Ask Paul: Should I start salary sacrificing?
Simon asks Paul if he's on the right track and whether he should stary salary sacrifing?
This is my second email after my first question was answered by you about five years ago when I was 24. I have just turned 30 and I am doing a master's degree in statistics part time. I have been working full time for Ambulance Victoria for the past four years. I earn $58,000pa after tax from my full-time work plus $15,000pa from casual jobs. I purchased a house in Doncaster East, Victoria, four years back for my mum and am living with her at the moment until I bring down the house debt. I have $313,000 debt left and expect to pay it back in full by 2021 at the current rate. Mum earns just enough to cover living expenses.
I have no credit cards or any other debt and own a car. I paid off my HELP for a bachelor's degree but started accumulating HELP debt again for my master's (currently $20,000). It is expected to be $42,000 by the time I graduate in 2017. The house is valued at $850,000 (purchased for $685,000).
I am wondering whether I should start salary sacrificing part of my salary into super or keep paying off the mortgage. I changed my super investment option to 100% shares. What is the best thing for me to do to plan for my future? Simon
Hi Simon, it's really nice to hear from you again. Congratulations on moving on to your master's - statistics is a tough one. You should be so proud of what you have done for your mum and I know she will be super proud of you. Buying a home and covering the mortgage while your mum uses her income for personal living expenses is really making her life a heck of a lot better. Good on you.
A $313,000 mortgage on a $850,000 property is comfortable given your income - you have a lot of equity. You mention you'll pay this off in 2021, only about six years away. I popped this into a calculator and came up with repayments of a bit over $5000 a month to clear $331,000 in six years. This is $60,000 a year, and I wonder if you have calculated this correctly? It is a big effort to save $60,000 a year for anyone and I don't think you would clear this amount from even both your jobs after tax.
Anyway, if you are clearing that mortgage quickly, even if not in six years, I really don't think you have any money worries. Owning the home, which will no doubt be worth well over $1 million by the time it is paid off, is a wonderful base.
Your HELP debt is of no concern to me. It is the lowest interest loan on the planet and only payable once your salary exceeds a set level. So let's put that aside.
If you have spare cash flow above your extra mortgage repayments, providing you do not need the money until retirement, I would be perfectly happy for you to salary sacrifice into super. This is done at a tax rate of 15% and the top part of your income is taxed at around 35%, including the Medicare levy. Not only would more money go into super than you would take home to put to your mortgage, as you have chosen the shares option in super you get the benefit of diversifying your money into an area other than property.
In terms of converting your super fund option to shares, here I am also in support. I appreciate your returns would not have been too flash in the past year but you will be investing for over 30 years. In my opinion, shares are decent value, having come well back from the highs of 18 months ago. So with a 30-year view, I do think it is a good time to be investing. In the short term I have no idea where prices will go but with a growing world population, growing global wealth and hence growth in demand for goods and services it is realistic to think that share values will grow over the decades as they have historically.
So I would like you to check that mortgage pay-off period and the size of the extra contributions you are making. Then I am fine with you topping up super, providing the money is not needed until retirement. Since I heard from you some years ago, your salary has improved, you have built a lot of equity in your house and you are building super and completing a master's And you have maintained your good savings habits. Based on this, I can really only say, well done and keep it going.
Do make space, though, for life choices, such as developing personal interests and taking some holidays.
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