Scott Pape: Bad taste lingers after GFC financial loss

DON’T waste time on resentment if you find yourself in a financial hole. Just dig yourself out, writes Scott Pape.

Paying down debts and saving aggressively are the best ways to get over a financial setback.

DON’T waste time on resentment if you find yourself in a financial hole. Just dig yourself out.

MAY ASKS: My husband and I lost $300,000+ in the GFC — bad property, tax schemes (woodlots), loans for shares, etc, all sold by a dodgy financial adviser and all of which collapsed!

We have slowly shed the debts. We now follow Barefoot, are “hosing down” our home loan ($185,000), have $65,000 invested, are building up our Mojo account, and have started giving Kiva loans.

Despite all this, I cannot shed the resentment I have for our friends who promoted the financial adviser to us. In your experience, do people like us eventually forgive themselves for listening to bad advice?

Read more: Wealth needs to be maintained and backed up by a bigger purpose in life

BAREFOOT REPLIES: You’ve managed to pull yourself out of a financial hole; now you need to let it go emotionally, for a few reasons:

First, the money ain’t coming back.

Second, it’s not your friends’ fault. Truth is, most people have no idea how to judge a financial planner: Did he have a nice smile? Nice suit? Salon-styled hair?

More likely, he made your friends some money (well, before the GFC hit) and they were just trying to help you do the same.

Third, if you’re going to get angry at anyone, direct it at the financial adviser, not your friends. He was the one who broke your trust and did the wrong thing by you.

You know what? It’s highly likely your friends lost a lot of dough with this douchebag too. Why not have a chat to them and explain what you went through — and how you pulled yourself back up again. Just sharing that story with them will make you feel better. Promise.

When investing ‘aggressively’, be sure to always have a solid buffer.

IN A RIGHT FIX

STACEY ASKS: My husband and I are in our early 30s and we earn $175,000 combined.

We are aggressive wealth-builders. However, one of our investment properties is in negative equity by $75,000 (we had a loan to value ratio of 97 per cent). We have no way of refinancing or selling as we cannot cover the shortfall currently.

We have three other investment properties (one that we will move into in five years) and thought to sell them to cover the shortfall. However, we have just had independent valuations done and this would only cover $20,000 — a huge mess!

Do we direct our “fire extinguisher” money to this and pay it down to where we can sell it? I say yes, partner says no. HELP!

BAREFOOT REPLIES: Aggressive is one word for your situation.

Borrowing 97 per cent of the value of the property doesn’t leave you with any wriggle room (negative equity simply means you owe more on your mortgage than the house is worth, in your case $75,000).

I understand the concept of aggressively using the equity to “leapfrog” and buy more investment properties.

There are entire books devoted to the strategy, and they all end with the landlord becoming filthy rich. In the book, that is.

The “only” thing you need to watch out for is going broke in the process! To avoid that, you need a buffer.

So let’s talk about your buffer. You need to make sure that you have enough money to cover the impact of higher interest rates, prolonged vacancies, and maintenance costs. That’s just for the investments. You also need Mojo (and income protection) in case one of you can’t work.

Either way, I’d be aggressively saving — and then potentially looking at unwinding the strategy.

TIMELY LOTTERY WIN

JACKIE ASKS: My boyfriend and I have a $45,000 deposit saved and have pre-approval for a $600,000 loan.

We have unsuccessfully been trying to break into the house market.

Incredibly, last week we won $464,000 in the lottery.

We are still very keen to buy our first house, but unsure what our best long-term option may be.

A $600,000 house (almost entirely paid off), a more expensive house, a cheaper house + invest in property, shares, etc. What would you recommend?

BAREFOOT REPLIES: Lucky you! Don’t tell anyone. Seriously, nothing good will come of it. Trust me on this.

Now, obviously you want to spend the money that will bring you the most happiness.

Yet using your winnings to buy a bigger, more expensive home won’t make you any happier in the long run.

What will make you happy — or at least financially secure — is buying a nice home that you can see yourself living in for at least the next 10 years, with as small a mortgage as possible.

So will keeping three months of Mojo.

And here’s my final tip: never gamble again.

Statistically, you’ve already scooped the pool. Kenny Rogers is high-fiving you right now!

Never over-borrow to live in a fancy house in a fancy suburb because it will just cause misery.

THE CRYING POOR

AMANDA ASKS: We are in our early 40s and, despite a combined income of $185,000, are feeling like the “professional poor”.

Working long hours, drowning in our mortgage, two young kids (with two depressed parents), no support to even have a Barefoot Date Night.

Our last holiday was four years ago and we were all vomiting with a virus.

We are sick and tired of life and need help.

I would rather live in a tent, but can’t even afford one. We are a sinking ship.

BAREFOOT REPLIES: Boo-freaking-hoo.

Let me hit you with the reality stick: according to globalrichlist.com, you are in the top 0.07 per cent richest people in the world, based on your income. That makes you the 4,262,959th richest person on Earth by income.

In other words, around 7.1 billion people would love to have your First World problems. You sound like what I call a “postcode povvo”: you’ve over-borrowed so you can live in a fancy house in a fancy suburb, and all it’s doing is making you miserable.

Now, all jokes aside, I totally understand the depression that financial stress brings. It’s horrible and it’s no way to live.

Thankfully there’s a simple solution: sell and buy something you can afford. On your income you can do this. Then you — and the kids — can start enjoying life.

Read more Barefoot:

Knowledge is key to dodging a financial bullet

Scott Pape on why he rarely tells people to sell family homes

What to do when you've lost everything

Scott Morrison and the house that debt built