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

The Death Cult Date

Scott,

I am reading a lot about an imminent crash on the US stock market dated to occur on 28 May due to the debt level of the US economy. As a self-funded retiree, you can imagine my concern. Is there anything I should do? I am considering moving my money from its current investment strategies in my superannuation fund to cash. The 2008 crash cost me 40 percent of my investment.

Reg

Hi Reg,

Sorry I didn’t get back to you earlier I was busy in my bunker, stacking baked beans and ‘doomsday prepping’ for the global financial meltdown of 28th of MayWhich was (strangely) a Saturday, when the the market was closed. But if we take a slightly wider view, say Friday to Monday, the market rose 0.3 per cent. What a ride!

Legendary billionaire investor Charlie Munger explains it this way: “People have always had this craving to have someone tell them the future. Long ago, kings would hire people to read sheep guts. Listening to today’s forecasters is just as crazy as when the king hired the guy to look at the sheep guts.”

Seriously, if you trace back the doom and gloom headlines, they almost always lead to a sales page on the interwebs to purchase an investment newsletter. Fear is a fantastic marketing tool, and the more they scare people, they more they shell out. Unsubscribe from this rubbish.

Scott

The Forty Thousand Dollar Phone Call

“NOW it’s mortgage brokers facing digital disruption in the third wave of property finance.”

I read that headline earlier this week in much the same way that my three-year-old reads his bedtime stories.

By guessing.

“Mortgage brokers facing digital disruption” … hmmm, OK, so maybe it’s like Uber for home loans?

“The third wave of property finance” … OK, nope. I have absolutely no freaking idea what that means.

But it’s my job to understand, so I kept reading.

Turns out the article was about a new mortgage broking app called Uno, which allows the public to broker their own deals.

It’s the creation of a clever bloke named Vincent Turner, who, some years ago, actually developed the software that 90 per cent of Australia’s banks and brokers use.

Interesting.

Now he’s turning the tables on the industry by “providing home loan customers with the same screens that are used by mortgage brokers”.

“We are establishing the third major wave in the property finance industry: consumer-brokered home loans.”

Ahh, so that’s where the third wave analogy comes from.

“At Uno, we don’t like to think of ourselves as a mortgage broker. We don’t have a sales commission structure.”

Very interesting.

After all, the $1.3 trillion home loan market does need a bloody good shake-up.

About half of all home loans are set up through mortgage brokers.

The banks pay them a collective $2 billion a year in upfront commissions, as well as ongoing kickbacks for the life of the loan (which is why some brokers sign you up to a three-year fixed loan — it also fixes in their commissions).

The government is worried that conflicted commissions result in bad advice.

After all, under the commission structure, the more you borrow the more they make.

So I called Vince at Uno, to talk about the “third wave mortgage revolution”.

He had his pitch face on: “Look at any other vertical: real estate, jobs, cars … there’s been a disruptive, revolutionary platform that consumers embraced.

“ That hasn’t happened with mortgage brokers. The home loan market is ripe for disruption … and we intend to own that category.

“Once consumers understand that they’re getting a better outcome, you don’t need to advertise. People just flock to it.”

Flocking hell.

It all sounded very “fintech” to me. Very “our office has a ping pong table and the blokes who work here have beards and wear long pants without socks”.

When it comes to finance, you need to bypass the buzzwords and follow the money.

Barefoot: “So, what happens to all the kickbacks the banks pay you for lining up loans, cobber?”

Vince: “All the money goes back into the platform … to enhance the user experience.”

Barefoot: “What does that even mean? Oh! You’re trousering the commission’s, right?”

Vince: “Well, yes.”

Barefoot: “Dude, you’re about as revolutionary to the mortgage market as the Kia Rio is to the luxury car market.”

And there you have it. Strip away the fancy technology and it’s the same old flog.

Yes, I’m grumpy. And, no, my advice doesn’t change.

If you’re getting a new loan, you should look at the smaller, online lenders like UBank, which for years has consistently offered one of the cheapest no-frills loans for people buying with a 20 per cent deposit (and that should be everyone, in my opinion). They don’t pay commissions because they’ve got Aldi-like pricing, 3.74 per cent at the moment.

There are other lenders, that occasionally offer sweet rates to win new business.

If you want to go with one of them, you should go through a cashback broker, who will rebate the trailing commission they receive (but keep the upfront).

Do this over the life of your home loan and it can save you upwards of $40,000.

Here’s the thing: on a $500,000 loan, the banks pay brokers $3500 upfront and around $1500 a year to get your business. And that’s your leverage right there. That’s how much it costs the bank to replace you.

So, if you’re refinancing, the simplest thing you can do is to call your bank and put the hard word on them for a better deal. I’ve been saying this for years — and swear on my little fox terrier’s grave, it works.

Not a week goes by that someone, somewhere, doesn’t email, tweet or Facebook me telling me that they’ve rung their bank, bluffed that they’ve been offered a cheaper rate (usually quoting UBank’s rate) and saved themselves thousands.

Uno you should do it. Go on. And shoot me an email when you get a better deal.

Tread Your Own Path!

Reminder: I first wrote about this years ago and highlighted the low fees. Today there are better bank accounts on offer. How do I know? Because my readers constantly email me about them! So before you do anything, google the best accounts on offer now.

So a Little Old Lady Sent Me a $50 Note...

I opened the handwritten letter and a $50 note fell out.

No, it wasn’t a letter from my grandmother. But it was written by someone’s grandmother.

Truth is, I get a lot of snail-mail from old folks who read my column.

Often they include money to pay me for my time … because they’re old-school, and they don’t expect to get something for nothing (though I always send the money back).

They also do it because they’re afraid and they need some advice.

As you read what happened next, think about an elderly person in your life that you could help.

The Frozen Fund

Barefoot: “Hello! It’s Scott Pape ... the Barefoot Investor... from the newspaper.”

Mrs Jones: “I don’t want to buy anything!”

Barefoot: “Mrs Jones, you are mistaking me for an Indian telephone scammer. You wrote me a letter… about your money.”Mrs Jones: “Oh, yes!”

Seriously, most of my calls to elderly readers begin this way.Along with the $50 note, Mrs Jones (not her real name) sent me a copy of her latest statement from her financial advisor. It showed that she had 38,000 units in the ANZ OnePath Income Trust, with a dollar value of “zero”.

What happened?

She had no idea. That’s why she wrote to me.

It turns out, at the height of the GFC, when the government made the decision to guarantee bank deposits, most income funds, including Mrs Jones’s ANZ fund, were hit with a stampede of investors wanting to get their money out.

So the managers ‘froze’ the fund -- and stopped their investors from taking their money out so they didn’t have to liquidate their fund at firesale prices.

But here’s a key point: while the ANZ fund managers took the drastic, emergency action of freezing their fund ... they did not freeze their fees. Which, according to a spokesperson from the ANZ bank, amounted to 1.75 per cent a year… which includes the trailing commissions paid to the financial planners who put their clients into the fund.

Lock the money up -- slowly drip it out over years -- and continue flogging them with fees … Kerching!

Getting her money back

Now you may be wondering, dear reader, how long these guys can get away with such behaviour.

Well, eight years, and a whole lot of worry later, the last of poor old Mrs Jones’ frozen fund is still … err … thawing.

Drip. Drip. Drip.

I contacted ANZ on Mrs Jones behalf, and was told that the bank “made the decision to stop charging fees on the fund last year”. Which strangely -- coincided with 95 per cent of the fund (eventually) being paid out.

They also assured me that they’d put their best people on “making sure Mrs Jones receives her final 5 per cent, pronto”. (And that -- strangely -- coincided with a phone call from me.)

Mrs Jones and Me

So I called her back:

Barefoot: “Good news, Mrs Jones, I’m told you’ll get the last of your money.”

Mrs Jones: “That’s a relief. I wasn’t sure whether I was right or wrong.”

Barefoot: “Well, you were definitely in the right, and they were definitely in the wrong.”

Mrs Jones: “I knew you’d be able to do it”.

Barefoot: “Why?”

Mrs Jones: “Because you’re from the Mallee, like me!”

Barefoot: “Thanks Mrs Jones … and I’ll be sending you back your $50”.

Mrs Jones: “Well, when you’re next in town, be sure to knock on my door and we’ll have a cup of tea. And I’ll make you some scones”.

Deal!

Tread your own path!

I’m a Financial Leper

Hi Scott,

On holidays recently I went to the reception desk at the hotel and was asked for my credit card. I explained to the guy on duty that we do not have one (being Barefooters, we willingly cut it up and now get by without one). So I had to pay the security deposit for the room in cash. The guy gave me a semi-stern lecture about the importance of having a credit card in the modern world. It made me feel a bit like a ‘financial leper’.

Vince

Hi Vince,

Like you, I don’t have a credit card in my pocket. Unlike you, I see it as a source of pride. It’s the ultimate anti-status symbol. I certainly don’t view myself as a leper -- but a leader. If you’ve got kids, you can bet they’ve noticed (and if they haven’t, tell them: “Dad pays cash”). Finally, as for having to hand over your own cash (which you can easily do via a debit card) to secure a room or a car… well, I think that’s a very first world problem to have.

Scott

Bonding With My Kids

Hi Scott,

In a previous article called ‘Time to Think of the Kids’, you outlined an investment bond strategy which would work well for our two kids, who are four and six. After researching it I'm not sure how to go about investing in bonds. Are you able to point me in the right direction? Also, do you think this is still a sound approach given the current low interest rates? Thanks for your help and your articles, which are the only financial information my wife pays attention to!

Tony

Hi Tony,

Excellent question. The word ‘bond’ throws people off. Your ‘investment bond’ doesn’t actually have to invest in bonds -- and in fact, given it’s a long-term investment for your kid, I wouldn’t advise it. Instead, you can choose to make the underlying holding a managed portfolio of shares. Lifeplan has a range of options that since 2008 have returned around 8 per cent for international shares and 10 per cent for Aussie shares.

Scott

D.I.Y. or R.I.P.O.F.F?

Hi Scott,

What is a reasonable ongoing management fee for invested funds? My wife and I have just over $1 million invested in our self managed superannuation fund. We paid $13,200 in management fees over the past 12 months, which works out at 1.21 percent. If published, please do not use my real name.

Wendy

Hi ‘Wendy’

First up, I always change people’s names.

Second, I’d argue that you don’t actually have a ‘self managed super fund’ ... you have a ‘financial planner managed fund’. There’s nothing ‘DIY’ about handing over $13,200 in fees a year.

For comparison, the super fund that I recommend to my friends and family charges 0.03 percent a year (with a mixture of ASX 300 shares, international shares and fixed interest). It also provides the opportunity to buy individual shares within the super fund (for an extra $280 a year plus $20 a trade).

In your case that would bring down your fees from $13,200 to about $400 a year. If you don’t have property in your fund (which I don’t recommend unless you’re a small businessperson), I reckon that’s a no-risk, guaranteed way to boost your super by at least $100k over the next 10 years.

Scott

The Ungrateful Son

Hi Scott,

My dad is offering me $25k worth of AFI shares to put in my portfolio. Sounds good but I was wondering what effects this would have on my tax. I take home $700 a week after tax.Thanks,

Nicholas

Nicholas,

Hang on a minute.

Your old man is giving you $25k in AFIC shares and you’re worried about your tax position!?

Let me explain how it works:

Let’s say AFIC makes $1 of profit, and pays 30 cents in tax. The remaining 70 cents in a dividend. When you do your tax return, you’ll declare 70 cents of income, plus 30 cents in tax credits for what AFIC have already paid. You’ll pay tax on the $1 at your marginal rate of 32.5 cent in the dollar. In other words, you’ll still get a post-tax dividend of 67.5 cents.

And if you want the benefit of compound interest, you should tick and sign the Dividend Reinvestment Plan letter that will be sent to you in the mail, which will automatically recycle your dividends into more AFIC shares, generally at a discount to the market price and without incurring brokerage.

In short, I’d suggest that the next time you see your father say something like this: “Dad have you been working out? Because you look amazing!” Then wash his car. Then thank him for giving you a financial headstart that most kids never get.

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.

The Dairy Farmer

Hi Scott,

I’m a dairy farmer and feel I have been let down by our co-operative, Murray Goulburn. I now have a debt to them that’s been backdated. Should I pay it back or leave and not have to pay it back … you see, the debt stays with the factory and not the farmer.

Paul

Hi Paul,

You’re dead right.As I understand it, it’s not so much a debt, as it is a clawback (via accepting lower milk prices) over the next three years. For most dairy farmers that means producing milk at break-even at best, or a loss at worst.

So if you look at the situation rationally, you could walk away and avoid paying anything back, and avoid the next three years of painfully lower prices. You could sell off your cows, lease out your land (if you can), and get a job in town (if you can). And ride it out.

Yes, that’s a lot of ‘ifs’ and ‘coulds’. But as a hard working farmer, you’d be used to that. You can’t control the milk price, you can’t control the interest rate or terms the bank imposes on you, and you can’t control the weather. The only thing you can control is earning other sources of farming (and non-farming) income.

The $64 million question is, what will the milk solids price do?

No one knows, not even a bunch of overpaid corporate spivs sitting in Murray Goulburn HQ.

Scott

The Case of the Pushy Parents

Hi Scott,

At 24, I am finally ready to move out of home for the first time. I have approx $60k in savings and I earn $38k. I plan to rent first to ensure I can live successfully with my partner, but my parents think I should buy straightaway. I do not feel I have the financial resources to help me get a loan, let alone repay it. I would want to buy in my preferred areas in Perth, especially if living alone. What options do I have?

Chelsea

Hi Chelsea,

Tell your parents to back off. You’ve done well to save $60k at such a young age. Yet on your income you don’t have enough money to purchase a home, even if you were going to take on a renter. The upfront costs of buying would eat up most of your savings.

Here’s a more realistic challenge that I followed myself when I was your age, and on your income level. Get used to living off $38k a year and put all your efforts into increasing your income over the next six years. And bank the difference! Achieve that, and you’ll have established the financial habits that will mean you’ll never have to worry about money again.

With habits like that, buying a house will be easy.

Scott

Should I Buy My Office in My SMSF?

Hi Scott

I just read your column on property investment and it got me thinking about commercial property. You see, I hate paying rent and outgoings to run my psychology practice, so I am thinking about buying something instead. I am not sure if this is a good idea and would love to hear your thoughts.Kind regards

Kellie

Hi Kellie,

Great question. It can really make sense if your premises is a big part of the value of your business (like a restaurant or a retail store). If so, buying will give you more control over your business, and allow you to build up another asset. And if you buy it within your SMSF, all the lease payments will be investment earnings to your fund and so will be taxed at 15 percent. Capital gains tax (CGT) will be more favourable if you sell it when you’re retired.

That being said, buying in your SMSF is expensive and time-consuming, and can lead to your fund being too concentrated on one asset -- so you need to buy well! If you’re a small or solo practitioner, it may be better to screw down a shared rental in a clinic and focus on investing your profits elsewhere.

Scott