Life in the One Per Cent

Hi Barefoot,

I am 21 and in my third year of a medicine degree. I have just found out that I will be receiving a generous $100k inheritance from my late grandfather to be held in trust until I am 25. The executor is arranging an accountant to sort out the trust. Firstly, do I get any say in how the money is managed? Secondly, how would you recommend I invest it if I am able? I realise this is a huge headstart in life and want to make the most of the four years in trust.

Sincerely,

Tom

Hi Tom,

You’ll have to read the trust deed, but I doubt you’ll have much say in how your money is managed. Given your grandfather was smart enough to make you wait till you turned 25 (and shaken a bit of stupid out of your system), to get your hands on the loot, I’m sure he’s thought it through. Best to talk to the executor.

Now, in four years’ time you’ll have $100,000 (plus earnings) and you’ll have your medical degree. From an income perspective, you’ll eventually reach the top 1 percent. That doesn’t automatically mean you’ll be wealthy, though -- god knows the doctors, dentists and football players I’ve worked with who don’t have two bob to rub together. So the way to honour your grandfather is to start preparing now, by learning the basic building blocks of wealth and low-cost, long-term compound investment (keep reading my column!).

Scott

I’m a Scaredy Cat

Hi Barefoot,

I am a financial scaredy cat with no idea! I am 34, my partner is 24, and we are awaiting her permanent residency to come through as she is English. We have almost $50k in an ING savings account and no assets but want a house and children (has to be IVF for lack of male parts in our relationship!). I also have a car loan that is costing me almost $600 a month. We earn $85k and $50k but my partner is only on a temp contract until she gets residency. What should we do?

Kim

Hi Kim,

There’s no need to be a scaredy cat -- we’ll make this really simple.Use some of that $50,000 to pay off the car loan immediately. Then promise me you’ll never borrow money to buy a car again.

Next, open another account and call it ‘our IVF account’. Instead of paying $600 every month towards a car, pay it towards the IVF. In eight months you’ll have nearly $5,000, which is enough for a single-cycle IVF treatment with a top-notch provider.

In the meantime, keep bashing away at your home deposit. With a combined income of $135,000, it won’t take many years to save a 20 percent deposit -- as long as you master the trick of living on one income and saving the the other.

In a few years’ time you should almost have the Triple Ms -- Mortgage, Midget -- and, depending on who wins the election, maybe even Marriage!

Scott

Help, I’m Desperate

Hi Scott,

I am writing this because my wife told me last night that she has run up a large credit card debt (the figure she will not say). We are both in our mid-forties, earning $80k and $65k. We have a mortgage of $465k and personal loans of around $25k. I feel really stressed about our financial situation. To me it feels like we are running out of time to own our home before we retire. Please help, I’m desperate.

Adrian

Adrian,

I could be wrong, but in almost every case I’ve come across where a partner has secretly run up a large credit card bill, there’s something deeper going on. In other words Adrian, they do it for a reason -- even if they don’t know it. Gambling? Spending? It’s all an escape from something. Until you find out what your wife’s running from, you’ll continue running in different directions.

Thanks for your support.

Scott

The Nosebleed Section

Hi Barefoot

I have an SMSF with $2 million in cash and shares. I visited a financial planner and was recommended a plan that would cost $1,100 to draw up. It involved purchasing a number of Australian shares, a number of managed funds (both Aussie and international equities), and cash. The goal is to provide $100k income per year. The initial cost is $33k, which involves moving all my shares to a management platform and purchasing shares and managed funds. After that, there is an annual cost of $12k. Is this reasonable?

Terry

Hi Terry,

They’ve charged you a special rate that is only for high net worth individuals.

It’s called the ‘rich bastard rate’.

That upfront whack of 1.5 per cent of your assets is a real ‘bend over and touch your toes’ type of fee.

And, if you’re trying to earn $100,000 a year, these turkeys are putting you 12 grand behind the eight ball from the get-go.

The longer I do this job, the more I’m convinced that most people would be far better off investing their money in an ultra-low-cost superannuation fund, which will provide you with professional trustees and a range of index investments, at a fraction of the cost of what you’d pay these turkeys.How cheap? Well, you could bring your upfront down from $33,000 to ... zero. That’s because most of the big industry funds charge no entry fees on their investments. You could reduce your ongoing management fees from $12,000 a year to around $1,500 a year by substituting their actively managed funds with low-cost indexed options. And if you really feel the need you could spend $1,100 each year to sit down with an independent professional planner and have them review your strategy.

Terry, if you’ve earned $2 million bucks you’re no dill. Stop acting like one.

Scott

The $40,000 Phone Call

Hi Scott,

Last week's column about the ‘$40,000 phone call’ got me thinking. I had heard before about ringing the banks to get them to renegotiate, but I’d always been too nervous to do it. This long weekend I decided to bite the bullet and ring our bank (one of the Big 4), loaded with info about competitors’ rates (mainly UBank). And I was able to get a 0.5% discount on our loans. Awesome! Thank you so much!

Andrew

Hey Andrew,

For most people it’s easier to bitch than switch. But Andrew, you bitched, and then didn’t even have to switch! My good man, you deserve to be congratulated with a frothy beverage of your choice from your lady friend.

Scott

Doggy Doo-Doo

Scott,

It's disappointing you perpetuate the attitude of dumping dogs at the pound for misbehaving one too many times. I don’t know if it’s about your ‘country lad off the farm’ persona. As a volunteer at my local pound, I know that if people took time to train their animals we wouldn’t see 200,000 dogs euthanised each year. I usually enjoy your content, but it’s a shame to read this coming from one who advocates taking personal responsibility.

Jenny

Hi Jenny,

Woof! I really deserved that. This week I’ve been chased around my inbox by dog-lovers from across the country. (To clarify, last week I stepped in some doggy-doo-doo by making a very poor analogy that a home isn’t like a pet you can drop off at the pound.)

For the record I totally love my two dogs, Buffett and Betty, and I apologise unreservedly.

Scott

They’re Taking My Home!

Hi Scott,

My partner has informed me he has a tax debt of $260k and that it has been placed in the hands of the debt collectors. He also has $30k in credit card debt. My car is in both our names and we have a mortgage of $200k. My partner has decided his only option is to go bankrupt and wants to transfer the house into my name only. He has been communicating with a ‘debt specialist’, which sounds to me as dodgy as the mess he is in. Is bankruptcy the only option?

Nicole

Hi Nicole,

Your partner is getting bad advice.Transferring the house into your name won’t work. The Bankruptcy Act has clawback provisions that last up to five years for any asset that is transferred or sold for less than it’s worth, prior to going bankrupt.

In your case, once your partner goes bankrupt the trustee will become the owner of his share of the house. Depending on how things go, they will probably push for you to sell your home.

Now, I don’t know what a ‘debt specialist’ is, but it sounds like he’s got the financial equivalent of a reiki healer trying to help him with his financial heart attack. Don’t make his mistake: call Financial Counselling Australia on 1800 007 007 and get a meeting with them, pronto.

Scott

The ATO is targetting you this year

This week, in preparation for tax time, I spoke to one of the most powerful people at the Australian Tax Office, Assistant Commissioner Graham Whyte.

Or Whytey, for short.

(I don’t know if anyone has ever referred to him as that before -- but I’m going with it).

Whytey (straight off the bat - no hellos, just tax, tax, tax): “Did you know it’s the 101st year of the tax return?”

Barefoot: “I did not know that.”

Whytey: “Income tax was brought in with the war, in 1915.”

Barefoot: “I did not know that.”

Turns out Whytey’s a treasure trove of tax history, and with good reason: he’s been working at the Tax Office for 35 years. In fact, he’s been there so long that when he started his career, he did tax returns ... by hand.

True dinks.“Back then, I would do 441 individual tax returns every single day”, he tells me.“Why 441?”

“Because there are 441 minutes in a working day”, he says.

Seriously, how freaking hardcore is that? No checking Facebook in those days. Just tax, tax, tax.

Whytey’s career reveals just how sophisticated the tax system has become: a bunch of bureaucrats with muttonchop sideburns and ashtrays on their desks scanning every single tax return have now been replaced by one bloody big computer (my description, not Whytey’s).

The ATO’s supercomputer collects 650 million separate transactions -- cross-referencing bank accounts, share certificates, Centrelink payments and more.

And when I say ‘more’, I mean Facebook. “In certain instances”, Whytey confirmed, though he wouldn’t elaborate. But I will. I’d say it’s a good bet is that if you declare a taxable income of $23,000 but you’re prone to posting selfies in your Ferrari on Facey, don’t be surprised if one of Whitey’s crew hits ‘Like’.

Seriously, these guys are watching you closer than your crazy ex-boyfriend.

So who are the ATO stalking this year?

Well, in the past, just putting a job on the hit list would apparently boost the tax take from workers in that occupation by 22 per cent for the year (like when they targeted Aussie actors who played the starring role in Crocodile Dundee).

This year Whytey says they’re not targeting any one profession.They’re targeting you.

(And me, and every single taxpayer.)

Here’s how it works: let’s say you’re a tradie living in Brunswick. As you’re putting in your tax return, the ATO supercomputer checks your deductions against other tradies living in Brunswick. If your claims are materially higher, the computer will pop up a message that reads: “Hey, buddy. Maybe you should take a second look at what you’re claiming, eh? Otherwise you may get a visit from the Deputy Prime Minister, Barnaby Joyce.”

(Actually, that’s not true -- Barnaby has more important things to do than tax compliance, like threatening to kill Johnny Depp’s handbag dogs.)

However, it is true that the ATO’s system does automatically warn you. And if you don’t heed their warning, Whytey tells me, the ATO will sends out 460,000 ‘please explain’ letters to individuals each year, resulting in an extra $1.1 billion in tax being paid -- which more than covers the cost of the stamps, and the 20,000 staff the ATO employs to lick them. (Seriously, what do they all do?)

In that respect, the ATO's supercomputer could be thought of as a sniffer dog at the airport. It's the first tip-off. Being audited is when the security officers take you into that little room, close the curtains, and pull out the rubber gloves. (And we’ve all seen Border Security. “I didn’t pack my boogie board” is just as lame as “I didn’t do my tax return, so I have no idea why Dennis my accountant claimed my nine-year-old son as an office expense”.)

The bottom line is that the ATO operates under a self-reporting system, which means it’s up to you what you put on your tax return.

Meet Your New Accountant

So if the ATO already has your number -- what extra value can an accountant deliver?

Well, if you’re a business owner they can be invaluable. Same if you have complicated tax structures like family trusts. But if you’re an average wage earner, you don’t need them. (Time to kick H&R down the block.)

Still, 74 percent of Australians use a professional to lodge, according to the ATO -- and they typically pay between $300 and $400.

What do you actually get for that?

A few forms to sign that totally indemnifies the accountant, and the predictably desperate, self-serving pitch, asking if you’d like to open a Self Managed Super Fund (SMSF).

You would?

Kerching!

Would you like audit insurance with that?

Kerching! Kerching!

Seriously, if you’re a wage earner with a simple set of affairs (i.e. most people), you should get a new accountant. In fact, I have the perfect guy. He’s reliable. He won’t get you in trouble. He’ll come to you. And best of all, he’s free.

It’s called ‘myTax’ -- the ATOs supercomputer’s brother from another mother.

With myTax you can do your return on your phone -- in around five minutes -- because the system pre-fills your information. So all you need to do is double-check the info, enter any deductions, and hit submit.

Ah yes, but what about those deductions?

Well, the ATO now has an app for that too. It’s called myDeductions, and it’s actually pretty good.

It allows you to take photos of receipts and enter work-related deductions on the fly. If you’re claiming a car expense, it has a built-in GPS tracker to record car trips. Best of all, it feeds directly into myTax.

The bottom line is that the ATO operates under a self-reporting system, which means it’s up to you what you put on your tax return.

My final question for Whytey could have skewered him -- but he came up with the goods.

“So, who does your tax?”

“Me! I do my own, always have done”, he says.

Tax, tax, tax!

Tread Your Own Path!

How to Score a $1.6 Million Pay Rise

Let me share with you an actual email I received from a former employee a few years ago:

Hey Boss,

I know I haven’t exactly lived up to expectations since I started, but in my contract there’s a clause that says I’m entitled to ask for a payrise each year. So I was hoping we could talk about it? :-)

Regards,

XXXX

Let me point out a couple of things about this approach:

First, never use an emoticon when writing to your boss (even if he or she is 20 years younger than you).

Second, hope is not a strategy.

And given that we’re getting close to the end of the financial year -- and, with it, annual performance review time -- today I’m going to show you the easiest way to make more than a million bucks, with a simple five-step strategy that I call ‘Career Compounding’.

I’m serious when I say more than a million dollars. Let’s look at two 25-year-old graduates, each starting on $35,000 a year. One gets a 3 per cent annual increase, while the other gets a 5 per cent increase. The difference over their working life is $1.6 million.

Now, here’s the important point: the biggest source of wealth is your salary. Yet the truth is that most people are as unlikely to compound their salary as they are to earn compound interest. Instead, they look back after a lifetime of working and all they have is excuses.

Your Excuses For Not Earning More

Question: do you know what the biggest mistake most people make when it comes to getting a payrise?

Answer: They don’t actually ask for it.Instead they come up with excuses like:

“Maybe my boss will notice if I put my head down and keep working around the clock”

Maybe, but it’s unlikely. Though it will definitely lead to you picking up the slack for your lazy co-workers, who sit on Facebook all day or waste company time arranging their honeymoon.

“I’ve done my job, as per my position description, so I’m entitled to a pay rise”

Actually, no you’re not. All you did was what you were employed to do. It means you held up your end of the bargain. That means you’re entitled to be paid what you signed on for. You don’t get promotions and above-average pay rises when you do your job -- you get them when you go above and beyond to become a linchpin for your boss.

“I don’t know how to negotiate … I feel awkward”

Seriously, 90 per cent of the negotiation is done before you sit down with your boss. In fact, it’s done over the preceding 12 months. And if you follow my five-step Career Compounding strategy, the only awkward thing will be how much your boss gushes in the performance review.

Introducing: Career Compounding

Did you know that, on average, you’ll spend 90,000 hours of your life working.That’s a huge chunk of your precious time on earth -- add in sleeping, your daily commute, and sitting on the can, and there’s not much time left over. You’ll actually spend more time at work than you do with your family and friends.

And here’s the killer: odds are you are totally unfulfilled with what you’re doing at work.

According to a Gallup poll in 2011, almost two-thirds of Aussie workers consider themselves to be ‘emotionally detached’ from their employer. That results in them turning up, punching the clock, and doing the bare minimum to keep their job.

The solution is to stop being passive. If you’re going to devote 90,000 hours of your life, you want to make it pay -- you want to Compound Your Career.

Step 1 -- Commit to being the best employee in your company

The simplest way to become a multimillionaire is to commit to being the best at what you do. Very few people you work with have ever made that commitment. Those who do, get paid a disproportionate amount of money. Do you think a CEO works 200 times harder than a regular worker? Of course they don’t. And trust me, they’re sure as hell not 200 times smarter either. They’re just committed.

Step 2 -- Make a list

Take out your position description, but this time look at it from your boss’s point of view. How does your job make her life easier? How does it contribute to your company? Most jobs can be boiled down to three fundamental tasks. Write them down. Then set yourself an ambitious goal for each task that you’ll have to stretch to achieve over the next 12 months. Write them down too.

Step 3 -- Arrange a meeting with your boss (no emoticons)

Present to your boss your list of prioritised tasks, and your goals -- and genuinely ask her for feedback.

You’re not doing this to be a brown-noser. You’re going to devote the next 12 months of your working life to this, so you want to be crystal clear that you and your boss are on the same page.Once you’re both in agreement, ask her if you can have a follow-up meeting every eight weeks or so to track your progress.Take notes on whatever she says, and for godsakes, smile.

Step 4 -- Put your goals into your calendar for a daily reminder

You now have your ambitious 12 month goals. The key to progress is doing a little bit on them every day, and tracking your progress. You’ll be surprised how much you can get done by hitting your goals for an hour a day, rather than bitching about the boss.

Step 5 -- Follow up with your boss

Never talk about money, or promotions, in these meetings.

Always talk about what extra you could do to help your boss. What can you do to make her life easier?

The bottom line is this: you want to frame it in your boss’s mind that you’re hungry, but humble. Be grateful for the opportunity to take on more responsibility. Then show her the daily progress you’re making towards your goals.So that’s your 12-month Career Compounding Plan.

Now my original suggestion was that this could earn you a 5 per cent raise. But if you actually do these five steps, I think you’d probably get a 10 per cent raise.

Stop for a minute and think about what a difference that could make to your life.

Then shut down Facebook

.And do it.

Tread Your Own Path!

Getting the Banker off My Back

Hi Scott,

My husband and I recently received an inheritance, which we have used to pay off our home loan -- which is obviously great. We are ready to discharge the mortgage and get the title deeds to our home back from the bank. But the bank is saying we should leave it with them to avoid tens of thousands of dollars in future mortgage stamp duty (say, if we decide to invest in property down the track). What to do?

Michelle

Hi Michelle,

Here’s what I’d say to them: “Screw you bastards, give me my bloody title!” The only reason they want to keep your title is so they can lock you in and sell you more debt.

Scott

We’re In Trouble ...

Barefoot,

We’re in trouble! We are currently trying to sell our house for $455k. We have a mortgage of $350k and car debts of $40k. We are on a single income of $80k (which is why we are selling the house). We then plan to pay off the two cars and the mortgage, and get a new house for around $250k (we are in a regional area). We are currently locked into our current mortgage rate, which is about 5 per cent. Should we pay the mandatory $10k to get out of the mortgage, or do what our bank advises and do a same-day settlement?

Tammy

Hi Tammy,

This is why I don’t like fixed rates. I don’t see how you can avoid paying the break fee, same-day settlement or not. But there is something you can do: negotiate with your bank -- tell them that if they want to pick up your new loan, they have to do you a deal on the break fee. It sounds like you’re making good long-term decisions that will take stress off your family, so either way I wouldn’t let this little matter put you off your path.

Scott

Down to My Last $700

Hi Scott,

I am a 46-year-old single mum of two teenage kids. I bought my home six months ago for $380k and had $10k left in the bank. Since purchasing the property, I have had to fund several unforeseen repairs (even after a building inspection), equalling around $15k. I now have about $700 left in my bank account! My house is worth about $360k and I earn $53k and have $145k in super. Should I sell, wear the loss, and go back to renting? Or stick it out for the long haul?

Natalie

Hi Natalie,

I totally understand the emotional pull of wanting the stability of a home of your own -- especially as a single mum. But it was a bad decision. You’re now more financially insecure than if you’d continued renting and focused on building up your Mojo.

Buying a home isn’t like buying a dog (if it craps one too many times on the carpet, you simply drop Fido off at the pound) -- a home is a long-term deal. You’ve already spent $16,000 in stamp duty, $1,000 in legals and $15,000 in repairs. If you were to turn around and sell it now, you’d lose $20,000 on the sale price and pay $8,000 to a real estate agent. All up you’d have smoked through $60,000!

On your income, including Centrelink and child support, you’re devoting roughly 40 per cent of your take-home to repayments. That’s tight, but doable. Hold on, tight.

Scott

I’m Dumb with Money

Hello,

I emailed some time ago asking what ‘invoice funding’ is but never got a reply. Can you please tell me what it is, as I am considering it but want to make sure first. I am kind of dumb when it comes to money.

Lina

Hi Lina,

It’s unclear whether you’re asking as a small business owner or as a potential lender, so I’ll answer both.If you’re in small business and you’re broke, you can get a lender to stump up the money to pay your bills -- and if you can’t pay your bills now, wait till they send you their bill! However, if you have to resort to high-risk financing like this I’d seriously think about getting the hell out of the business.

If you’re an investor thinking it could be a good way to earn a higher return, you’re acting all cray-cray and not in a good way. Don’t do it.

Scott

We Don’t Care about Inheritance

Hi Barefoot,

My mum wants to subdivide her valuable block (worth about $1 million) and build a multi-generational home for herself and my family. Emotionally this would be good for all of us. Problem is, she will not talk about money and I know I cannot offer anything like market value on the property. At the most I could offer $130k plus $300 per week. Mum wants us to be tenants in common. My siblings won’t argue because we don’t care about inheritance. Please, Barefoot, tell my mum how to protect her interests.

Jane

Hi Jane,

The ability to balls this up is big, so keep it simple. Have your mum subdivide the block and use the profit to built the new home, with you paying rent. The family home is exempt from Centrelink assessment, and any rent she receives from family members doesn’t count as income, so it won’t affect her rate of age pension. Then you can invest your $130k and potentially buy your own home down the track.

Scott

Ripping Off Kids!

Hi Scott,

I’m angry. Why are 15-year-old kids working at Macca’s forced by their super funds to hold life insurance? It costs so much that it leaves them with bugger all at the end of the year in their super accounts. Why do they need to pay insurance -- is it just an industry rip-off?

Al

Hi Al,

Yep, your average pimple-faced burger-flipper doesn’t need the three types of default insurance that most super funds automatically enrol them into (Life, Total and Permanent Disablement, and Income Protection). Combined they can cost upwards of $300 a year.

Want the good news? There’s a simple solution: write to your kid’s fund and say they want to opt out of the insurance. And now the bad news: in 2013 some political pinhead decided it would be a good idea to abolish the ‘member protection’ rule put in place to protect small super accounts (less than $1,000) from being eaten up in fees. Mark that down to a win for the finance lobbyists.

Scott

The Ticking Time-Bomb in Your Super Fund

I’ve never told you this before.

If you think you’re close to ‘kicking the bucket’ (well, 55 and over), you need to read this. And if you have someone in your life who’s in the bucket-kicking zone, you should share this column with them -- because it will save them a lot of heartache, stress and money.

I’m going to explain how the average retiree in this country gets screwed over by their super fund when they retire. And I’ll show you the simplest way to safeguard your savings when you retire.

Let’s begin.

One of the bravest things I’ve done in my adult life was to take my bride to the pub in the weeks leading up to our wedding day. Once seated, I scribbled our lifetime financial plan on the back of a serviette.It consisted of me drawing three buckets:

Blow Bucket: all our living expenses, including house repayments (this bucket has a hole in it).

Mojo Bucket: three months of living expenses (this bucket gives you a feeling of safety and security).

Grow Bucket: superannuation, investment properties and shares (this bucket makes you wealthy).

And then I drew a tap above the buckets, which represented our income that we could pour into the three buckets.

The reason my three-bucket strategy is so powerful is that it’s so simple. It keeps you on the same page financially throughout your marriage. However, after talking to hundreds of Barefooters (and my parents), I’ve discovered that it can fall apart when you retire -- when you turn off the tap.

Kicking the Bucket

The big mistake most people make is putting all their money into the one bucket when they retire -- super. In most cases, your super fund will automatically invest your life savings into what they call their ‘balanced option’.

Question: What does ‘balanced’ mean?A good guess might be that riskier assets like shares would be balanced out by safer assets like cash and fixed interest.

Wrong.

The average Aussie super fund has more money invested in shares than in almost any other country in the world, according to a study by financial outfit Mercer. It varies from fund to fund, but right now your balanced fund could have as much as 70 percent of your money invested in shares.

Of course, over the long term, shares outperform every other asset class, so having a default fund chock-full of stocks is a very good thing if you’re a young Playboy Bunny … but not so good if you’re old Hugh Hefner.

As the big Texan, Dr Phil, would say, “how’s that work’n for ya?”Great … at the moment.

“The average super fund has delivered 9.5 per cent over the last seven years”, a press release from SuperRatings says.

Hang on, why are they only talking about seven years of returns?

BECAUSE THEY DON’T WANT TO TALK ABOUT WHAT HAPPENED IN THE GFC.

So let’s talk about the GFC, and the heart palpitations and wealth destruction it caused retirees who had all their savings tied up in the one very unbalanced bucket.Here’s another question for you:

Guess which country suffered the biggest losses on retirement savings during the GFC?Iceland.

Guess who was the second biggest loser?

Australia.

Yes, the Organisation for Economic Co-operation and Development (OECD) found that our superannuation funds lost a larger share of their members’ funds than any other pension system in the world -- with the exception of Iceland.

But let’s not be too cocky. There’s no glory in beating Iceland for the wooden spoon. Seriously, even being put in the same sentence as Iceland is embarrassing: relative to its population, this fishing village masquerading as a country suffered the single largest banking collapse in history, which left it in a severe economic depression.

So the $64 billion question is, how can Aussie retirees like you avoid this happening when (not ‘if’) the next GFC happens?

Answer: Go back to the buckets.

The Three-Bucket Retirement Solution

Take your partner to your local (and take advantage of $5 pensioner parma night).

Grab a serviette and draw the three buckets, and explain that this is how you’re going to safeguard your savings as a couple throughout our retirement. Like Goldilocks, it’ll ensure you don’t take on too much or too little risk, but get it just right.

The ‘Blow’ bucket is still where you draw your day-to-day expenses, and that should be in cash.

Your ‘Mojo’ bucket is where you get your safety and security. Throughout your working life, it should sit at three months of living expenses. When you retire, you should boost your Mojo bucket to three to five years of living expenses (factoring in any age pension you receive).

If you’re a Collingwood supporter, you’re probably quite comfortable with losing, so you may only need three years of living expenses. If you’re a nervous type, shoot for five years of living expenses.

Here’s the thing: knowing that you have three to five years of money socked away is going to save you from a lot of sleepless nights when the markets get rocky. The last thing you want to do is watch your investments crash, panic, and sell them all at the bottom of the market -- just because you’ve got no cash to live on. It’ll buy you time to ride out the storm, when your shares will rebound.And remember, be conservative with your Mojo -- a nice balance of cash and fixed interest (even though interest rates are low). With Mojo, we’re chasing a different type of return: peace of mind.

Your ‘Grow’ bucket is where the remainder of your money should be invested. Specifically, it should be invested it in good-quality, dividend-paying shares (or share funds) within your super. And, most importantly, you want to direct the dividends from your Grow bucket to automatically flow into your Mojo bucket -- so you’re always automatically replenishing your Mojo.

In retirement, with your income tap turned off, your biggest risk is that you’ll outlive your savings. You need to stay ahead of the rising cost of living, and historically the safest way to do that is by investing long term in the share market (Grow) while still protecting yourself (Mojo).

Right now, the GFC is a distant memory.

Right now, the US market is on the second longest upswing in stock market history.

That’s why the time to set up your retirement buckets is right now.

Tread Your Own Path!

Investing in New Zealand

Hi Barefoot,

I’ve recently moved back to New Zealand. I was wondering what the NZ equivalent of AFIC is, as I am going to begin my NZ share portfolio.

Helen

Hi Helen,

You can buy AFIC (or ‘AFUC’ for you Kiwis) on the New Zealand Stock Exchange. It’s exactly the same low-cost investment company that’s been around for well over 80 years. Then again, I’m not an expert on investing in New Zealand -- there may be better sheep to shear over there!

Scott

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.

Getting Rid of Granny

Scott,

My mother is 73, on a pension, with limited savings after her divorce. She lives with me and my husband (we’re newly married) in our rental -- in a granny flat underneath. We want to start looking at buying our own home but don't want to take my mother with us. The problem is that she's expecting it as she can't afford to rent on her own or buy a property. But I don't want to be tied to my mother’s purse-strings until she passes. Help! What do I do with her? What are her -- and my -- options?

Alisha

Hi Alisha,

This isn’t going to be easy, but you really need to help your mother.

Sit down with her, and lovingly work through the options of where she can afford to live based on her income. The maximum age pension plus rent assistance works out at just over $26,000 a year -- about $500 a week. She can afford to spend $150 per week on rent. That may involve moving out to the country, or finding a share house, or both.

You and your husband don’t owe your mum a subsidised home for the rest of her life. You do, however, owe her unconditional much love, kindness and non-financial support.

Scott

Flip Flop Finance

Barefoot,

I keep seeing proof of financial advisors contradicting themselves. Another example of this was in last weekend’s newspaper, where one broker had a ‘BUY’ on Cochlear and another had a ‘SELL’ on Cochlear! For us amateur punters who run a (successful) SMSF (aided by your weekly words of wisdom), how are we supposed to choose shares for an SMSF?

Barry

Hi Barry,

You’ve nailed the paradox of the stock market: on each side of every trade there is someone with an opposing view.

As for choosing shares, I have three things I look for. First and foremost, I only invest in businesses that make money. Sounds obvious, but of the 2,200 (or so) businesses listed on the ASX, fewer than 10 percent of them consistently make profits money over a five-year period. That narrows down the pack. From there, I look for companies that have low debt and a high return on shareholder equity. Finally, they have to have a ‘margin of safety’ -- in other words they need to be going cheap at the moment.

Scott

Cambodia Calling

Hi Barefoot,

My husband and I are Aussies currently living and working in Cambodia on a combined income of $1,500 a month. We own a property in the suburbs of Melbourne worth $450k, with a $307k mortgage and rental income of $1,564 before expenses. On what we are making, the mortgage is a struggle to maintain and we want to continue our life of travelling long term. Should we take the capital gains hit, sell the house and invest in shares, or keep on as we are?

Tim and Claire

Hi Guys,

Sounds like a loaded question to me: you want to sell it, don’t you?

But before you do, let’s look at it from both sides.On one hand, you could keep it. After all, it’s forced savings -- and with interest rates this low, surely you can cover the gap, so long as there’s no major repairs or renos required. I doubt you’re adding to your superannuation in Cambodia, so it’s one asset that’s working for you.

On the other, you could sell it. If it was your home, and it’s been less than six years since you started renting it out (and you haven’t bought another home), you won’t pay capital gains tax under the ATO’s ‘six year rule’. Then you should invest the money in a low cost share fund.

The main thing is don’t rush into it: remember, there are large upfront costs in selling (like agent’s commissions) and buying again (like stamp duty).

Scott