Ask Paul: Help, my husband and I are disagreeing over money
Dear Paul, my husband has turned 50 this year and I will be 50 in a few months.
We have recently inherited around $500,000. With this we have paid out our mortgage and some credit cards.
We don't seem to see eye-to-eye on what to do with the balance of the money, as he is now panicking that we have no money to retire on. He has around $300,000 in super and I have around $264,000.
We have three investment properties, one of which we are in the process of selling, as there has been no capital growth but the income on it has been steady.
It has also been a great tax deduction over the years. He thinks the debt on the investment properties should have been paid out a long time ago and can't see why we should keep that debt.
I have to say I am getting lost in what to do with the balance of the funds. We also have around $20,000 each in shares. Do I concentrate on paying off the debts or split the funds between super and savings?
Your thoughts would be appreciated. I just can't see the forest for the trees at the moment. - Luisa
For any couple, maintaining harmony over financial issues is not easy. The trick, of course, is compromise. Hopefully selling one investment property is the start of that. Obviously your debt levels will immediately drop and your cash levels will go up.
Let's move back from the trees and look at the forest, which I must say is in great shape. After the sale of the property, you will have two investment properties, which I assume are going okay.
Thanks to the inheritance you are mortgage-free, you have no credit card debt and you have a combined $564,000 in superannuation and $40,000 in shares. Things look very good to me.
Even better, you are only 50, so I suspect you will have at least another decade to add to your wealth. Firstly, top up your super via salary sacrifice to the maximum $25,000 each ($27,500 from July 1).
This is just wealth-creation magic. You no longer have mortgage repayments, so you can do this. You only pay 15% tax on the contributions, so it is not that painful as it comes out of your pre-tax income.
Then you can debate the wisdom of paying down debt on the two remaining investment properties. I hope your mortgage is in the high 2% to mid 3% range.
Hopefully your husband sees that this is not a big impost and hopefully it is covered by the rent. If you chose to put your savings towards reducing this debt, then that is fine. But do remember that by paying off a 3% mortgage you are earning 3% on your money.
History shows super earns a much higher rate than this, plus there's the 15% tax rate on your contributions. History does indicate that investing money in super and then using that to pay off your mortgages is likely to give you a better result in a decade or so.
Luisa, there are no guarantees in life, and I do turn to logic when it comes to money.
But relationships and happiness are far more important. So, if the "super versus pay off loans" issue was adding stress to my relationship, I'd agree to pay down the loans. Paying off debt costing you around 3% is probably not the very best decision, but it is still a good one!
The critical factor here is that you save consistently for the rest of your working life. Compound returns and time will be the solution to a comfortable retirement.
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