How Do I Pay Less Tax?

Dear Scott

I work 80 hours a fortnight and am the main provider for my family. Four months ago I got a new job that pays $86,000 a year. Earning over $80,000 means I am now in the higher tax bracket, so I pay more tax. I worked out that if I reduce my work to 70 hours and keep my income to just under $80,000, I would take home the same amount of money as do I now. Is it worth reducing my overall income to avoid paying too much tax?

Dave

Hi Dave,

Dude! You’re the main provider of your family, why are you playing defence?Besides, if lowering your tax is your endgame, I can show you how to slash it to zero: just buy a bunch of negatively geared properties. In quick time you’ll be so negatively geared you’ll be positively screwed.

Jimmy Barnes wrote a song about the slog of a salary, it’s called the Working Class Man. There’s honor in working hard, delivering value, and providing for your family. To answer your question, yes you can game the system by cutting back on your hours. But what’s the long-term cost? Where will that thinking take you and your family in 20 years time?

Scott

The Great Grandmother

Hi Scott,

I’m in my seventies, and I’m very anxious. One of my grandchildren doesn't have enough savings to qualify for a housing loan, and is short by about $160,000. I’m prepared to use my apartment as a guarantor for that amount to enable the loan to be approved. My question is if in the future the loan is defaulted on, and my property has to be sold to pay back this money, would only the $160,000 be taken back by the bank, or would they take it all? Hoping you can help?

Joan

Hi Joan,

If things go bad, the bank won’t want your apartment, they will just want their money back. How you cough up the cash is totally up to you. You could sell your apartment, and move in with your grandchild -- for the rest of your life -- for instance.

You’re being very financially prudent asking this question. So, my advice would be not to go guarantor for your grandchild, and instead help them become financially prudent. Buy them a copy of my old book, the Barefoot Investor. It’ll teach them that they’ve got a wonderful opportunity: time. You don’t have as much of that. That’s why you shouldn’t be taking risks.

Scott

Insane in the Membrane

Hi Scott,

Warning: we’re completely insane.I’m married with two kids (1 and 3 years old). Work full-time ($85k plus super). Hubby works two days a week and clears $650 a week.

We’ve finally paid off our tiny 2 bedroom flat (approx $400k), which we rent out to a friend for $300 per week (mates rates). We in turn rent a 3 bedroom townhouse for $550 a week.

Here’s my question: Should we sell the unit? Keep the current scenario? Pack up the kids and live in our tiny flat? Or do we give in and buy house and land package in the outer burbs?

Kirsty

Hi Kirsty,

The only evidence that you are indeed crazy is if you actually decided to move your family of four into that ‘tiny 2-bedder’. You paid off a $400,000 investment, pat yourself on the back! If I were you I’d stay sell your investment property. Even after accounting for Capital Gains Tax (CGT), it’ll provide, to quote Donald Trump, a ‘Yuge’ deposit. On your household income you could comfortably borrow another $300,000. I’d buy an existing home, in a good suburb, that you can see yourself living in for at least ten years.

Scott

The 93 Year Old Barefooter

Hello,

I am a 93 yr old self-funded retiree. We’re in a comfortable position, however the drop in rates has dented our income badly. We have $156K in Commbank’s Hybrid securities known as PERLS, which are terminating on April 16th, and they are offering to convert it to Perl VIII. The rate is attractive: bank rate plus 5.2%, but there is added risk too. Would you agree and is there a better alternative? Not interested in capital gains - only income.

Reg

Hi Reg,

I wouldn’t let my grandparents invest in these so-called hybrid securities. CBA’s PERLS are sold as an alternative to term deposits, but in terms of risk they’re closer to shares, mainly because there’s no guarantee you’ll get your money back, or get paid interest. There’s a lot of fine print, but that’s the guts of it. I’d be even more conservative, and stick with term deposits. Remember, you also have the option of drawing a little bit down, conservatively.

Scott

Donald Trump Effect

Hi Scott,

Should investors panic if Donald Trump wins the Republican nomination for president....or only panic if he actually wins the presidency? He has managed to offend almost every minority group in America as well as quite a few foreign nations who may no longer wish to have dealings with the USA as long as such an ignorant and arrogant moron is in charge of the world's largest economy. Will he have an effect on world markets?

Dave

Hi Dave,

In my unqualified opinion, Trump is a complete trainwreck.

The idea that in order for America to ‘win’, other nations have to lose, makes me want to repeatedly smack him over the head with Adam Smith’s Wealth of Nations.

Still, it’s easy to get sidetracked watching this idiot. The truth is that the US has had it’s fair share of loonies in the oval office, but over the past 100 years the US market has still risen 18,520-fold.

Scott

Whisky...as an Investment?

The Lord moves in mysterious ways.

An interview I’d hoped to bring you this week fell over at the very last minute - leaving me staring at a blank screen. Yet in the darkness of my deadline, he reached out to me and sent a message from above. (Okay, it came via Gmail). It read:

Dear Scott,

I thought I would share something my husband and I are looking into: Nant Whisky from Tasmania. They’re offering a 9.5 per cent compounded return on a 4-year investment of $25,000. Seems better rates than any term deposit or savings accounts. We thought this could pay for a new car or holiday every 4 years ($11,000 profit).

Thoughts?

Nicole

My first thought was ‘thank you Nicole for saving my bacon!’

My second thought after reading the Nant Whisky investment pitch was that I needed a very stiff drink.

By all accounts Nant produces a damn fine drop -- it’s been referred to as ‘liquid gold’ by a liquor buff -- and they’ve won awards at the World Spirit Awards. They’re also expanding rapidly into whisky bars across the Australia and Asia.

Yet it was Nant’s ‘investment opportunity’ that was giving me a hangover.

Nant offers investors the opportunity to buy two barrels of their single-malt whisky for $25,000.

Then Nant ‘guarantees’ that, in four years’ time, they’ll buy back the barrels for $36,007 (precisely). That works out to be a cracking 9.55 per cent per annum compounded return.

As Nicole wrote, that’s an $11,000 profit in four years.

Sniff! Sniff! Something smelled off. So I called up the company and spoke to Nant’s founder, entrepreneur Keith Batt in Brisbane.

Barefoot: “So who is behind the guarantee to buy back the whisky?”

Batt: “We are.”

Barefoot: “But you’re a bankrupt. You owe $16 million. And the company behind your last venture is in the process of being liquidated owing $20 million!”

Batt: “I’m the General Manager. I’m not the Director.”

Barefoot: “How much money have you taken from investors?”

Batt: “We don’t give out those figures … we’re a private company.”

Barefoot: “Yes, but you’re taking the public’s money. Specifically from mums’ and dads’ SMSFs. You run national newspaper ads using Aussie cricket legend Matt Hayden to spruik your investment and your ‘guaranteed’ returns.”

Sniff! Sniff! Something smelled off. So I called up Matty Hayden, who was in Bangladesh.

Barefoot: “Mate! What gives?”

Hayden: “Look, I love their whisky but I’m not involved in the strategy of the business. I’m seeking clarification on my current contract … as I haven’t been paid for a few months.”

(Fair enough. I hope he really likes their whisky. Maybe they’ll pay him in booze?)

Anyway, as my day wore on, the more people I spoke to about the business, the more concerned I got.

Sniff! Sniff! Something smelled off -- and then I found it -- it was cow dung.

Nant’s latest ‘investment opportunity’ is for investors to “buy 10 purebred Black Angus breeding cows, for $30,000”. And just like with the whisky barrels, investors are being lured by a guarantee: Nant guarantees they’ll purchase the cows back in five years’ time for $47,335.

Guess what the annual return works out to be?

The same as the whisky barrel investment: 9.55% per annum, payable in five years’ time.

So I called Nant and spoke to their PR person, in Brisbane.

Barefoot: “I may be a little stupid, but shouldn’t there be a difference between the returns an investor would get on whisky and what they’d get on cows? Why are you offering EXACTLY the same returns?”

Nant spokesperson: “We’re a vertically integrated company and we have opportunities to be retailers.”

Barefoot: “Uh-huh.”

The truth is you should never invest in anything you don’t understand -- even cattle.

That rules me out.

I have two cows. They’re named ‘Cash’ and ‘Frank’, and they were a wedding gift from a mate.

After years of having them knock over our fences, eat my wife's roses, and crapping all over the place,  I finally announced at the dinner table (over beef casserole, I believe) that it was time to sell them.

My toddler Louie’s top lip began to quiver: “No! Don’t take my Cash Cow Daddy!”

(They’re both still here.)

Anyway, let’s get back to our tale of investment beef jerky.

By now the smell was overwhelming, so I called up one of Australia’s leading cattle farmers, David Blackmore in Melbourne. His award-winning wagyu beef is served in posh restaurants like Rockpool and Nobu, and he exports to over 20 countries.

Barefoot: “What do you think of the returns Nant are offering?”

Blackmore: “Well, I’d struggle to achieve that return on our wagyu cows. And to pay that return to investors and still make a buck! Well that would be very … difficult.”

Barefoot: “You’re being kind.”

Blackmore: “I’ve been in agriculture for over 50 years and I’ve never seen one investor make money out of any of these schemes.”

Throughout my frustrating conversations with Nant, they kept on reiterating that they weren’t offering a financial product. There’s a reason for that. If they were, they’d have to issue a Product Disclosure Statement (PDS), and be regulated like any other investment company by the Australian Securities and Investments Commission (ASIC).

“The investors, they own the cattle. At the end of the lease they’re free to take them ... and put them in their backyard if they wish.” said Nant.

Trust me on this -- you don’t want to do that. They’ll knock down your fences, eat your roses, and crap all over you. They’re not cash cows.So now let me get back to Nicole -- my gift from above -- and the woman whose innocent investment question kicked this all off.

Nicole, since I got your email I’ve worked my way around the world (well, Tassie, Queensland, and Bangladesh) and my advice for you is this:Grab your $25,000.Invest it in a simple online savings account -- which really is guaranteed (by the Government).

In a year’s time you’ll have earned roughly $875 (less taxes).

Not much? Sure.

But it’ll buy you a dirty big rib eye steak, and four bottles of Nant whisky.

It’s apparently a great drop.

Sniff, sniff!

Tread Your Own Path!

Should I set up a SMSF?

Hi Scott,

I have inherited $500,000. My existing super fund balance is $140,000. I own my home and have an investment property (value $500,000) that I owe $230,000 on. I plan to work for another five to ten years. My accountant is recommending I set up the SMSF as a 'tax structure', saying it is the 'last tax haven' available. I am keen to buy more property with the funds in the SMSF. What do you think?

Greg

Hi Greg,

Here’s a car analogy:Your accountant is selling you on how wonderful cars are -- ‘beats the hell out of walking!’ Of course you could buy any old car to get you round, but your accountant is suggesting you rent a car from him. (Perhaps I’ve been watching too much Top Gear, but the analogy I’m using is the ongoing fees in an SMSF that would flow to the accountant’s pockets.)

However, if you were sitting across the desk from me, I’d suggest you’ve already got too much exposure to residential property through your own home and investment property. I’d suggest that diversifying into local and international shares would be a smart idea -- and generally share funds give a better income yield in retirement with much less hassle.

Speaking of hassle, I’d ask you about how active you (and your partner) want to be with your investments. If it’s not really your thing, I’d suggest you try an ultra-low-cost super fund. But then again I’m not a car salesman.

Scott

Single Mum Wants Security

Hi Scott

My home insurance is up for renewal and (like Tegan who wrote in last week) I'm looking for a total replacement policy. You said you use an insurance broker -- is that the right step for everybody? And if it is, how can I tell which ones might rip me off? I am a single mum with two little boys and I am on a little income.

Janet

Hi Janet,

I’ve received a lot of mail about this, so now’s a good chance to explain how this all works.

There are a number of insurers who offer ‘total replacement’ policies, but it’s certainly not the standard in the industry. The standard is ‘sum insured’, which is pretty simple: you guesstimate how much your home would cost to replace and insure it for that value. If you’re wrong and the house burns down, the insurer will only cough up the sum you’ve insured for. You foot the difference.

Therein lies the problem. Most people have no idea of the true cost of rebuilding a home. A good insurance broker will know, and will advise you accordingly. They’ll also read through your policy and alert you to clauses that could affect your ability to claim. And, if you have to claim on your policy, a good broker will represent you.

How do you find a broker who won’t rip you off? It’s actually a lot like dating. Don’t fall in love with the first guy. Make sure he takes the time to educate you, rather than just selling you on how big his policy is. And always trust your gut. Good luck.

Scott

A Super Simple Question

Hi Scott,

I am 42 and a high-income earner ($260,000 a year) and my wife is a stay-at-home mother. I know I am able to make an after-tax contribution to my wife -- but am I able to make a pre-tax contribution to her super account?

James

Hi James,

Yes you can. You split your employer super contributions (including salary sacrifice amounts) up to your limit of $30,000. You get the tax breaks, she gets the extra cash in her super. You’re the man! Happy wife, happy life!

Scott

Help! My Son Is on the Nibble!

Urgent help needed! My son is turning 30. He earns good money. He doesn't live at home but pays very cheap rent. Yet I have now found out he lives borrowing on NIBBLE -- he owns nothing and is still paying off his $30k car loan. You had an article in the Herald-Sun some time ago about these loan sharks. Can you send it to me so I can send it to him? I give him hints all the time about him about it, and I even bought him your book, but nothing is doing any good.

Jenny

Hi Jenny,

I think you mean that your son is taking out loans with a crowd called ‘Nimble’, who target Gen Ys with TV ads showing an ironic hipster rabbit. Their tagline is ‘smart little loans’. They’re trying to be all 2.0, but the truth is they’re just another payday predator.

As a parent, my heart goes out to you. It’s totally natural to want to help (read: nag) our kids into making smart decisions. However, your son is now a grown man and he’s obviously not listening to you (or me!). So you’ll have to leave it up to life to teach him this lesson. And based on Nimble’s terms, it’ll be delivered sooner rather than later. When it does, don’t bail him out under any circumstances.

Scott

Are we in a housing bubble?

Are prices going to crash by as much as 50 per cent, as some experts predicted in the news this week?

Will the government have the ticker to change the negative gearing rules?Well, to answer these questions, and offer some views on livestock, this week I caught up with none other than the newly crowned Deputy Prime Minister of Australia, Barnaby Joyce.

And in doing so, I worked out we actually have quite a lot in common: we’re both country blokes. We both have a love of numbers. And we both have a habit of saying whatever’s on our minds at the time.

Barefoot: “Thank-you for your time Deputy Prime Minister. I currently own two Alpacas on my farm, and I just don’t care for them at all. They’re more stubborn than Greens Senator Sarah Hanson Young. Have you ever been spat on by an alpaca...or a Greens supporter?”

Barnaby: “No, although I’ve actually had alpacas run alongside me as I go for a jog down the side of my road. They just look like too much…hard work”.

Barefoot: “First home buyers have the footprints of property investors squarely on their backs. Negative gearing has created an uneven playing field because they can write off their losses against their tax. Explain to me how this is fair or productive?”

Barnaby: “Well….there are affordable houses, there just mightn’t be affordable houses in the places you’re looking. When people say there’s no affordable houses, well that’s not correct, there are, and in regional areas they’re vastly more affordable than in the cities”.

“Look I bought a house in St. George in South-West Queensland. I lived out at Charleville, now I’m living south-of Tamworth, but here’s the thing: I’m still out of town where it’s cheaper. What I’m saying is you’ve got to look across the nation. If you look around and say the houses around me are unaffordable you’ve got to ask yourself... is there somewhere else you can go where they are affordable?”.

Barefoot: “So what you’re basically saying is the Government doesn’t have the ticker to touch negative gearing, right?”

Barnaby: “The problem you’re going to have is that if you start messing around in any place without a proper plan, the problems you can create can be vastly greater than the problems you had. If you go into any market and take a substantial group of people out of that market, you can have an incredibly detrimental effect on all the people who have currently bought a house. There’s two sides to every equation”.

Barefoot: “Yes, but there is a substantial group of people who right now are priced out of the housing market. They’re called first home buyers”.

Barnaby: “There are two groups of people who you always have to consider: the people who want to get in and the people who are already there. So it’s never a simple equation, if you’re going to say I’m going to make all houses cheaper, you’ve just made all the people who own houses or owe money to a bank on a house, poorer”.

So here’s my take out from my discussion with the Deputy Prime Minister.

There is absolutely zero chance the government will do anything more than fiddle around the edges of negative gearing policy.

As Barnaby says there are two sides to every equation -- and make no mistake, in politics the side that wins is usually the one with the most voters -- and roughly two-thirds of Australian voters are homeowners.

It makes perfect political sense: who the hell wants to be remembered as the government that pricked the biggest housing bubble in history?

Well, I’ll tell you who: Bill Shorten.

He’s got nothing to lose, so he’s prepared to roll the dice, and end negative gearing for existing homes.It’s bold, and it’s brassy.

But there’s just one little problem with it: getting Aussies off negative gearing, is alike a junkie getting off the gear. Long-term it’s totally the right thing to do. Just not today...maybe tomorrow (but probably not). The scary part is that everyone knows there will be a withdrawal period, and it will be nasty, and no one can accurately predict what will happen. But let's have a go...

Bill Shorten has said that if he’s elected, negative gearing on existing properties will be axed on the 30th June 2017. However, he’s also assured landlords (and his party) that anyone who buys before that, gets grandfathered tax deductions for life.

So, what do you reckon the property market will do in the run up to the cut off date?

Boom, baby!

What will happen the day after?

Will we be shivering in in a corner, with our heads in a bucket?

Who knows?

Either way we should encourage our politicians to make hard, courageous decisions, that benefit the country in the long-term. However the trouble is for a politician, long-term isn’t even a three year electoral cycle these days -- just ask Kevin, (and Julia and Tony).

So where does that leave first home buyers, with the likelihood that the Barnaby and his boys will be returned to power?

Well, last year the former Treasurer, Smoke’n Joe Hockey’s advice to young people who were struggling to crack into the Sydney property market was to ‘get a good job that pays good money’ (teachers, nurses, police-women, scientists... no house for you. Lawyers, bankers, politicians, you win!).

When I asked Barnaby the same question, here’s what he said:“

The great thing about Australia is if you’ve still got the drive, if you’ve still got the mongrel about you that wants to get up and go, you’ll get there. But if you think you’re going to – by some stroke of luck – walk into a multi-million dollar place for a couple hundred thousand bucks, well that just ain’t going to happen. Like everything in life you’ve got to start from the bottom, work hard and you’ll get there”.

Tread Your Own Path!

Check Out Choice!

Hi Scott

You have strongly suggested (and The Checkout and Choice agree with you) that homeowners should get a ‘total replacement’ policy. So, being the devoted follower I am, I spent my morning looking into it. Who offers such a thing? Well, I looked at ALL the usual suspects ... and not one of them offers it. Everyone’s recommending it, but someone forgot to tell the insurance companies -- and of course if it is to our benefit then they will not want to offer it! Any suggestions?

Tegan

Hi Tegan,

There’s a reason they don’t offer it. Most people totally underestimate the true cost of rebuilding a brand new home, the same way that most people underestimate the cost of replacing all their possessions. You’re bearing the risk of this underinsurance, not the insurance company.

That’s the reason I pay an insurance broker manage all my general insurance: first to make sure I am insured for ‘total replacement’, and secondly, because they’re experts at dealing with the claims process. Insurance isn’t like buying baked beans. Cheaper is not better.

Scott

Negative Gearing Going?

Hi Scott

My question is simple, though I know your answer may not be. What do you think will happen with negative gearing? I’m worried because I own three properties (all on interest only loans, all negatively geared), and I worry what will happen if they abolish it. I am thinking about buying another property in student accommodation.

Rosemary

Hi Rosemary,

Labor’s proposal won’t come into effect until 2017, and they’ve said in their policy document that the changes won’t be retrospective. In other words, your existing tax deduction status is safe. Still, negative gearing is now officially an election issue, and the Minister for Networth will now have to have address it, one way or another.

My personal view is that negative gearing, much like superannuation concessions to higher income earners, will eventually be clipped. Not if, but when. That’s why I don’t advocate making an investment solely for the tax benefits. Right now you’re losing money. Work out how to turn that around, because any changes to the tax treatment of housing will likely hit the market hard.

Scott

‘X’ Marks the Spot

Hi Scott

I am recently retired and I have topped up my Australian Super to $400k and put $1,050,000 into my SMSF. I will also have a part of $1.2 million to invest after our Family Court matter is settled. Last week I got a call from a fellow who claims his company made 28 per cent after tax in 2015 through investing in the share market. It is called ‘Shares XP’. Is this too good to be true?

Mal

Hi Mal,

Congratulations! You’ve won the money game. With (roughly) $2 million in savings, you can comfortably draw $100,000 per annum tax free in retirement and you’ll never run out of money. There’s only one final risk that you face: financial salespeople getting their mitts on your money. I don’t know anything about Shares XP other than what I’ve seen on their website. It appears part of their service is trading Contracts For Difference (CFDs). These types of trading products are financial cancer. Don’t do it. Stick with AustralianSuper, and find another hobby.

Scott

The World Is Against Me

Scott,

I’m a recently divorced dad with a legal bill of $40k (lawyers are dogs!) and a credit card debt of $20k. I work two part-time jobs which together earn the equivalent of a full-time job, about $75k gross a year. The divorce settlement sees me keeping the property, valued at $1.1 million with a loan of $320k remaining. My mortgage broker is working on getting a loan for $380k but has come back and said my second job won’t be counted so I have to take out a higher rate investment loan. What can I do about these pricks?

Wally

Hi Wally,

Here’s why you’re not getting any love from the banks: you’re bringing in $4,800 a month ($75k p.a), and your monthly repayments on $380,000 are around $2,100 a month, or about 45 per cent of your monthly income. Out of what’s left over you’ve got to put food on the table and pay child support. Even if you had one full-time job most banks would charge you a higher interest rate, but given you have two part-time gigs, it makes your income less reliable. The bottom line is that you’re not in a strong negotiation position.

You have three choices: one, take the higher interest rate loan and chew really hard (though that’s not what I would do). Two, get a higher paying full-time job so you’re not handing nearly half your wage over to a banker. Or three, downsize, pay off your debts, buy a cheaper house, and spend time with your kid.

Scott

Help, We’re Trapped!

Hi Barefoot,

My wife and I are 39 and have three kids. I am the sole breadwinner, earning $80k plus super, and we live rent-free as part of my job. We own a rental property with a $298,000 mortgage, with tenants paying $380 per week, which covers the mortgage. We have $8k in credit card debt. Put it all together and we feel trapped! Each week we just seem to cover our expenses. I would love to get my Mojo account up and follow your share investment tips, but we never seem to have the money. We would love a holiday!

Gary

Hi Gary,

I may look like a fairy, but I have no magic wand to wave at you. By my calculations you’re pulling in close to $6,000 a month in the hand (when you factor in the Centrelink family benefits that I assume you’re getting), and you’re not even paying for a roof over your head? And you have credit card debt? C’mon, cobber! A wonderful holiday for you would be to drive an Uber taxi around your city, five nights a week, until you’ve paid off your credit card.

Scott

Real Estate Mistakes

Have you ever dreamt of building a multimillion-dollar investment portfolio?

Travelling overseas — business class — while you live off your six-figure-a-year passive income? If you have, today I’ve got a real treat for you.

This week I caught up with two of the most successful property investors of the past few years.

Kate and Matt Moloney are a twenty-something couple originally from country Victoria. Yet they are anything but typical: they built an $8.5 million property empire, generating $570,000 a year in rental income, in just three years.

In 2012, Kate and Matt were recognised for their achievements, being crowned “Investors of the Year” by Your Investment Property magazine. A panel of five industry experts pored over their portfolio and, after much deliberation, awarded them the prestigious prize.

The entrants were described as “some of the country’s most shrewd investors” and “property powerhouses who are showing the rest of Australia how it’s done”.

“These are ordinary, everyday Australians who have chosen to make a difference in their lives through property investing. By showing fortitude, the willingness to take risks and a sense of the gigantic opportunity that is Australian property, they’ve strived ahead and offer a shining example of how to succeed,” said the magazine.

And specifically: “The young couple wowed our judges with their awe-inspiring ability to get together property finance, even in times when they’ve been without savings or equity.”

Hang on. Hold your horses.

Let’s back up the nag and take a look-see at that last quote: the judges were “wowed” with their “awe-inspiring ability” to borrow money “without savings or equity”?

Uh-huh. We’ll mark that down. Let’s keep going.“The truly remarkable part is that both are just aged 24 and now in a position to semi-retire”, gushed the magazine, which put the couple on the front cover.

“We’re heading on our first round-the-world trip — business class. We’re quitting our jobs and heading to Africa, North America and Europe for a well-earned rest,” said Matt.

“We’ve done the hard yards, starting our investing when we were teenagers, and now we just want to enjoy ourselves,” said Kate.

You can picture them, can’t you?

They’ve got their “Investors of the Year” Oscar-like trophy wedged into their Gucci carry-on luggage. They’re reclining in their plush leather seats, triumphantly clinking their champagne glasses as the pointy end of the plane lifts off the tarmac bound for the bright lights of New York City.

Meanwhile the rest of us are stuck in peak-hour traffic — spilling coffee on our shirts — and cursing the cost of affording a dog box in Bendigo, much less owning a multimillion-dollar property portfolio.

And Kate and Matt lived happily ever after, right? Well, no.This story doesn’t end in the business class lounge, but three years later in the bankruptcy court.Yes, today Kate and Matt are bankrupt.

Well, not officially — though I assured them this week that it’s definitely going to happen, and soon.

That’s because they currently owe $5.8 million on their investment property portfolio. The value of these properties (mostly bought in the mining boom-and-bust town of Moranbah, Queensland) has plummeted to a paltry $2.3 million today. In other words, they’re $3.5 million underwater on their loans.

To make matters worse, both Matt and Kate are currently not working. But it wasn’t losing their jobs that did them in — the seeds of their financial cancer were sewn back in 2009 when they paid $7000 to attend a property seminar from an outfit called Real Wealth Australia and they got well and truly swept up in the rah-rah.

It was at the course that Kate and Matt ditched their half-paid-off marital home in country Victoria and set their eyes on becoming miyonaires! The strategy was simple: buy multiple investment properties in mining towns.

I mean, what could be better than buying one investment property?

Buying 20.A few years later — having well and truly sucked the spruiker juice — Kate and Matt attended a $4000 workshop hosted by Dymphna Boholt, who says on her website that “educating on success, money, and material wealth are the things that I am best known for”. (To be fair, she’s also known for making misleading claims that have been exposed by the ACCC and Fair Trading Queensland.)

They were so motivated by Boholt’s first seminar that they ended up graduating to her platinum mentoring service, which cost $30,000. For that money, says Kate, Dymphna was recommending investing in mining towns.

Kate also alleges that some people she was dealing with throughout her buying binge were receiving kickbacks on the debts she was taking out, though she says it was never disclosed to her.

The problem is that this young couple from the country were unwittingly held up as poster kids of success, and their story was used to suck more people into the get-rich-quick schemes.

“The spruikers would fight over us. They’d get us up on stage with the motivational music blaring. Each claimed that it was their course that had turned us into multi-millionaires in a few years,” said Kate.

“But it was all built on lies. Even our capital city properties were sold for huge losses.”

The hard truth that Kate and Matt have learned is that there’s no shortcut to any place worth going.

They’ve also learned that Your Property Investor magazine is the equivalent of a porno for property punters. (Though I’d argue they’re not so much Playboy — more like Hustler.) Seriously, it’s so sleazy that they should sell it wrapped in cellophane.

By the way, I didn’t get away scot free on this one either. In researching this column on the interwebs, I found there are a lot of investment property gurus who really don’t like me: “The Barefoot Investor gives commonsense, simple and incredibly boring savings advice”, said one.

Bit harsh!

Then again, if Kate and Matt had followed the Barefoot path, they’d own their own (modest) home today — before they turned 30.

And here’s the thing: once you knock out your biggest payment, your financial world changes: You can build a multimillion-dollar investment portfolio, you can semi-retire, and you can even save up and enjoy an around-the-world trip … business class.

Tread Your Own Path!

P.S Kate told her story last night on 60 Minutes.

All week Channel Nine had been promoting it as ‘the next great mortgage disaster’.

Last night I got to see the story, and it was … rubbish.

I was looking for an intelligent discussion on the dangers of an investor-led boom. Or perhaps a pointer of the role that property spruikers played in pumping up prices in investor-ghettos (mining towns, student accommodation, inner city dog boxes, government supported NRAS housing, negative gearing).

Nope.

Our flagship investigative show suggested that house prices in the mining town of Moranbah -- which saw its median house price jump by as much as $500,000...then plummet by as much as $600,000 -- is comparable to what is going to happen in suburban Australia.

That assumption, to quote my toddler Louie is “Ri-dic-orus”.

Finally, if you want a fly on the windscreen account of the sleazy world of the property seminar circus, buy Kate’s book. Goodness knows she needs the money.

The $18 Million Man

Hi Scott,

I'm 33, a consultant in relatively solid employment and have had some recent solid years of income, the immediate future looks bright. I have $500k in cash and would prefer to keep my cash liquid, out of the property market and in the sharemarket. Should I lump the entire amount into a mid strength fund at 12.5% to 15%? Or diversify and go 80% fund and 20% shares, oh a little bit of mojo too I guess? I am a natural risk taker!Thanks,

Ben

Hi Ben,

I've never heard an investment labelled 'midstrength'. Sounds like a beer.

All kidding aside, you shouldn't label yourself 'a natural risk taker' until you've watched the value of your investments fall by 50 per cent. Everyone sees themselves as a risk taker until they lose money. (Warren Buffett has watched the share price of his company, Berkshire Hathaway, decline by 50 per cent three times in his investing career. He never sold once).

Yes, you should have three months of living expenses in a Mojo account. Yes, you should also have a home. If you've got both of these under your belt, I'd be investing directly in shares: either via low-cost Listed Investment Companies, or building a portfolio of individual companies.

The bottom line is that you're young and rich -- and you'll end up richer: if you'd invested $500,000 in 1980, it would have grown to be worth $18 million today. History doesn't repeat -- but it sure does rhyme.

Scott

Baby Debts

Hi Barefoot,

We've just got married, and are looking to start our family quick smart (we're both 35). However, I'm concerned about servicing our current debts. We have 3 units valued at $400k, $550k and $800k respectively and owe $250k, $250k and $600k on each. We can do this at the moment, however when my wife has a baby her income stops and she is the main breadwinner. She earns $140k and I earn $90k p.a. Should we sell something? I'm completely overwhelmed!

Chris

Hi Chris,

Without seeing details of your household expenses, the income you receive from your investments, and the condition of your properties, it's hard to give a specific recommendation. However, if you're planning on supporting your family and being on hook for the upkeep of three investment properties, for an extended period -- on $90,000 -- that sounds...ambitious.

The good news is you're asking questions at the right time. You're moving into a new, very expensive stage of your life. Things won't go back to 'normal' for fifteen or twenty years.

So, sit down with your wife tonight and discuss your 'new normal': how many kids will you have? When does she see herself going back to work? How much will childcare eat into her wage? Would you consider being Mister Mum?

Dude, talk to your married mates, and ask them if they wished they'd had a conversation like this before they both found themselves up to their elbows in nappies. You're on the right track.

Scott

Mojo...No Go?

Hi Scott,

I have a query about building up an emergency fund of 3 months salary (Mojo). My partner and I earn roughly the same income. Do you recommend we both have the equivalent of 3 months salary in Mojo ($40k combined) or do you think it is ok to just have one 3 month salary amount ($20k) in Mojo to cover for either of us if needed.

Kath

Hi Kath,

It's not 'three months of salary', but 'three months of living expenses'.The idea behind having a Mojo account is that you only draw on it in an absolute emergency. Seeing a thermomix on sale is not emergency. Having your house burn to the ground with everything in it is an emergency. When you're forced to use your Mojo money, you spend it carefully, making every cent stretch until you're back to normal.

Now, if you and your partner are getting married, do the following: work out how much you could both live on for three months, then open an online savings account in joint names (nickname it Mojo), and start saving till you get to your joint goal.

If you're not planning on getting married, or sharing your finances, you'll need to save three months of living expenses on your own. Remember, a Mojo moment that could crop up is breaking up with your boyfriend.

Scott