Really digging these savings
A COUPLE who have mined a mint have the opportunity to be financially bulletproof, says SCOTT PAPE
Barefoot Investor
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QUESTION: My husband and I are both 26 years old and have saved $500,000 over the past six years of working life (in the mines). It’s sitting in a fairly low-interest savings account. Due to decreased interest rates, we are now looking to get our money out of cash and into an investment. We are uncertain whether the best path at this point is property or shares. We are fairly transient, so owning our own home will be a little way down the road. Steph & Steve
ANSWER: You two are complete weirdos. If you were normal, you’d have matching jetskis, matching hair extensions and a million-dollar mortgage! Seriously, though, your financial achievements tell me that you’re going to end up being multi-millionaires. It’s not a question of if, but when. If I were a property spruiker, or a mortgage broker, I’d tell you to take on a lot of debt to buy a house, and plough your income into servicing the debt. But instead I’ll give you the (admittedly conservative) advice that I’ve followed myself.
YOU HAVE TWO CHOICES:
1. Invest every cent, while using your income to build a house deposit from scratch. Put your savings in a low-cost listed investment company, tick the form and reinvest the dividends. In 20 years you’ll have a $2 million portfolio (inflation-adjusted) throwing off $100,000 a year in passive income. Remember, you’ll still only be in your mid-40s by then. It may feel like a lifetime away, but statistically it’s about the halfway point in life.
2. Do it the other way around — keep saving and (eventually) buy a family home all but debt free! While you’re doing this, you could use your income and awesome savings ability to build up a million-dollar share portfolio from scratch. Ultimately, the choice is yours, but you have two things that make you financially bulletproof — decades of potential compounding and the emotional intelligence to save now so you can live a truly amazing life later. You’re weirdos — and winners. Well done!
ON THE DEFENSIVE
Q: I’m considering buying my first investment property. I’ve seen advertising for Defence Housing Australia, and it seems steady, reliable and backed by the Government. Is this something you would recommend for a first-time investor? Jill
A: No, I don’t recommend Defence Force Housing (DHA). As a general rule, I’m wary of any investment that is advertised heavily to mum-and-dad investors. Here’s their pitch: DHA builds the home and sells it to an investor (usually via a ballot system, because they’re in high demand from mum-and-dad investors) at “fair market value”. Then the owner leases it back to DHA for about 12 years (and defence force people live in it). The rents are basically backed by the Government, there are zero vacancies and if the hot water service goes on the blink you don’t get a midnight call — DHA just fixes it for you. Sounds good, hey? Well, hold your fire. These advantages come at a significant cost. Generally you’ll pay a 10 to 15 per cent premium for a DFA property, the areas that DHA builds in may not be high growth, and DHA charges 16.5 per cent management fee each year of the lease. I wouldn’t touch them with a barge pole.
NO CREDIT IN MATE’S PLAN
Q: I’m 27 years old and have $15,000 in credit card debt. My grandmother passed away recently and I will be getting an inheritance of around $25,000. I was planning to use the majority of this to pay off my credit card debt, but a friend has suggested I put the money towards a cheap investment property in the suburbs instead and pay down my credit card debt with my current income of $60k. I’m torn. Help! Karen
A: This one’s easy — your friend is an idiot. I want you to honour your grandmother by paying down your credit card and putting the rest ($10,000) into a high-interest online savings account. Then make a vow to never, ever get another credit card again.
HEADING FOR A GREXIT
Q: I’m a bit anxious about my situation. The positives: $105k annual income (including super), $60k in a savings account, and an amazing home. The negatives: $160k loan due July 2016, $400k variable home loan (house worth $500k), $13k on a fixed car loan, and $40k on credit cards (0% balance transfer due February 2016). I can feel the walls closing in and am thinking about taking a second job on weekends. Any ideas? Alan
A: Have you been watching what’s happening in Greece? Next year, you’re going to have your own “Grexit” — the banks will shut off your ATM access and you’ll have to go cap in hand to your lenders to do a deal. You need to talk to your lender — immediately — and renegotiate the $160,000 debt. It’s highly unlikely you’ll be able to consolidate the loan into your home loan, because you don’t have enough equity. So negotiate to extend the term of the loan as long as you can (without getting skewered by the interest rate). That’ll give you a fighting chance.
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