Jack*
The Age
Monday July 22, 2002
JACK wants to get his finances in order. He hopes to pay off his credit card debt shortly. ``I will also pay double off (my) car loan, which is $660 a month," he says.
He plans to start saving between $750 and $1000 a month, paying $100 into a managed fund, $100 into a property securities fund and the remainder into ING as savings.
``These savings will fund a holiday in February next year to Canada as well as a deposit on an investment property," he says.
Jack wants to get an interestonly $150,000 loan, with the aim of negatively gearing, after he has made two $1000 deposits into the managed fund.
He is also keen to start salary sacrificing about 6 per cent of his salary into his super fund. ``I plan to purchase two lots of shares at $500 each," he says. ``I'm trying to sell (one of my cars, the one worth) $2300 to purchase the shares and pay off credit cards or car loan."
After purchasing an investment property, Jack wants to work overseas for a couple of years. His plan is to earn Canadian and United States dollars, possibly also some sterling, before returning to work for 10 more years.
Ultimately, Jack wants to buy a surf and snow shop and work there three days a week or so. He wants to spend the rest of his time surfing and snowboarding.
Ian Mein, a certified financial planner, an authorised representative of Winchcombe Carson Financial Planning, and a member of the Financial Planning Association, replies:
Ah to be young again! Jack, your current and planned spending doesn't leave much room to move but you seem to know what it takes to set goals and budget hard to achieve them. This is half the battle.
Get rid of the second car, which is only costing you money, and use the cash to pay off the credit card debt or reduce the loan on the other car if you have managed to pay the card off by the time you sell it.
Focus on clearing all personal debt, even if it means delaying your holiday.
Seven months doesn't sound like enough time to get a property deposit together and take off overseas. Don't forget about the other costs of a property purchase such as stamp duty, loan and legal costs, insurance and so on. This adds up to many thousands of dollars.
Also, interestonly lenders usually require a larger deposit. I suggest you find out as much as you can about your lending options and what's involved before getting in over your head.
There's no doubt property can be a great longterm investment. But, like all asset classes, property is cyclical. Do your homework carefully. Most commentators are wary of residential property after the recent boom.
Property can be inflexible and may not be the best option should things change or if you stay overseas for an extended period.
Consider a strategy of creating longterm wealth by investing in quality shares - both Australian and international shares. Shares and managed funds are a more flexible investment medium as you can turn your holdings into cash at relatively short notice.
The negative sentiment, particularly on the international scene, presents good buying opportunities for longerterm share investors.
Instalment gearing, if undertaken sensibly, is an effective wealthcreation strategy and is less risky than, say, margin lending. Instalment gearing is where the regular amount you invest is matched with a loaned amount, effectively doubling the amount you have available to invest.
Why not start salary sacrificing the extra 6 per cent into super now, with a view to building it up later. Fifteen per cent of your gross salary (that is your employer's 9 per cent and your 6 per cent) going into super will probably be your best longterm investment because of time and compound returns.
You will also save tax because super contributions are taxed at 15 per cent as opposed to your marginal tax rate of 31.5 per cent, including the Medicare levy.
I recommend you seek advice from a certified financial planner. A skilled adviser can canvas all the available options, set you on the right path and help you keep your plans on track.
Jack, 23, is a communications engineer with a credit card debt and a car loan. He wants to get his finances in order, travel and eventually own a surf and ski shop.
Income: $41,000 a year.
Savings: $200.
Expenses: Rent, $230 a month; utilities, $70 a month; petrol, $150 a month; groceries, $150 a month; insurance (health and car), $120 a month; car repayments, $330 a month; ING savings, $100 a month.
Liabilities: Credit card debt, $2500; two cars, worth $2300 and $11,000.
Assets: Super, $3000.
* Not his real name.
© 2002 The Age
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