The money questions you've been asking Paul Clitheroe for 30 years
Answering money questions seems to have occupied quite a bit of my life, write Paul Clitheroe
I started doing talkback radio in the mid-1980s, then the Money program on Channel 9 and, of course, the past 18 years on Money magazine.
Along the way I also find myself answering money questions on planes, at dinner parties and even barbecues!
"How about a hot tip?" is common. This is easy to answer. I don't have any "fast money" tips, mainly because they don't work.
As you can imagine, if indeed I did possess any such investment miracles to achieve instant wealth I'd use them myself.
In terms of what I would call "serious" questions, property, shares, super and debt reduction are the recurring themes.
These are what I would call "getting ahead" questions.
A selection of Q&As from the past three years feature here and you'll see that the advice is still solid.
What is really noticeable over the past decade, in particular, is how well many young people are doing with money. Many Money readers in the 27 to 35 age group are in a really strong financial position and looking to grow from there.
Property is clearly Australia's favourite investment - no surprises there given our home is a tax-free asset when we sell. And, of course, there's negative gearing into investment property. Superannuation was seldom mentioned 30 years ago but now it is nearly always a part of readers' questions. Consumer debt, and how to get out of it, is also a key theme.
The thing that really gives me pleasure, though, is the amount of thought people are giving to their money. Thirty years ago questions really were pretty simplistic.
Today they are much more thoughtful and forward looking. Most are based around becoming financially independent in the decades to come. This is great news, as the key to money success is to do small things on a regular basis.
Hopefully, the Money TV show, radio and this magazine have made a small contribution to the evolution of people in having a deeper understanding of money issues.
1. Maximise wealth
Q. My partner and I are 26 and 27. We bought an apartment recently for $490,000 and have a $440,000 mortgage. We earn a combined amount of $180,000 a year and have $40,000 in an offset account and no credit card debt. I have an additional $6000 in shares. We save $1000 a week between both of us. What should we do with our money to maximise our wealth? Robyn
Paul: Hi Robyn. Congratulations on taking the big step and buying a property. Despite the high price of property in Australia, I remain very keen on the principle of home ownership.
Real estate agents may like to disagree with me, but my logic is not that property is necessarily the best-performing investment. In fact, if serious wealth is your vision, then it is business where the money is. This may well be the business of owning and developing property, mining, the services sector or wherever your personal skill set is, but the fact is that property ownership is a secondary asset to business.
Business generates jobs, which gives individuals the capacity to rent or buy a home; business also leases property and creates demand for property. Owning and paying off a property, while a really sound strategy, is a proven "get rich slowly" strategy. Take a look at the various "rich lists" from any economy - you will see that those who make the list are in active businesses. Sure, some like the Lowy family here in Australia may have created their wealth from property, but it has been the active development and management of commercial and retail property, not passive home investments, where their billions comes from.
Don't get me wrong - owning a property and paying it off is a terrific plan. We followed this plan ourselves, buying our first home, a tiny semi, back in 1983. As children came along, we sold and used the increased equity to buy a bigger home. Some 20 years later, in 2003, we were very excited to own our home debt free. Now this in its own right was a great plan, but what does reinforce my point is that at the same time we used around $20,000 as a deposit to buy the semi we risked the same amount to start my business ipac.
This was a big issue for us. We were pretty much the ages you are now. Putting the extra $20,000 into the mortgage would have been a really sensible move and we realised we could lose it by starting a new business.
But we did have a good grasp of risk and return and felt a business was the best option for us. It certainly proved to be correct. Property has done very well for us, but our $20,000 put into our own business has just been an outstanding investment.
That said, a lot of businesses fail and many never really generate decent returns. So I need you to think about your goals, objectives and in particular your skill sets and attitude to risk. There are a number of paths you can follow. Here are a few broad thoughts:
1. The straight and certain
You clearly have good money skills and good jobs. You could pour your savings into your unit - I suspect you would pay it off in six or seven years given your pay is likely to increase. You could then rent it, or sell and upgrade to a bigger home with a very manageable debt. By the time you hit 60 I think, along with your employer superannuation, you would be financially very comfortable.
2. Add a bit of risk
You could buy your next property now. In other words, you could buy a bigger place, maybe a free-standing house, today. Borrow to buy it using your current equity to support the loan. Rent the place and then get a tax deduction (negative gearing) on any losses. Equally, you could borrow to buy a share portfolio.
3. Go your own way
Depending upon your skills and determination, you might choose to go into business yourselves and risk your savings in this area. But be warned - do not even contemplate this without a very realistic business plan.
The great news for you is that you have the key pre-condition for wealth creation - surplus income. From here it is really up to you to decide what life you want. Maybe it is a family where one of you stops work, or children may not be in your plans. You may wish to work overseas, or you may not.
My advice is to firstly think about what is really important, and the life you want to lead. Once you sort that out I think the investment path you choose to follow will become clearer. If in doubt, though, keep doing what you are doing right now and get that $1000 a week into your offset account. This is a brilliant plan. Your savings effectively earn the rate of interest you are paying on your mortgage tax free and risk free. Every dollar is available to you if you decide to buy another property, shares or even start a business.
As a final thought, though, the time to take some sensible investment risk is when you are young.
2. Pay off the mortgage or top up super?
Q: I am 30, earning $50,000, with $26,000 in super.
My husband, Ben, is 31, a sole trader with a taxable income of $60,000 last financial year and has $8000 in super. We have three young children, with a home valued at $900,000 (mortgage $280,000). Last year we purchased an investment property, borrowing the
whole amount (mortgage $410,000).
We originally bought the investment property as my husband did not contribute to super. Should we continue to pay off our investment and will it be enough for his super?
Or should he think about contributing to his super fund or setting up a self-managed fund? My husband strongly believes he should be paying off his family home rather than putting money into super. It would be nice to know if we are on the right track or not. Tennille
Paul: Hi Tennille. I reckon that life must be really busy for you two. I had to laugh at myself. I was about to say "you guys", which I do tend to use as an "everyone" sort of thing, but I remembered our Australian of the Year and former army boss, David Morrison, saying that this is gender based and "inappropriate". While I hope I use it in an inclusive, affable and casual way, he did make a fair point when he said that few say to a mixed group "hi girls", so fair call. "You two" it is.
Anyway, back to you two. Life must be hectic. Vicki and I had three kids, now all adults, and it was a super-busy time. With the demands of a young family, your job and your husband's business I am mightily impressed you have time to think about your finances.
I am going to go with your husband's view, and this is not a gender bias! You are just 30 and your husband 31. Your incomes are solid but not at a level where you are highly taxed. So the 15% tax on money salary sacrificed into super is not really a huge tax saving for you.
Equally, you have at least 35 years to retirement. I have no idea what will happen to super over several decades, so in your shoes I'd take the more certain route and pay off the home. Interest rates are really low and likely to stay that way for a while, so it is a great chance to get rid of your loan's principle.
It is very much like Vicki's and my situation going back 30 years. Our incomes were not that high, so our tax rate was low, making super less attractive. We worked at clearing the mortgage and were just delighted to put the title deeds in our safe once it was paid off. By that stage our tax rate was much higher - we do tend to see peak earnings as our career and business skills develop - and we started focusing on super. It gave us a significant drop in tax paid but, just as importantly, we were much closer to retirement.
The other advantage of clearing your home debt is that you build a tax-free pool of equity. This can be used if you sell to upgrade or - cautiously - to support an investment loan to buy other quality assets.
I have no doubt that, in time to come, super will be a key part of your planning. But this is not the time - due to your tax rates, the flexibility of keeping money out of super and the decades of possible government changes to the super rules.
Right now your wealth is pretty much 100% exposed to property and your husband's business. But at such a young age that is fine. In the longer run super will be a great place to build exposure to local and international shares, along with other assets such as infrastructure and commercial property.
All that is in front of you. What is fantastic is that you are on a great track. You have more than $600,000 in equity in your home and an investment property. Over time you should spread your risk and diversify, but I am very happy with where you are right now.
Enjoy your young family, and if your husband looks pleased that I support his views on super, tell him he owes me a beer.
3. Property v shares
Q: My wife and I are both 35 and work as part-time teachers. I am on $45,000 and my wife is on $31,000.
We have paid off our house, valued at $410,000, and have $185,000 in international shares. We have two small children, aged two and four, and have combined super of $140,000.
We are having heated discussions about our next financial step. We live in country Victoria and my wife thinks we should buy a two-bedroom unit in Melbourne - Prahran or Hawthorn - to hedge against rises in the city market.
She feels that we might be priced out of the Melbourne market because regional property appreciates slower than city property. However, I would rather invest in more shares or a real estate trust to get exposure to commercial property. Can you please arbitrate for us? David
Paul: Hi David. It's really good to see that you've been able to pay off your home while having $185,000 in shares and $140,000 in super.
It's a strong position for a couple in their mid-30s and creates a solid foundation on which to build wealth. I do note that you're both working part time at the moment.
This may well be a lifestyle choice for you to spend more time with your young family but you should keep in mind that you're in your prime earning years and moving to full-time work would substantially boost your capacity to save as well as build your super when the time is right.
After 32 years in a happy marriage, I am going to stay well clear of arbitrating between your investment choices! But I am happy to look at the differences.
Yours is conservative as it involves no debt and sees you going with an ungeared and relatively liquid investment, perhaps shares, managed funds, real estate investment trusts, exchange traded funds or similar. This is a perfectly valid strategy.
Your wife is equally correct. Prahran or Hawthorn will do just fine over the long term. But you need a deposit - I'd suggest more than 20% to avoid lenders mortgage insurance. I imagine you'd need to borrow $500,000 or so. Risks are a property downturn, inability to rent in a recession or interest rate rises. The gearing, however, should work for you in the longer term.
So what we have here is a risk-return moment. The geared property really should do better, but you must plan for a few bumpy years at some stage. Property will not always go up and you do already own property. Move forwards 20 years and I have little doubt the geared property will do much better than ungeared investments.
So do your numbers and build in an economic drama, rising rates or a recession. If you can survive that, geared property should deliver return for your risk. If in doubt, why not go the "get rich slow" route, which is working so well for you now. Maybe a geared property is better as the kids grow - and you could both be on higher incomes. Over to you!
4. Boosting super
Q: I am 44 and my husband is 51. We are both teachers. I work part time earning $50,000 and my husband earns $80,000.
We have three kids aged 14, 12 and 10. We owe $45,000 on our residence ($450,000 value) and currently pay $2000 a month towards it.
We have an investment property with an interest-only mortgage of $160,000. It is valued at $230,000 and earning $280 a week rent (positively geared but as it is in a regional town we don't expect much in the way of capital growth).
To help our super along I am salary sacrificing $300 a fortnight (I have $50,000 in super) and my husband $600 a fortnight (he has $60,000).
How can we set ourselves up for the future and retirement? Miranda
Paul: Hi Miranda. The good news is that you are well on the way in terms of setting yourself up for the future. Right now you are in good shape, but in the very near future things start to look very bright as you will clear your mortgage in mid-2018.
Being mortgage free is a big deal. When it happens, you should take a bit of time out to enjoy the moment. But the really important bit is that all of a sudden the $2000 a month you pay to the mortgage will be freed for investment. Even better, your budget and lifestyle have been established without that $2000 a month. And the most critical step is to not get used to spending it!
I see this so often. It is really easy to stop putting your mortgage repayment aside and to leave it in the family account - and all of a sudden your savings discipline disappears and the $2000 a month is never seen again.
So the moment your mortgage is paid off, keep saving the $2000 a month, preferably in a separate account from your day-to-day money. If invested, not spent, the power of this $2000 is just extraordinary.
Let's give you both another 15 years in your working lives and a good chunk of the $2000 a month, once your mortgage is paid out, could be used to invest in a number of ways.
You could put it in a high-interest bank account, use it to build a share portfolio, put it towards a deposit for another investment property or add to your super via salary sacrifice.
Saving for 15 years into a cash account is, while safest, my least favourite. Here I can only assume you'll average a rate of about 2% after tax. A projection on an investment property is all too hard as I can't guess how much you would borrow, but that amount put into a decent share portfolio would historically be likely to show some 7%pa.
This is pretty conservative and includes about 4% in dividends and 3% capital growth, and while this is a guess based on history it is not a silly one.
I do think salary sacrifice into super will be powerful as your contributions going in are taxed at only 15% and so are your earnings. With super rules being debated and changed, I would want you to go to a super calculator such as the one on the SmartMoney website and do your own numbers but, as you are saving $2000 a month after tax, you can save more with before-tax contributions.
Looking at your tax rates and current rules, between you and your husband I reckon there is a tax advantage of about 15% to 20% in going the salary sacrifice route for part of that $2000 a month.
You will also need to look at your contribution limits at that time but, just as an example, it is pretty safe to assume this super strategy may mean you can add some $2300 a month to super. Super funds have averaged some 7% to 8% a year over the past few decades.
I am not trying to dictate strategy here as a heap will happen in your lives - pay increases, promotions, longer hours at work. I would not ignore the tax advantages of super and I feel continuing to save that $2000, on top of your home, compulsory super and rental property, will give you a financially secure future.
5. Our first property
Q: My partner and I live in a remote area in north-western Australia. I am a 26-year-old female earning $59,000 a year and my partner is a 24-year-old male earning $180,000pa.
We have no debt, no assets and own our car outright. Work pays for most of our expenses and we spend only about $1500 a month. This gives us the ability to save $10,000pm. Since moving here nine months ago, we have saved $115,000 in a high-interest account and are awaiting our tax refunds of $14,000.
We would like to invest in the property market in our home state of Victoria but we are not sure where to begin, who to speak with or whether it is a good time to buy. This will be our first property (of many, we hope), so we are unsure how to structure our loans and whether to buy for capital growth or cash flow.
We hope to invest for the long term so we will be able to retire early and have the choices in life to do the things we love, such as travelling. Teri
Paul: Hi Teri. I am delighted to see that you have a sound long-term plan to create wealth early so you can do the things you love. Shortly we'll have a minor argument about whether a property-only strategy is the way to go but the key issue for me is that you do have a plan and your savings put you in a position to make this plan happen.
I suspect that working in the remote north-west is challenging and lifestyle options are pretty limited. But the big plus is that you can really save, and $10,000 a month is just terrific - good on you both!
My advice is to ignore a lot of the stuff you read about: salespeople push positive cash flow properties, others push capital growth potential. But property is a common-sense asset and I would really like you to do your own research. In particular, avoid property seminars like the plague. They are run to benefit the promoters, not the attendees, who all too often end up buying overpriced properties in poor locations.
So let's go with common sense. Australia's population will continue to grow, hence the demand for property in areas with jobs, public transport, modern facilities, schools, healthcare, a nice community feel and decent coffee will do well. If you use these characteristics to choose where to buy, I do think you'll end up looking at established, near-city suburbs. So you won't get a bargain, nor will you get high rental returns.
Most sensible people also go for the obvious, so well-located properties sell for pretty much market price. The good news is there will be plenty of properties to look at and lots of recent sales, so you will have genuine market data about real selling prices.
Start looking online to get a feel for prices in the suburbs that appeal to you. I always recommend buying property you would live in - if you'd live there chances are it will rent well and, if needed, sell well. Now is not a bad time to buy. Sure, prices are high and, while I don't see a collapse, I do think this boom has started to slow. Prices may go back a little but if you buy good property in a good location, don't overborrow and are prepared to hold for the long term, it is hard to see how you can go badly wrong. Mind you, it is important that you spend time looking at properties - the internet is a great guide but don't buy sight unseen.
I am perfectly happy for you to build a property portfolio - but with a couple of reservations. Borrowing is a good plan but be very careful about basing your borrowing capacity on your current level of savings. The longer-term job prospects for you and your partner are critical when it comes to supporting debt.
Also, at some point rising interest rates will push the market backwards. You need to make sure that you can hang in and meet your repayments. Gearing looks great as markets rise but on the way down it magnifies your losses if you have to sell.
Equally, over time I really would like to see you both build your super. This is typically invested in shares, infrastructure and commercial property by professional super managers. This spreads your risk and gives you diversification.