My Variable Income

Hi Barefoot.

I like your stuff and follow it pretty closely. As a result of that, and some hard work, we are doing okay.

We have just started our own business, but because we’re starting out we don’t draw a wage for my husband, so my job pays the bills. We’re making money on paper, though cashflow is a killer. I get the idea of your 60/20/20 rule when there’s a consistent income --- but where on earth should we start when one of us is self-employed?

Nikki

Hi Nikki,

Fantastic question!

The 60-20-20 Rule involves screwing down your living costs to 60 percent of your income and then devoting 20 percent to savings and 20 percent to splurging.

And you know what? It’s actually the perfect plan for people on a variable income.

Why?

Well, you may not know how much money you’ll earn, but you know how much you have to spend to keep the lights on and beer in the fridge. Your business needs to cover that figure, and your superannuation, as a minimum. If it’s not, make changes in the business until it does, or, if it’s never going to happen, get out of the business.

When you earn more than your basics, plough that money into your savings. As a small business owner myself, I have three months of personal living expenses and three months of business expenses sitting by. Being your own boss can be brutal -- so stack the odds in your favour.

Scott

When Are You Going to Apologise?

When are you going to apologise to your readers for your stupid advice!? They really will be ‘barefoot’ if they keep their ‘Mojo’ in a savings account, now the Reserve Bank has cut interest rates to a historical low of 1.75 percent! They won’t even have money to buy shoes!

Tony

Hi Tony!

I’ll take your exclamation marks and raise you!In all the time I’ve been Barefoot, I’ve never had anyone write to me and say “You bastard, Barefoot! The worst thing I ever did was take your advice and save some money so I could get some financial breathing space!”

Seriously, Tony, I view my Mojo savings the same way that way Warren Buffett sees the billion he has perpetually parked in zero-percent-returning US treasury bonds: the return is peace of mind ... and the ability to be greedy when other people are fearful.

Scott

The Rocking Chair Test

Hi Barefoot,

My wife and I are both 30 and we are lucky enough to earn a combined $350k per annum. Our living costs are $40k a year now, though kids may happen. Last year we paid off our mortgage, and we have a combined $200k in savings and $130k in super. We grudgingly admit that some risk is necessary, but find investing stressful and confusing, so we want minimal involvement. What is the best low-stress, set-and-forget strategy to retire on our own timeline (not when the government lets us access super)?

Max

Hi Max,

At the tender age of 30 you’re basically at the financial finish line, while most of your mates are still on the starting blocks. Respect. Also, your living expenses are very low for your income, which is a sign that you’re not wankers. More respect.

Here’s my practical advice: set up a family trust and invest a set amount into low-cost listed investment companies (LICs) or direct shares every single month. That’s how you take the confusion and stress out of it. Keep it simple, and it’s likely you’ll be multimillionaires by the time you hit your 40s.

From that point on, your life won’t materially change -- regardless of how many millions you eventually pile up. So I’d encourage you to do a little exercise: imagine you’re sitting side by side in rocking chairs 40 years from now, looking back at your lives. What did you devote yourself to? Who did you help? What change did you make? What are you proud of? Then do it.

Scott

Please Help, I’m Desperate

Hi Scott,

In one of your recent newspaper columns you exposed the Tasmanian whisky operator Nant Distilling Company, warning your readers to steer clear of them. I was not so lucky. I have $15,000 invested with Nant, and I am finding it all but impossible to get them to honour their ‘buy back’ promise, even though I have abided by the agreement. I have rung the company at least 20 times. I even had an email from an operations manager agreeing to pay me out, but he has since left the company, so I am back to square one. Is there anything you can do?

Fraser

Hi Fraser,

What can I do?

Well, I’ve warned investors (and retired cricketer Matthew Hayden, who was spruiking for them) just how horrible I believe this business is. Seriously, an investment in Nant is much the same as a teenager’s first binge-drinking experiment with whisky -- In both cases you’re likely to end up shivering in a dunny, covered in vomit.

Sadly, I don’t think you’ll get any help from the regulators either. Reason being, when I was investigating Nant they were at pains to point out that they weren’t marketing an investment product -- which would see them regulated by ASIC, the corporate cops. Instead they argued that they are simply selling whisky.

Yet here’s Nant’s pitch to SMSF investors taken directly from their website: “Our unique barrel buy-back program offers you an equivalent return of 9.55% compounded annually, paid when you sell your barrel back to Nant after four years maturation.”

So what happens if Nant decides not to buy back the barrels?

Well, you’ll get … nant!The worst thing about Nant is that they’re still flogging their investments -- sorry, whisky barrels -- to unsuspecting investors, even though it appears they’re not paying out existing investors like you.

Seriously, though, I called Nant on your behalf, and they assure me that ‘everything is fine’, and that you’ll get your money back, in a few months. Perhaps. Maybe. Depending on the maturation process (and testing) of your whisky.

Scott

The Most Important Investment Lesson In The World

“If you stick around till lunch, I’ll share with you what I believe is the most important investment lesson in the world”, Warren Buffett told me (okay, and 40,000 others) in Omaha last weekend at the Berkshire Hathaway annual meeting.

At which point my old man, an Omaha virgin, elbowed me in the ribs and said with a grin, “This is what we came here for”.What was Buffett’s secret?Smart beta? Emerging markets? Hedge funds?

Nope.

But if you’re a bloke from, say, Ouyen, it’s not a bad guess.

After all, it’s not hard to be intimidated by the world of high finance. Billionaires. Private jets. Sophisticated finance-speak.

Let’s face it, no one living in suburbia gets access to the hottest hedge funds on Wall Street. They’re closed shops. You need serious bucks and high-finance connections to get access to the most exclusive funds run by the sharpest investors in the world.

The refreshing news is that Buffett has spent years poking fun at Wall Street.

And, as always, he’s put his money where his mouth is.

You see, back in 2007 (when I was an Omaha virgin myself), Buffett made a famous million-dollar bet.He bet that a basic, no-brainer index fund that simply tracks the market will outperform the most elite hedge funds over 10 years.

A New York firm, Protégé Partners, took Buffett at his word and put their money into five of the best hedge funds they could find. We’re talking incredibly smart money managers with highly sophisticated strategies. They can bet against the market, they can get in and out of the market when they want, and they can scan the world for the best opportunities.

It was certainly a ballsy bet from Buffett -- particularly since the timeframe would include the Global Financial Crisis (a time when the index tracker, well, tracked the market straight over a cliff).

Back to Omaha.

Lunchtime came around, and Buffett gave his highly anticipated speech.

He began by putting up a slide showing how his million-dollar bet was going.

You guessed it: the no-brainer index fund had wiped the floor with the high-fee hedge funds -- outperforming them, to date, by a staggering 40 per cent.

Here starteth the lesson.

(As you read this, understand that Buffett is referring to stockbrokers, highly paid fund managers, financial planners and asset consultants.)

Over to Mr B:“Supposedly sophisticated people, generally richer people, hire investment consultants. And no consultant in the world is going to tell you, ‘just buy an S&P index fund and sit for the next 50 years’. You don’t get to be a consultant that way, and you certainly don’t get an annual fee that way.

“So the consultant has every motivation in the world to tell you, ‘this year I think we should concentrate more on international stocks’, or ‘this manager is particularly good on the short side’. And so they come in and they talk for hours, and you pay them a large fee, and they always suggest something other than just sitting on your rear end. And then those consultants, after they get their fees, they in turn recommend you to other people who charge fees, which … cumulatively eat up capital like crazy.

“And they always change their recommendations a little bit from year to year. They can’t change them 100% because then it would look like they didn’t know what they were doing the year before.

“I’ve talked to huge pension funds, and I’ve taken them through the math, and when I leave, they go out and hire a bunch of consultants and pay them a lot of money”, said Buffett as the crowd roared with laughter.

At this point, Buffett’s sidekick and Berkshire Vice Chairman, Charlie Munger (who is a sprightly 92 years old and who’d consumed more Coca-Cola and peanut brittle throughout the day than was at my three-years-old’s last birthday party), chimed in and said:

“Warren, you’re talking to a bunch of people who have solved their problem by buying Berkshire Hathaway … and that has worked out even better.”

He’s right.

From 1965 through to the end of last year, Berkshire shares have risen 1,598,284 percent, versus the S&P 500’s 11,355 percent (and less for most professionally managed funds).

In a few words, Buffett’s investment lesson was this: don’t pay over-the-top fees.

And I agree wholeheartedly. (At Barefoot, we have our own independent investment newsletter which has consistently beaten the market by focusing on ultra-low-cost funds and savvy stock picks.)

Says Buffett: “There’s been far, far, far more money made by people in Wall Street through salesmanship abilities than through investment abilities.”

Tread Your Own Path!

The Gag Falls Flat

What I took out of the deliberately boring budget, is that young first home buyers are screwed.

The government is clearly making property prices an election platform. That’s why they’re not touching negative gearing -- despite the fact that the Prime Minister has referred to it as an ‘excess’ in the past.

Coupled with that, the retrospective changes to super (cutting what you can put into super, both pre and post tax, and limiting how much you can hold), means many high income earners will divert their cash from super to property.

Finally, when you add in this week’s interest rate cut to a historic low of 1.75 per cent (with more to come), you can see what I mean when I say that young people are screwed.

The Prime Minister, in full election mode, suggested on morning radio that wealthy parents should ‘shell out’ to buy their kids a home. Okay, so it was meant to be a gag, but it was in poor taste for the millions of young families who are struggling to save up for a deposit.

Truth is my parents couldn’t afford to buy me a house. And I wouldn’t have wanted them to anyway. Saving up a deposit and buying a home under your own steam is one of life's great achievements. It’s a pity that this government doesn’t understand that, and instead makes it even harder.

Reminder: I first wrote about this years ago and highlighted the low costs. Today there are better deals on offer. How do I know? Because my readers constantly email me about them! So before you do anything, do a quick google.

Don’t Believe the Hype

Hello Scott,

I don't have a question. I just want to congratulate you on your commonsense approach to financial issues. You stand for self-responsibility, hard work, living within your means, and using time as a path to financial security. I have managed to achieve a comfortable retirement through these principles, not from any great windfall. You avoid the hype and doomsday predictions of other so-called experts and focus on what an individual can do within their own life. Well done.

Bill

Thanks Bill!

I’ve been writing this column for 11 years, and people complain and congratulate me on the exact same thing: ‘Your stuff is just common sense!’ Maybe it’s just not that common these days?

Scott

Widow Learns a Lesson?

Hi Scott,

I recently lost my beautiful husband unexpectedly. Unfortunately we didn't have a will. It’s been a stressful and expensive lesson, I want to make a will but don't really want to pay hefty solicitor fees. What do you think about 'do it yourself' will kits?

I don't own any property and just want to protect my savings and super and leave it to my chosen beneficiaries.

Deb

Hi Deb,

There’s a question behind this question…You’ve been through a traumatic, totally life-changing event.

You don’t need a will kit. You need a plan. I’d recommend you sit down with a financial advisor (talk to your not-for-profit super fund). Explain that you need a plan to protect and grow your savings, and a plan to manage your estate – which will include drawing up a simple low-cost will by a solicitor, and completing binding nomination forms for your super. Think of this as an investment in peace of mind.

Scott

Help! My Partner Left Me Poor

HI Scott,

My partner left me in a poor financial state when he broke up with me. My house is worth $275k and I own $90k of it. I have $110k of superannuation, I earn $95k and I am 51 years old. I want to retire at 65. So, should I sell my house and try to buy a unit at around $280k on an interest only loan and salary sacrifice the balance of what I used to pay on my home loan into my super, or should I try to pay off my unit once I've bought it?

Wendy

Hi Wendy,

Hang around my inbox for a while Wendy, and you’ll find thousands of people who would happily trade places with you: you’re young, you’ve got equity in your place, and you’ve got more super than most women. Life is good. Now let’s make it better.

First things first: there’s no reason to sell your current home – you can refinance your existing home loan to interest only – though I wouldn’t recommend it.

Instead, I’d stay where you are, and aim to have it paid off by the time you retire – at 67 (let’s tack on another two years of work).

If you pay $1550 a month off your home loan, you’ll be on track to be debt free when you retire (though understand interest rates will likely increase over the next 16 years).

If you can get your non-mortgage living expenses down to about $2,500 a month, you’ll beable to salary sacrifice $1700 a month into your low-cost growth-orientated superannuation fund. And if you can do that, you’ll be on track to retire with a balance of $560,000.

Scott

Can We Buy a Million-Dollar First Home?

Hi Barefoot,

My husband and I have a goal of buying a house in four or five years. Our goal is to have a 20 per cent deposit for a $1 million dollar house. Big goal, but even if we miss the mark we will still have a good deposit. My question is: Is it possible to save this amount of money while living by your 60-20-20 rule? Basic maths says no. We earn $128,000 before tax between us and presume this will go up soon. We also wish to start a family in a year or so. Are we being ridiculous?

Naomi and Ben

Hi Guys,

Yes, you are being ridiculous.However, you’re in good company. I meet a lot of newly married couples that want to do in 5 years, what took their parents 25 years.

So let’s have an adult conversation: you can’t afford to buy a million dollar home because you’re earning $128,000 a year, and because you’re about to start a family. You simply aren’t earning enough. Besides, your goal shouldn’t be to buy a million dollar home -- it should be to own your own modest family home outright in fifteen years. That’s probably how your family did it.

Scott

My Knight In Shining Armour Has Arrived!

Hi Scott,

My knight in shining armour showed up! The trouble is, with him came the henchmen that are credit card debt, a Cash Converters loan, a jewellery store loan (from when he proposed to his ex), and a monster Telstra bill -- all up around $15,000. Where do we get copies of all these bills, and how do we go about paying them off? He earns $110,000 and can have them smashed out in a matter of months, I reckon.

Amanda

Hi Amanda,

It sounds like he’s been a bit loose with his lenders, so I’d suggest he gets a copy of his credit file (if he writes to VEDA, they legally have to provide him with a free copy). It’s the financial equivalent of an STD test – if there’s a nasty surprise, it’ll be on that file.

Now from a logical standpoint, your fella should be able to smash his debt out in a matter of months: he’s earning around $6,600 a month after tax. Yet people get themselves into financial strife, (and stay there) for all sorts of illogical reasons.

So here’s my tip for you.

Make your knight in shining armour pass one final test before he gets the hand of you, his princess: make him get out of debt on his own. Encourage him for sure. But don’t do it for him. That’s his test.

Look, I’ve been doing this a long time. I meet a lot of people who have shacked up with a partner thinking they’ll change them. Most of the time it doesn’t work. Especially when it comes to money management. Then again, I could be wrong, I’ve never encountered a knight!

Scott

How to Make a Budget

Next week is the budget … and you know what that means?

Not much.Just a bunch of middle-aged white guys trying to put lipstick on a pig.

Here’s the truth that you won’t hear on Tuesday night: we’re paying for our government groceries on our nation’s credit card.It’s true.

Wayne Swan inherited a $21 billion surplus in 2006; six years later we had a $48 billion deficit. The boom is now long gone, but Sco-Mo (like Smok’n Joe before him) has continued to fall into the same trap. It’s a bit like the out-of-work miner who recently emailed me saying: “I’m broke -- should I sell my jetski to pay off my credit card?”

Me, I don’t do budgets (government or personal).

However, I do have a good handle on my numbers, and how much it costs to run my house of representatives. Keep reading and you will too.

Think of this article like the sealed section of Dolly magazine.

“Is my bank balance supposed to look like this?”

“Does everyone really spend this much?”

“Am I normal?”

Well, let’s rip it open and take a look.

‘You Inc’: 60 per cent of your income

How much does it cost you to keep the lights running and the kids from drinking out of the dog’s bowl?

Well, a good yardstick is you’ll be allocating 60 per cent of your after-tax household income to food, shelter and Netflix. In other words, all the things you need to live safely in the suburbs.

Here are some rough percentages based on an average household income:

• Housing: 30%

• Utilities (power, gas, water, broadband, phones): 5-10%

• Transport: 5-10%

• Insurance: 5%

• Food: 5-10%

Hang on. I know what you’re thinking.

Sure, these percentages work for people on an average income, but they’d blow out for people on really low incomes (with more of their money going towards food and shelter), and for those on really high incomes (BMWs, baby!).

That’s true. It’s just a guide. Close enough is good enough. Run the numbers for your household.

Here’s the thing: knowing how much it costs to run ‘You Inc’ -- actually having a monthly dollar figure -- is incredibly powerful.

See, if you ask someone how much their basic living expenses are (and I do, and quite often) they’ll generally parrot back how much they earn. That’s because (a) they’ve never bothered to figure it out, and (b) whenever they get a pay rise they spend more, generally upgrading their homes and their cars. That’s normal. That’s what marketers have brainwashed us to do.

Yet it’s also what keeps people trapped in stressful jobs they hate, and in situations that aren’t healthy for them. Plenty of people lead lives of quiet desperation in trophy suburbs.

Let’s keep moving.

Savings: 20 per cent

Do you allocate 20 per cent of your hard-earned towards savings?

Most people don’t. (Including the government. Turnbull and his team spent two years complaining about ‘Labor’s debt and deficit’, but when they got approval to lift the nation’s debt, they ramped up debt from $153 billion to $400 billion.)

That’s because Australian households have some of the highest levels of debt in the world.

If you’re a card-carrying member of our credit card nation, you should first save $2,000 into a Mojo account (a high-interest online savings account).

Then you should start paying off your minor debts by attacking the smallest one first (say a parking fine), knocking it over, and then moving on to the next biggest one – and keeping going. I call this the ‘domino your debts’ method, because you knock them down one by one (other than your mortgage and your HECS-HELP debt).

If you really want to get happy, you should be devoting at least 20 per cent of your income to escaping the cult of credit and building up your Mojo. It’s the fastest way I know to gain financial self-confidence.

Splurge: 20 per cent

Do you direct 20 per cent of your money towards things that make you smile?

Again, most people don’t do this.If you’re ‘normal’ you’re like the Treasurer, shuffling money around while saying the right things (‘surplus in 2020’!) which you probably don’t even believe.

As I said at the beginning of this article, I’ve never followed a strict budget.

Where you live, what you drive and what you do for work are the heavy hitters of your financial life. Get them sorted -- and kept to a minimum -- and you’ll never have to do double-dunk your teabags again.

For me, getting a handle on my numbers was a game-changer.Knowing how much it costs to run ‘Pape Inc’ has meant that, as I’ve earned more, I haven’t just upgraded to a fancier car or suburb, none of which will make me any happier in the long run. Instead, I’ve directed the extra money to the things that really matter -- like my family, and travel, and sheep.

And that’s the cool thing about living within your means -- spending less than you earn. You’re free to really treat yourself with the nice things in life. (I’m writing this to you from an A380 sitting next to my old man, who I shouted a once-in-a-lifetime trip to see Warren Buffett.) There’s no need to feel guilty about splashing out when you have money in the bank.

Word up, Sco-Mo.

Tread Your Own Path!

The Ultimate Boys Trip...

This week I’m travelling to Omaha, Nebraska.

It’s time for my annual pilgrimage to Warren Buffett’s ‘Woodstock for Capitalists’ shareholder meeting.

Even better, this year I’m taking my old man.

It’s the ultimate boys’ trip … organised this year by my mother, a self-confessed ‘details’ person.

We have printouts. Stapled. Highlighted. In plastic pockets.

Seriously, I wouldn’t be the least bit surprised if the old man rocks up to the airport with one of those hidden bum-bag travel wallets, just in case he encounters trouble on the mean streets … or cornfields ... of Omaha.

It also means we booked the trip through Mum’s local travel agent, Carol.In the age of the interwebs you’d be forgiven for thinking a travel agent is about as relevant as Clive Palmer's political career.

Not so.

Carol managed to get Dad a seriously cheap fare that was exclusive to her agency, which I couldn’t replicate over the web (I tried).

“It comes with a few conditions” announced my mother.

“Here we go” I grumbled.Ignoring me, she continued, “you have to fly out on Wednesday...and stay in Los Angeles… and you have to be away for a minimum ten days”.

I could see what was happening here. My diary has interviews and meetings backed up to the hour before I leave (and more while I’m away). Dad’s diary? “April is clear … and so is May”. (Retirement is a relaxing time of life. Then again, he always seems to be busy).

Anyway, I relented. We’re staying in Los Angeles. I’m secretly hoping that thirty years on he’ll make good on his promise of taking me to Disneyland … instead of camping at the Murray River.

So with travel on my mind, let’s go Barefoot and talk about how you can cut two big costs from your next overseas trip.

How Not to Get Screwed on Travel Money

I’ve long recommended overseas travellers sign up for a GE Money 28 Degrees MasterCard.

And that’s despite the fact that I hold GE Money in the same regard as Tigerair, where on my last flight I was wedged between a rotund Greek man and the dunnies (each time I’d hear the flush and the opening of the door, I was hit with a waft of … recycled airline food).

Anyways, the 28 Degrees has no annual fees and no currency conversion fees. Yet they’ve now managed to balls it up by introducing a 3.3 per cent charge on cash advances.“Buh-Buh GE Money”, as Bill Clinton would say.

The other cards I’ve recommended in the past are pre-loaded travel money cards from the banks -- however I’ve now ditched them as well.

The idea is attractive: you pay $15 or thereabouts for the card, and preload your travel currency and lock in the rate (the banks will screw you a few percent on the exchange, just so you remember who’s in charge).

There are no ATM fees, and you’ve got the security of having a separate card to your daily banking.

The problem occurs when you return.

It seems the banks have taken a leaf out of the gift card market. See, the reason that retailers push gift cards so heavily is that they get paid upfront, and they know a certain percentage of the cards will end up in a sock draw and never be redeemed.

In late 2014 ASIC slapped the Commonwealth Bank over the fact that 45,000 of its customers had $2.2 million sitting in expired Commbank Travel Money cards.And with the deft touch of arrogance that embodies Australia’s biggest bank, they flatly refused to get in touch with their customers and offer them refunds of their own money.

Instead, any leftover money has to be claimed by customers within three years, otherwise it goes into the government’s consolidated revenue fund, and can only be claimed by searching ASIC’s MoneySmart unclaimed money website.

So what card do I recommend these days?

The Citibank Plus Transaction Account.

It’s got no annual fees, no overseas ATM fees, and no currency conversion fees.

However, like opening any new bank account, it’s initially a pain in the rump, and it takes longer than you expect. So my suggestion would be to open it now, and keep it in your sock draw for the next trip.

One more tip I’ll give you is if you’re paying for something by card, and you’re given the option to pay in Aussie dollars -- never do it. It’s called Dynamic Currency Conversion (DCC), and it’s an absolute rort that will slug you an additional 5 per cent on your transaction.

The bottom line is that you can’t control the direction of the Aussie dollar, but you can control how much you get slugged when you’re overseas.A Golden Era of TravelIt’s seriously cheap to fly overseas right now. Data from the International Air Transport Association shows that international airfares are the lowest they’ve been in three decades.

I called up Skroo Turner, the founder of Flight Centre, who has been a pioneer in the travel industry for four decades. He reckons we’re in a Golden Age of travel:

When Qantas’ first flight to London took off 68 years ago, it was only the very well-heeled who could afford to step onboard. Passengers were paying the equivalent of about 85 weeks’ pay. So, based on what people are making now, a 1947 flight would set you back $130,000.By the early 1980s, the Flying Kangaroo had started a price war - and flights to London were down to $1800 return. Today you can pick up a return flight to London from $1063 - less than an average week’s salary.

The other thing that will keep Skroo happy is that I’ve found the process of booking through a travel agent -- like Carol -- to be worthwhile: they can often get better deals than what’s on the web, they cop the same commissions on hotels as Expedia and Wotif (about 10 per cent), plus they do all the legwork, and are a central, single contact if things go wrong when you’re overseas.

Think of your travel agent as a pretty good substitute for a details-oriented mum.

Tread Your Own Path!

Copping a Big Loss

Barefoot,

We are huge fans -- we religiously read your columns every week. We are in our 40s and earn around $140k between us. We have been badly burnt with a Melbourne CBD apartment. We owe $550k on it and rent it out for $360 a week. Today, units in the block are selling for just $400k. Do we sell for a massive loss and tack it on to our home loan, or hope in time it will bounce back?

Jen

 Hi Jen,

Only you can make that decision.

However, I have one observation to make after watching a lot of people lose a lot of money on dud property deals over the years: time doesn’t turn a bad property into a good one.

The truth is you actually lost your money when you bought. That money is gone. It’s not coming back. Now, you can anchor your expectations on getting back to $550k, but what you paid for the apartment is irrelevant to your renter, or the next buyer.All you can deal with is the here and now. So let’s deal with that. You own a $400,000 apartment which is costing you by my (rough) calculations around $10,000 a year in after-tax losses to hold onto. There’s a huge oversupply of Melbourne apartments, so I doubt your rent (or value) will increase anytime soon. The question you need to ask yourself is, knowing what you know now, would you buy that apartment today?

Thanks for your support,

Scott

400,000 problems

Hi Scott,

My partner and I earn great money, close to $400k a year. After years of splurging on kids, cars, houses and fantastic holidays, we are finally sorting out our ‘stuff’. We have savings of about $70k plus about $150k in shares. Here is my question: I took a call today from a financial company talking about a strategy called ‘post reduction tax’. Sounded good. Is it a real thing?

Cindy

Is ‘post reduction tax’ a real strategy?

Well, I think I remember reading about that in the Australian Journal of New Idea. Professor Kim Kardashian was detailing a ‘post reduction strategy’ to get her bikini bod back after having her latest baby.

Cindy, what I’ve just said is no more stupid than taking a cold call from a stranger who pitches you an investment opportunity to save you tax.

Statistically, on your household income, you’re 97 percent wealthier than the rest of the population -- it’s time you started acting like it.

Three points:

First, while a high income allows you to look rich, it doesn’t automatically make you wealthy. For that you need to save, which you seem to be doing, so well done.

Second, you should minimise your taxable income the smart way. Salary-sacrifice the maximum amounts you can both put into super ($30,000 if you’re under 50, $35,000 if you’re 50+). With any money left over, focus on paying down your mortgage, as well as looking to invest either in a family trust or investment bonds.

Finally, don’t get too stressed about paying tax. It’s a good thing! This is something I know about -- I’m a high income earner but I don’t have a dollar of debt. Some people would call that silly. I call it peace of mind -- and when you’ve got that, you’ve really got it made.

Scott

The Lying Scumbag

Hi Scott,

I am negotiating with my ex-husband on our separation. It has been a long and arduous process, mainly because he is a lying scumbag and has no regard for anyone but himself. I want his super, which he says is ‘bugger all’. When pressed he said it is less than $4,000 (because he has always been self-employed and never bothered with it). No matter. I want it. He says I can’t get it because it’s too small. What do you say?

Nicole

Your lying scumbag of an ex-husband is actually telling the truth. Well, what I mean is, if his balance is under $5,000 then it’s deemed ‘unsplittable’ in a separation. Having said that, your husband isn’t the sort of person I’d play golf with, or allow to ‘self-report’ on how much money he has. So I’d get your solicitor to run a check on that. One more thing (and I hate to say this): if your super balance is over $5,000, it can be split!

Scott

I Just Got Out of Jail … Now What?

Hi Scott,

I made a huge mistake years ago and ended up in jail. I got out, put it all behind me, and found a job. But now I’ve been made redundant, and I can’t find another job because of my criminal record. I owe $360k on my mortgage (I live alone). I have redundancy money of $14k, and I'm really scared that I won't find another job. I have applied for fifty jobs and got three interviews -- and as soon as they hear about my jail time I get stonewalled. I want to work. I don't want to lose everything. How can I survive?

Steve

Hi Steve,

First, well done for turning your life around.

Second, you should ring your bank immediately, speak to their hardship department, and tell them you’ve lost your job.

Third, understand there are organisations that can help. WISE Employment helps former inmates get jobs, the TOLL Group has a well regarded ‘Second Step’ program, and there are heaps of government and community agencies (like the Salvation Army) that specialise in helping people like you get into a job. Get in touch with them immediately.

Finally, create a 60-second pitch about your past: take full responsibility for your mistakes, discuss your specific learning lessons, and explain why you’re a better person because of what happened -- and a harder worker than the next bloke. You’ve got a lot to prove to yourself and others. Practise it in the mirror till it’s perfect. Say it in interviews, say it on dates, say it to your kids. Say it till you beleive it.

Scott

The Gold-Plated Urinal

Scott,

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 $6,500 a year. I then pay an ongoing commission of 0.44 per cent, which adds a further $1,800 (pretty much cancelling out the rebate). I am assuming I have read the documents correctly. Am I being ripped off?

Peter

Hi Peter,

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), they 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.

Scott

Realistic Expectations Please, Barefoot

Hi Scott,

You often quote an ‘800-fold increase’ in the share market in the last 100 years. As an investor in blue chip stocks for the last 25 years, this regrettably has not been my experience, nor do I have 75 years left for this to right-size itself. For first-time investors, and those seeking your advice, surely it is now time to recalibrate your ‘100 years of history’ example and use a more relevant percentage -- the last decade, for example.

John

Hi John,

You got your figures slightly off.

The US market has actually risen 18 thousand-fold over the past 100 years.

But, hey, I take your point -- in the long long run we’re all dead (or cryogenically frozen, like Walt Disney), right?

That’s why I’ve consistently said three things:

First, focus on dividends, not share prices. The bulk of your returns come from dividends rather than capital growth (which is why, in my days working for Channel 7 News, I used to die a little each night when I read out the ASX 200 price index).

Second, over the long run you can expect a return of about 6 per cent per annum after inflation -- and that’s a key point, you want your nest egg to grow faster than inflation. At 6 per cent you’ll double your money every 12 years.

Third, there are plenty of lean years in investing where things go sideways, or backwards. That’s the price you pay for earning higher returns over the long run. That’s why I advocate having three to five years of living expenses in retirement in savings and term deposits to get your over a hump.

The share market (as measured by the dork on the nightly news) has basically gone nowhere over the last ten years. But if you factor in dividends, you’ve made 60 per cent. That’s the real story.

Scott

HELP! My Partner has No Idea How Screwed Up I Am

Hi Scott,

I am at a low point. I have been with my partner for a year now, and I know she is ‘the one’. I want to propose ASAP but I have debt from my earlier days, and I urgently want to be rid of it before proposing. Here is my situation: credit card $15,000 (at 0 per cent, expiring in May), line of credit $15,000 (at 0 per cent, expiring in September), personal loan $10,000 (at 10 per cent), mortgage $290,000 on a house valued at $330,000 (rented out at $1,100 per month), salary $85,000 plus super. Please help me, Barefoot! I do not want to start married life with debt hanging over me.

Hugh

Hi Hugh,

That’s the power of love!

Or more likely, it’s the power of overplaying your hand while you were dating -- showering her with gifts, acting like you had it all together and were husband material -- and then madly scrambling to live up to the expectations you’ve laid.

Welcome.

You’re at least 16 months of two-minute noodles away from getting engaged.

You’ve got $40,000 worth of debt. I assume you’re also having to tip in at least $500 a month on your investment property. You’re taking home roughly $5,300 a month. So you should be able to save around $2,500 per month to knock off your debt if you really pull your horns in.

That means you’ll be debt free in 16 months ... and then you can start saving for the wedding! If she’s a Bridezilla (and you won’t know until you’re 90 days out), you’ll be hit with another $40,000 bill, which is the average cost of a wedding these days. It’s a long road ahead, bucko.

My advice?

I’d be honest with her.

She’s going to work it out anyway when you start wining and dining her at the Ikea food court -- “Oh these Swedish meatballs are amazing!”

Admit to her the mistakes you’ve made. Show her you’re man enough to buckle down and get through them without having to sacrifice your long-term investments.

Tell her you’re doing it for her, and your future family.That’s the sort of bloke I’d like to marry (well, if I wasn’t married already, and if I was gay, which I’m not, and if gay marriage was legal, which it’s not). You get my drift. And remember, if it turns out she’s turned off by your lack of cash, well that’s a very good outcome too.

The bottom line is that you’re not the first fella who’s punched above his weight to impress a woman.

Now live up to it.

Scott

One of the Most Shocking Emails From a Reader, Ever

A couple of months ago, I received one of the most shocking emails from a reader, ever:

Cancer Stricken Single Mother ... Lends a Hand

Hi Scott,

I’m in my 50s and have just battled cancer. I foolishly helped out my partner with $112,000 in credit cards that he put in my name over a 10-year period. Now I've beat cancer, I want to fix this up. I have consolidated against my home to lower the massive credit card repayments. My partner isn't repaying the loan but instead wants me to buy a bigger home for us both. With 80 per cent debt now against my place, I can't see this happening. Should I sell up and buy cheaper?

Tina

The guts of my response to Tina was: “If you were my sister, I’d be telling you that before we sort out your finances, there’s one more cancer you need to beat: your partner.”

But I couldn’t just do that, so I called Tina later that week and offered to help her personally -- on one condition: that she throw this scumbag out on his ear. But she said she wasn’t prepared to do it.

That was six weeks ago.I have over 10,000 questions sitting in my inbox, so I archived it (physically and mentally) and moved on.

And then today, as I was sitting in front of my computer checking the share market, I got a telephone call from a number I didn’t recognise.

Barefoot: “Ello?”

Caller: “You said you wouldn’t help me until I kicked the financial cancer from my life. Well, I have. So I’m asking for your advice.”

Barefoot: “Go on.”

It turns out that Tina’s partner -- who I’d love to name -- is a dog.

Not only did he rack up $112,000 in credit cards in her name while she battled cancer.

Not only did he refuse to pay back the credit card debt, he asked her to buy him a bigger home.

And all the while he was cheating on her.

“He was always very secretive when it came to money … but now I know that’s not all he was hiding,” she told me.

Australia’s $11 Billion Dirty Secret

That’s all a bit heavy, right?

Well, it turns out Tina’s not dancing in the dark. Plenty of people are hiding their spending from their partners.

This week a survey by Finder.com.au found that the average Aussie spends $2,713 per year on hidden expenses -- ones they don’t tell their partner about.

Interestingly, the survey found that men spend more than three times as much on secret purchases than women -- $4,596 per year compared to $1,476 per year. It also found that the the number one guilty spending pleasure for blokes was vices like gambling (uh-oh), followed by adult entertainment (oh-kay).

Women are a bit more restrained -- the survey found they are more than twice as likely to hide clothing purchases than men. Big surprise!

Sometimes I wonder about these surveys, so this week I decided to do my own research -- and actually got a higher number of responses than the original survey, over a thousand people. Roughly 60 per cent of my audience said they’d never dream of hiding their spending from their partner.

Of those who did own up to secret spending, my favourite comments were:

“A vet bill for $1,000 … for my rabbit.”

“I bought a Porsche 911 off a friend and told the wife I was looking after it for him ... I had to admit to it after about six months.”

“A horse. In fairness I did ask, he just wasn't listening properly and I knew it, so took advantage of that. He saw it in the paddock when I brought it home.

Apparently the trick is to have at least six horses of the same colour -- that way you can keep adding and non-horsey husbands can’t tell!”

You Can’t Keep a Spending Secret

Really, there are really only two reasons that you’ll go behind your partner’s back and secretly buy stuff.

The first reason is that you’re married to a control freak who watches over their money like Clive Palmer watches over a plate of chicken wings.

Oftentimes, the controlling -- sorry ‘money minded’ -- person will ration money out and force their partner to justify every dollar they spend.

This type of relationship is more common than you’d think, and it often rears its ugly head when a woman is at home on maternity leave. The woman reverts to being a teenager, having to ask their partner for money. Throw in sleep deprivation, a teething baby and mortgage repayments, and you’re on Jerry Springer.

That’s why, for the sake of our marriage, my wife Liz and I manage our money as a team effort.

We share the same bank account.

We agree how much is paid into it, after we’ve filled our other ‘Mojo’ and ‘Grow’ wealth buckets.

And most importantly, we have an agreement that we can each of us can spend $400 on whatever we choose. No need to ask for permission. Anything over that we talk about, and make a joint decision.

(And that’s a good thing. Personally, I am deeply offended by how much her hairdresser charges. My hairdresser hasn’t changed his ‘$20 short back and sides’ pricing in 14 years. Though, admittedly, she looks a lot better than I do.)

The second reason someone acts behind their partner’s back is simple: they don’t share their partner’s values. Sadly, it took Tina 10 years and $112,000 to work that out.

Tread Your Own Path!