Get out of debt — start now and stop the stress

MAKING your money work for you is still the best way forward, writes the Barefoot Investor.

Don’t wait to get out of a financial mess.

A S you read this, I’m sitting by the pool in Fiji, so the only question I’m answering this week is, “Would you like another beer?” So with that, here are some of my favourites from the many questions I’ve received over the years.

Bula!

GREG AND EMMA ASK: 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?

BAREFOOT REPLIES: 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 what 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 proceed to line up your debts from smallest to largest and knock them down one by one, while making the minimum repayments. Do it this week.

SPRUIKING A FANTASY

WENDY ASKS: My husband and I are in our 40s and have paid off most of our house — $400,000 remains on a house valued at $1.9 million. Our neighbour has recommended we buy positively geared property with a company called DDP — Dream Design Property. His philosophy is that you cannot have too much debt as long as it is positively geared. I guess it is easier to have a positive cashflow property with record-low interest rates, but I do wonder what will happen when interest rates go up. Any thoughts?

BAREFOOT REPLIES: Shrubs. You need to invest in good-quality, fast-growing shrubs that will block out your neighbour and his stupid advice. I searched for the company you referred to. It showed a young dude standing in front of a Ferrari, with the headline: “From student to investor with 15 investment properties in three years.” Shrubs, Wendy, invest in shrubs.

Plant shrubs to block out a neighbour’s stupid advice.

 

TIME TO ACT IS NOW

DENISE ASKS: I love reading your column each week and it has taken me way too long to write to you. My husband and I earn $147,000 together and have got into serious debt over the years through bad business decisions and other reasons. We have our own home with a mortgage of $346,000, and two investment properties — on one of them we owe more than what it is worth, and the other we could sell outright (valued $150,000). We have credit card debt of $160,000 and two personal loans of $70,000. Please help.

BAREFOOT REPLIES: Most people who write to me need a little plastic surgery with their credit cards — you need a total brain transplant. You’ve got $230,000 in personal debts, so you’re essentially tied to the railway tracks while the train thunders down the hill. It’s now or never. I’d sell the investment property, but make sure you allow for any capital gains tax. Use it to pay off the bulk of your credit cards. Then I’d lodge a hardship variation for each of your remaining debts — aim to negotiate a freeze on your repayments for six months. Use that six months to work three jobs so you can come out of the blocks with a fighting chance.

DOESN’T FEEL RIGHT

PETER ASKS: I read you religiously, so I think I know your thoughts, but I’m just checking. My AMP-administered super fund financial planner charges me a management fee of 2.0058 per cent, less a rebate of 0.4500 per cent, over the range of products I hold with AMP. This equates to about $6500 a year. I then pay an ongoing commission of 0.44 per cent, which adds a further $1800 — pretty much cancelling out the rebate. I am assuming I have read the documents correctly. Am I being ripped off?

BAREFOOT REPLIES: I once answered a similar question by suggesting that anyone being charged these nosebleed fees, and there’s a lot of people in this boat, should have their name fixed on a gold plaque just above the urinals at AMP HQ. That way, the 26-year-old fund manager knows who he’s peeing on. “Thank you, Peter from Cranbourne.” However, that answer caused a bit of a stir, and took a few years off my editor’s life, so let’s not engage in toilet humour (again). Yes, you are being legged. If you have 15 years left till you retire, and you’re contributing $10,000 a year, the cost of your current fee arrangement paid to AMP will be around $283,000. With that type of money you could redecorate a bathroom or three.

HAPPILY EVER AFTER

LAUREN ASKS: I need your help. It’s about my partner. See, everything Barefoot says to do, my partner does. He follows your financial advice religiously. So my question is: when are you going to tell him to marry me? We have been together five years, have a child, a pet dog and a home. I get it that weddings are expensive, but I need the title of Mrs. Please, Barefoot, make him rush to the altar as fast as he buys your share picks.

BAREFOOT REPLIES: I’ve had some interesting questions in my time, but this one takes the cake. I’m not sure if my financial licence covers me for such a recommendation, but let me ponder this for a week or so.

(POSTSCRIPT: A few months later, not only did Lauren’s partner put a ring on it, but the happy couple also asked me to announce they were getting married at their surprise wedding! Congratulations Lauren and Chris!)

barefootinvestor.com

The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice

Originally published as Get out of debt — start now and stop the stress