you have two years to make a claim against him. As a de facto, you are entitled to make a claim on his assets (and he yours). I can’t say what you’ll “get” in a settlement. That’s a negotiation, which will be worked out (probably) through lawyers).

(And for all the de facto dudes reading this, Amy is a real question, with a fictional name. In other words, Amy could be your girlfriend. De factos have the same financial entitlements as marriage after two years, so act accordingly).

 

CONFUSED ABOUT INTEREST-ONLY LOANS

Q: I am a little confused. My mortgage broker has advised that I roll over my mortgage on my home to an interest-only loan. He says that this will lower my monthly repayments, though I’m not sure what the downside is. What is your advice? Louise

 

A: He’s right, it will lower your monthly repayments. However it’s only because you’re not paying down the debt, you’re just merely servicing it. If you’ve been reading this column for any length of time, you’ll know that I’m a big fan of owning things outright. Stick with a principal and interest loan for your home. You don’t want to be at the mercy of the banks. If you want a working example of how these bankers behave, the last couple of weeks provides a perfect example. Late last year the government regulator warned the banks to limit their borrowing to property investors, who are pushing up prices. The banks ignored their warning. Until last week. Yet instead of limiting new investor loans, they decided a more profitable deterrent would be to increase investors’ interest rates. And not just for new investment loans ... they jacked up their rates for every investment loan. All four banks did this. All in the same week. They gouged a billion dollars from investors. No one batted an eyelid.

 

WORRIED MY SUPER IS TOO SMALL

Q: I’m a pregnant 36-year-old small business owner. My business profits about $180k an average each year. I have a HECS debt of about $20k and a super balance of $40k. I also own my home and have about $40k in mojo/savings and $20k in shares. For the past several years, I have been declaring a $50k wage for myself to lower my tax. But this means my super and HECS contributions have been minimal. I’m concerned my super is not where it should be. What do you recommend? Joanne

 

A: If you’re earning that type of income, and you own your own home, you should be maxing out your pre-tax superannuation contributions, which are currently set at $30,000 per annum for people under the age of 49. It’s a great tax deduction. After that I’d be setting a goal each quarter to invest into a good quality share portfolio, preferably via a trust (talk to your accountant).

 

A SUPER RIDICULOUS MANAGEMENT CHARGE

Q: I’m a 67-year-old single retiree on a part pension of $681.70 a fortnight. I own my own home. I have $259,897.23 with Colonial First Choice. My financial planner charges close to $4000 every six months to look after my superannuation. Am I being overcharged? Mary

 

A: Yes, you’re paying about 3 per cent of your balance, which is ridiculous. You appear to have a very straightforward situation, which would indicate your adviser is having a lend of you. Talk to a low-cost industry fund and see if they can get you a better deal. Thanks for your question. Whenever I print these in the paper, I find it causes other retirees to look at their fees, and it saves them lots of money!

 

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Originally published as Looking wealthy or being rich? Real millionaires save diligently