Prince Charming’s credit woes aren’t yours to repay

IF you have a burning money issue, or want to win a fight, put your questions to Barefoot Investor.

06/02/2009 BUSINESS: Scott Pape. The Barefoot Investor. HWT staff.

QUESTION: I’ve met the man of my dreams (we’re going to be married one day), but we’re bringing two very different financial situations to the table. I have $40,000 in savings and shares, and no debt. Yet my partner has pretty much the same amount in debt … and no assets. My question is this: should I keep my money separate and wait until he pays his debts before starting to work towards things together?

Pip

 

ANSWER: Yes, until you get married keep everything separate. A lot of women are in your boat. Their long-awaited Prince Charming finally arrives — in a leased BMW, and with credit card debt! You don’t need to apologise and you’re not being materialistic. Marrying a financial loser will have a massive impact on your quality of life — and on your future children’s lives. It’s the No. 1 reason for divorce. So, I’d gently explain to him that, if he’s planning on marrying you, one of the easiest ways he can show his commitment is by manning up and becoming a good provider. The nice thing for him is that, unlike many messages us blokes get, this one is concrete: less debt plus more savings equals happy you.

 

WRAP NOT ALL ITS CRACKED UP TO BE

Q: About three and a half years ago, my wife and I borrowed $100,000 to invest in a BT investor wrap account (on an adviser’s suggestion). That investment is now worth $150,000, but it has cost us $33,000 in fees. Is the investment worth keeping? Or should we cash it in and focus on reducing our mortgage?

Mike

 

A: I’m not a fan of borrowing money to invest in the sharemarket. It’s too risky for most people and advisers tend to make out like bandits on these deals while lumping you with all the risk. If I were in your shoes I’d get out of the deal and split the proceeds three ways: paying down some of your mortgage, putting some money into superannuation (via a low-cost index fund), and keeping three months of living expenses in a Mojo account.

 

BERKSHIRE RETURNS BETTER ELSEWHERE

Q: We bought $40,000 of Berkshire Hathaway funds on your recommendation when they were undervalued and Buffet was buying back his own shares. We now have $75,000 to invest in shares. Should we buy more Berkshire, or look at something local given the dollar is low? Our financial planner returned a less-than-impressive -3 per cent on investments last year. Would love some guidance.

Alina

 

A: You won twice: Berkshire Hathaway is hovering near record highs, and the dollar has given your returns a nice kick along too. But Berkshire is too expensive at these prices. As Buffett said in his latest shareholders’ letter: “A business with terrific economics can be a bad investment if it is bought for too high a price. Berkshire is not exempt from this.” Keep your Berkshire, but make your next investment a local one. If you’re under 45 and earning more than $80,000 a year, I’d strongly suggest you look at investing over the longer term into a low-cost Aussie share index fund via an investment bond. Ask your adviser about it — but make sure he doesn’t charge you a trailing commission on it!

 

NO CHANCE BUDGING LENDER’S INSURANCE

Q: I have a question about lender’s mortgage insurance. My kids bought an investment home together 17 months ago and now my daughter wants out, so my son is going to take over the mortgage. Bankwest has told them that they are not entitled to any refund on the $16,000 LMI they paid less than two years ago on a 30-year term loan. Is there anything that can be done?

Pam

 

A: LMI insures the bank against people defaulting on debts, sticking the cost of this (in your case $16,000) with the customer. Generally it isn’t portable or refundable, though, in my view, it should be. There are really only two main players in the market, and they make their own rules (and they can — people without enough savings have no power). In your kids’ case, I think LMI is justified because your son will now be carrying the entire can. If nothing changes, it means the LMI the bank originally demanded is still applicable.

 

REINVEST DIVIDENDS ON ESTATE WINDFALL

Q: My husband tragically passed away recently. I’m in my mid-40s and have two children, 12 and 10 years old. Luckily, I don’t have a mortgage and our home is worth $600,000. I earn $48,000 a year, but I currently need $1000 more per month for expenses than I’m earning. I Have $350,000 from my late husband’s estate, which I have sitting in a bank account earning 2.3 per cent. What should I be doing with this money to look after us now and in the future?

Jenny

 

A: You’re in a good financial position; everything will be fine. The most important thing is that you feel safe, so I’d encourage you to keep $38,000 in a high-interest online savings account (which Barefooters call Mojo) for extreme emergencies. Then, I’d take $12,000 and put it into another high-interest savings account to give you a year at your desired income. After that you really should look at ways to earn $60,000 a year in your career, rather than continually eating into your husband’s estate. I’d then invest $300,000 into good-quality Aussie shares, like AFIC or Argo. You’ll earn about $15,000 a year in dividends, but I’d strongly urge you to enter their dividend reinvestment plan (DRP). With a DRP you receive no dividends in hand; instead the money is ploughed back into buying more shares — often at a small discount, and with no brokerage fees. Doing so should mean you’d have a million-dollar-plus portfolio when you retire.

 

ASK A QUESTION AT BAREFOOTINVESTOR.COM

Originally published as Prince Charming’s credit woes aren’t yours to repay