Overwhelmed by the mortgage, midgets and marriage

Question: My name is Jane and I am so far in the red that I’m starting to look like Julia Gillard.

My husband and I bought our first home two years ago when we were first married. At the time we were both working, but we have since had a child and survive on only one income. We are struggling to get by, using credit cards to pay the basics (food and bills), to the point that we have $12,000 on cards. We both feel overwhelmed. What can you suggest?

Jane

SCOTT: It’s a tough situation you’re in, and not unlike many young families today when two incomes become one, which then has to feed three. The key to turning your financial life around is to take decisive action – and quickly.

Burying your head in the sand and spending money on credit cards buys you a seat on the bankrupt express, and by the sounds of things you’re nearing the last stop.

So, the first step to getting out of your hole is simple: stop digging. The merry-go-round of debt-induced misery won’t stop until you make a firm decision to stop spending money you don’t have.

Sure it sounds like a simple solution, but that’s really the only choice anyone has.

The next step is to see a community-based financial counsellor. You can find one in your area by calling the Australian Securities and Investments Commission on 1300 300 630 or www.fido.asic.gov.au (and do a search under financial counsellor). Do not go to a mortgage broker, or any other commercial debt consolidator or administrator. Most of these guys are looking out for their best interests, not yours.

The financial counsellor will look through your situation and provide you with some options. Then it’s up to you to accept some tough love and take action.

Refinancing is all too often promoted as a miracle method, but in reality it’s usually a Bandaid solution. Nothing will change until you take control of your situation. So look at your budget (you do have one, don’t you?) and allocate every spare cent to paying off your debt. Make the mental shift from spender to a saver. It’s well known that most problems stem from arguments over money (well that and the monogamy thing). The most important reason to take control of your finances is to ensure that you protect your most valuable asset you have – your family.

Q: My name is Jill and I want to teach my kids about money because I don’t want them to fall into the same traps that I did. What can you suggest?

– Jill

SCOTT: The number one way to teach your kids good money management skills is by having your own money sorted. Kids learn more by seeing than by telling. It’s sometimes thought of as a taboo to talk to your kids about money, but it’s often the best way to make it real for them and instil lifelong lessons.

So, other than leading by example and including your child in some of your financial decision-making when they reach an appropriate level of maturity, I would suggest using an allowance as a tool to teach financial responsibility.

Reinforce that it’s not a handout, but a way to teach them how to deal with money. Get them to allocate their money into different categories like spending, saving, investing, and giving back (this works regardless if you’re giving them $5 a week or $50).

QI’ve heard you talk about Warren Buffett’s company Berkshire Hathaway. I mentioned it to a financial planner and he said that they’re $US100,000 a share and that the risk is that Buffett will someday retire (or die). He suggested that I’d be better off in a retail managed fund. What do you think? If I do invest how do I go about it?

– Sam

SCOTT: Firstly, for my friends at ASIC I will disclose that I personally own shares in Berkshire Hathaway. My reason for this is quite simple:

I want to get the highest possible returns for my money, so I have chosen to employ the most successful investor the world has ever seen to do the investing.

Ten grand invested in Berkshire in the 1950s would be worth $50 million today. That averages out to a compound annual return of 21.5 per cent a year for 40 years. I also don’t like too much risk, so Buffett’s guiding golden rule of don’t lose money sits well with me.

While it’s well known in the industry that most professional fund managers don’t invest their big (shareholder-given) bonuses in the funds they run, Buffett has practically 99 per cent of his wealth invested in Berkshire, so where his personal money goes so does mine.

Now let’s look at some risks your financial planner has raised. While it’s true Buffett will be blowing out 77 candles next year, by his own admission he’s still tap-dancing to work at an age where most of his mates work up a sweat doing the crossword each day.

There will come a time for him to retire, and in that event the next person I want managing my money is the guy who has sat alongside and learned from him for the past 30 years.

Yet I reckon the real reason your financial planner doesn’t want you to invest in Berkshire Hathaway is that he doesn’t get a trailing commission.

As a means of comparison, in Berkshire’s 1996 annual report the company stated that the running costs for the company’s head office (that makes all the investing decisions) stood at 0.2 per cent of net assets, or about 1000 per cent cheaper than the 2 per cent that the average managed fund charges for their expertise to invest your hard-earned (which includes a juicy kickback each year to your financial planner).

Your financial planner is right, Berkshire Hathaway does trade at $US120,000 a share. However, there are also class B shares which represent one-thirtieth of the value and trade around $US84 a share (As at 20/03/11). These can be bought quite simply through CommSec for about $US65 a trade.

Q: I’m from a public relations firm and our major client is XYZ Bank. We love your column the Barefoot Investor and read it each week. The reason for writing is that our client has just launched a new funky credit card aimed at the youth market, which we thought you would want to write about. Attached is a press release.

– Tony

SCOTT: It seems you’re an enthusiastic follower of my column, although perhaps not a close reader. Thanks for getting in contact. I’d love to alert my readers to this “funky” product. Send me the details and I’ll definitely write about it