Pounce on debt before lion bites

INTEREST rates are low, but soon you’ll feel the beast’s sharp teeth, warns SCOTT PAPE

Black-maned male African lion roaring, headshot, Africa. (THINKSTOCK)

QUESTION: My wife and I have two kids (3 and 5) and earn a combined $160,000 a year. We owe $1500 on our Visa, $14,500 on our MasterCard, and $52,000 on two car loans. We also owe$408,000 on our home, which is worth about $450,000. We would like to upsize our house in the future, to perhaps $700,000. My question is, what is the best way to proceed with paying down debt and future investing? Linda and Chris

 

ANSWER: You don’t realise it, but (financially speaking) you’re resting your head in a lion’s mouth right now. You’re paying $3000 a year in credit card interest, $7000 in car repayments, and $20,000 on your mortgage — roughly 30 per cent of your take-home pay all up. That’s totally manageable — so manageable you can’t even feel the prick of the lion’s sharp teeth because interest rates are low. Yet, left unchecked, your propensity to borrow for things that have zero value (credit cards) or fall rapidly in value (cars), combined with your willingness to supersize your mortgage, will cause the lion to bite your head clean off. My advice would be to downsize your debts before you upsize your home. Make a priority of clearing your $68,000 worth of debt — do it quickly, before the lion wakes.

 

DON’T LOAD UP ON DEBT IN RETIREMENT

Q: I am 60 and my husband is 63, and we both plan to work until 65. Most of my wage goes into the mortgage. My husband wants to invest in property, a unit in a nice complex in a thriving touristy town. The cost is $340,000 (plus expenses), which would be interest only and negatively geared. The entire cost would be borrowed on equity from our home, worth about $670,000 with $36,000 owing. That’s the plan, anyhow. Is this a good investment idea, and can it work? Denise

 

A: I think it’s a terrible idea. You’re too old to be loading yourselves up with debt. Negative gearing is a stupid idea at the best of times, but it’s totally insane when you’re in your 60s and about to retire. What good would a tax deduction be in a few years when you’re not working? Instead, at this stage of your lives, you should both focus solely on boosting your super by engaging in a transition to retirement pension, and pay off your home loan when you retire in a few years’ time.

 

SAVE YOUR FUTURE WITH A CHEAPER CAR

Q: My partner and I are in our 30s — no kids, renting, with a joint income of $140,000. We have no savings, $90,000 in car loans, $12,000 in credit card debt, and $10,000 on a personal loan. We are starting to stress about our financial future, buying a home, retirement, etc. What would be the best way to get our heads above water and get on track to invest and save? Greg and Emma

 

A: You’re right to be stressed about your situation. I’m stressed about your situation. You’re breaking one of my golden rules: “Thou shalt not drive motor vehicles that cost more than half your annual wage.” Here’s the rub: you’ll shell out $126,000 (in repayments) for cars that will be lucky to end up being worth $26,000. That’s $100,000 worth of stupidity right there. So, I’d sit down with your bank (or, failing that, your local credit union) and see how you can fix this mess. Tell them you want to sell your cars, pay out the debt and any shortfall (which the finance company will require you to do), and buy a third-hand Toyota Corolla for $8000. Then you should save up $2000 in Mojo and then line up your debts from smallest to largest and knock them down one by one (while making the minimum repayments).

 

LOOK TO PLANTINUM’S HOLDING COMPANY

Q: I know you’re a fan of listed investment companies like AFIC and Argo. What do you think about the latest IPO offer, Platinum Asia Investments Limited? Richard

 

A: I think it’s very interesting. Platinum Asset Management has a good track record investing in Asia — their existing Platinum Asia fund has not only beaten the index, it’s returned an average 17 per cent per year since it was established in 2003. With that record, they’ll likely raise hundreds of millions of dollars in the IPO. However, I won’t be investing. The managers, Platinum Asset Management, are lining their pockets on this deal: they’re charging an annual fee of 1.1 per cent, and they’re also slugging investors with a “performance fee” that entitles them to 15 per cent of whatever they make over the benchmark (after they’ve caught up on any underperformance). Nice work if you can get it. Instead, I’m more interested in investing in Platinum’s holding company, Platinum Asset Management (ASX: PTM). Like all good fund managers, they don’t risk any of their own money, they get paid generously even when their stock picks slump and, when the fund does well, they share handsomely  in the spoils. Sounds like a wonderful business to me, though it’s a bit expensive at the moment, for my liking.

 

DITCH THE CREDIT CARD TO EASE STRESS

Q: My husband and I are on a combined income of $220,000. We have a $700,000 home loan

with a bank valuation of $1.5 million, manage a $3000 credit card, have no other debt, and have $2000 in our Mojo account. We have three teenage boys. Should we sell the home, rent until our youngest finishes school, invest our money and then move out of the city to a cheaper area? I’m totally overwhelmed. Thoughts? Trish

 

A: There’s an easy way to get rid of your overwhelm: ditch your credit card and build up $15,000 in Mojo. On your income you’ll be able to do that this year. As far as downsizing goes, it’s a great idea to free up some equity (tax free) and boost your superannuation.

Originally published as Pounce on debt before lion bites