Get cash flow under control before investing

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

Calculating personal finance

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

Q Hi Scott,

I have been absolutely terrible with money my whole life.

My current situation is this: $3500 left on a $20k personal loan for a car I sold years ago and am still paying off; $3000 on one credit card and $5500 on another which I used to purchase crap I no longer own.

I have a take-home pay of $4000. I have no savings at all, and I'm usually left with nothing at the end of the month. Rent and bills are about $1000.

My plan is to pay off all my debt as fast as possible and then put money into savings. The thing is that I would like to start investing, but I also want to own a home, so I'm a bit confused about the order in which to do things. What do I do?

Anonymous

A It sounds like you've finally reached a place where you're sick and tired of being broke. That's a wonderful place to be.

You don't have any money, so don't worry about investing or buying a house - focus on getting square, which will take you about six months if you get motivated.

First, take stock of where you are right now. You owe $9000, and can save $3000 a month if you get serious.

So the first thing I want you to do is save $2000 into a Mojo (savings) account, which will provide a safety net. Once that's done, line up your debts from smallest to largest, and knock them over one by one (we call it dominoing your debts).

CREDIT'S FOR TRAVELLERS

Q Hi Scott,

I am just wondering if you have any advice or recommendations on selecting a credit card?

Usually you don't seem to talk about them apart from cutting them up and dominoing debts.

John

A Hi John,

I run a successful small business (and a successful small family) debt-free. The only card I recommend is for overseas travel, and it's the GE Money 28 Degrees Mastercard which has no ATM charges or currency conversions. Just remember, though, that it does charge credit card "screw-me" rates, and may just be a carrot to lure you in.

NOT SO SUNNY

Q Hi Scott,

A family member is encouraging me to look at an investment property through the website propertyinvestmentplanning.com.au because there are government tax incentives available.

She is building a townhouse on the Sunshine Coast, positively geared due to their lack of cash flow.

What does this mean, and am I missing a good opportunity?

Hope you can help.

Bernie

A Bernie,

If you talk to enough people, you will find the "deal of a lifetime" actually comes around at least once a month - and often the most expensive advice comes free.

A "positive cash flow" investment property means that the property will put money in your pocket. Yet it's important to calculate your own figures, because a) sometimes people fib, and b) you're the one signing on the dotted line for a 25-year mortgage.

The Sunshine Coast is one of the hardest-hit property markets, mainly because it attracts a large percentage of investors. I wouldn't invest my money there.

COVER YOUR BASES

Q Hi Scott,

What are your thoughts on renting shares that I own? I have been hearing good things about it, but mostly from people who are selling "the dream" and who I don't really trust.

Marc

A Hi Marc,

What they're referring to is a strategy involving derivatives, where you sell an option against your existing portfolio of shares. It's confusingly called a "covered call", and the aim is to boost your investment return by a few per cent each year.

In a previous life I was a derivatives adviser - it was a good money earner - though I never did it personally (too risky for me). It can be quite complex and you run the risk of having to sell your shares, so it's important that you get good advice.

And generally, anyone who dumbs down the strategy of "renting shares" isn't someone I'd trust to do the job.