Advice - next stage in our investment plan

[SMB091]

Hi all,

Long time reader, just joined today to get some advice on my next steps for our family's investment plan.

Here's our current scenario;

My wife and I are currently 28 years of age. We have a mortgage against our house but no other debts (no car loans, credit cards, etc etc). We have no kids but plan on starting to try towards the end of the year.

Household P&L

Joint family income (NET) = $135,182
Household expenses = $39,392
Repayments on loan = $28,008
Surplus = $67,782

*All above quoted figures are annual

Household BS

Family Home = $800,000
Home Loan = $441,000
Equity = $359,000
Cash / Offset = $30,000
Combined Super = $70,000
Net Assets = $409,000

Our current strategy has been simple - pay off the mortgage as quickly as possible (i.e. all surplus money at the end of the month goes onto the mortgage). Our current interest rate is 3.96%. Add-back tax (at a rate of 30%) our total return on paying back our mortgage is $5.66%.

The goal is to have our mortgage paid off by 40 years of age. This time frame takes into consideration having kids (therefore increasing our expenses) as well as loss of income while the wife is at home. Once the mortgage is paid off, I was planning on salary sacrificing the maximum I possibly can into our super to maximize the tax benefits of doing so, and then invest the remainder of our money into a managed fund. The plan would be for both of us to continue working to 55 years of age (another 15 years) and then slowly retire (I will continue to work though even if its a couple days a week).

Based on this, I anticipate to have roughly $1,016,730 in managed fund investments as well as roughly $416,000 in combined super.

Calculations for the above as follows

Current Surplus = $67,782
Remaining years of work post mortgage payoff = 15
Total surplus savings = $1,016,730

* Notes regarding the above calcs
- Do not factor in increase in expenses for kids
- Do not factor in CPI increases in wages or living expense
- Do not factor in pay rises through promotions at work
- Do not factor in return on investing funds over the 15 year saving period

My super contributions = $10,000
Wife's super contributions = $6,000
Total = $16,000
Total years available for super investment = 26
Total surplus balance = $416,000

* Notes regarding the above calcs
- Do not factor in increased super contributions
- Do not factor wife staying at home therefore not making contributions
- Do not factor in return on investing funds over the 26 year saving period

PLEASE NOTE; I understand my calculations have a lot of flaws and missing assumptions, however this is just very rough just to get some advice for now.

My questions are;

1. Based on our current scenario, is paying off the mortgage as the first priority the best thing to do? I look at it as a guaranteed return of 5.66% risk free. Should I be looking to invest and beat that?

2. Is our long term investment strategy a smart one? I am trying to keep things simple. The plan obviously does not factor in inheritance and stuff like that. I feel very guilty thinking with that mind set so prefer not to think about it.

3. What's missing? I'm looking for harsh criticism here (please do not criticise the calcs, I have already noted I have some assumptions missing - I have a more detailed model at home).

Appreciate any advice that can be provided.

SMB

 

[Zaxon]

Appreciate any advice that can be provided.

We can't give advice. What we can do is make generalized statements.

1. Based on our current scenario, is paying off the mortgage as the first priority the best thing to do? I look at it as a guaranteed return of 5.66% risk free. Should I be looking to invest and beat that?

Paying back the mortgage as a priority is a very good idea for most people. For the reasons you've stated, when you pay down a mortgage, it's essentially a risk free return. The second reason is to protect yourself should you become unemployed between jobs. The less debt you carry the better.

Using debt to invest can work, but only if you have a long track record of solid investment returns.

2. Is our long term investment strategy a smart one? I am trying to keep things simple.

Your plan seems well thought out. Many people take a similar approach.

I anticipate to have roughly $1,016,730 in managed fund investments

3. What's missing? I'm looking for harsh criticism here

Index funds outperform managed funds on average. So the modern trend of investing in low cost, broad based ETF index funds is a good one.

 

[willoneau]

Hi one thing I would like to add through experience, once kids come along (i have two ) the amount you start to spend on them , for them eg school trips , holidays, teeth and everything else under the sun adds up to a lot more than you think. While only two of you attack that mortgage as surplus will be a lot less down the track. Just my thoughts .

 

[HelloU]

concessional super tax rate is 15%
u say ur marginal is currently 30% .....(could be argued 15% to be better than 5.66% if u chase thru the numbers)
depends what u think of super .........
if keen, max concessional is $25K each ..... (u can do this urself without having a employer sacrifice arrangement - just using forms from the super mob)

 

[macca]

Firstly, congratulations for actually having a plan, that puts you a long way in front of many of your peers

Secondly, remember to have some fun while you are all young, it does not need to be expensive trips away, even a family picnic under a tree by the water will refresh the batteries and improve your family relationship

I agree that reducing the mortgage is a foolproof way of getting a good return but it may pay to be aware that should things turn to mush the banks may not allow you to redraw on your loan. They may also insist that you make repayments even though you are well in front on your repayments.

I have always favoured utilising the flexilibilty of a mortgage offset account, this achieves the exact same result by reducing the interest charges on your mortgage but gives you the flexibility of using the cash for any purpose at your own discretion.

An extra benefit is that should you need to upgrade your house to accommodate the quads that arrive unexpectedly, you can use the cash as a deposit and keep the old house as an investment property and the interest would then be tax deductible.

On a redrawn loan, that would not be the case as the redraw is being used to purchase your own home.

As far as the market is concerned, I agree with Warren Buffet, unless you have the time and enthusiasm to really dig deeply into stocks, you are far better off in the long term, simply investing in the index.

You may consider investing in more than one country but I would still stay with the index, a retail fund that can consistently beat the index is a very rare thing indeed.

Should you want to study the market there is no reason why you can't invest a small portion of your funds on anything you wish, hopefully developing your own style that you can build on over the years.

Your plan to get rich slowly has a far higher success rate than most people realise.

 

[SMB091]

Thanks for the feedback guys.

In terms of mortgage, I throw my net savings onto my mortgage and keep $30k in my offset account at all times. That equates to roughly 6 months of my expenses including mortgage repayment. I find the psychology of putting the money on my mortgage and watching the limit drop is better for me then having the money sit in my offset account where I may lose track of my savings pattern.

My biggest concern at the moment is the unknowns.

Example; we currently don't have kids and have no idea how much they will cost. So whilst our earnings capacity will increase as we get older and more experienced in our job, we will obviously incur more costs due to our children.

Hopefully our increased costs aren't perfectly offset by increased earning capacity however I don't think it'll work that easy!

 

[tech/a]

My 2 cents

Also look for ways to leverage your earning capacity
Either with a full or part time business
PAYE employees re limited to what their boss will pay them
So increase in income will only be in line with cost of living
Unless you are exceptional or an expert in an area.

Other than that your well on your way

 

[barney]

Thanks for the feedback guys. My biggest concern at the moment is the unknowns.
Example; we currently don't have kids and have no idea how much they will cost..... we will obviously incur more costs due to our children.

Ok, firstly I'm in a bit of a mood so forgive me if I appear a bit unreasonable ....

but Kids don't cost you anything … they enhance your life beyond anything we possibly deserve as parents, whether they are "good" kids or "bad" kids …..

As for the rest of your financial speculation …. nothing wrong with planning for your future and well done for thinking about it … but, in the end, I truly hope that you live long enough and "healthy" enough to reap the benefits of any "sacrifices" you need to implement to achieve security in your "older age".

Personally, after being around for a while, I would suggest a balance of work hard and save hard should definitely be balanced with "have fun and enjoy life" …..

and seriously don't worry about how much the kids cost …. the more they cost you, the more interesting life becomes

 

[SMB091]

Hi Barney,

My best mate had that mind set. He said "kids don't cost anything" and popped 2 kids out before he was 25.

He wanted a career change so joined the police force on their basic wage. His wife, the poor thing, was finishing her degree whilst trying to raise the kids. Only joined the work force last year and is also starting from the bottom. Fast forward 5 years, they haven't recovered. I've never seen someone as stressed as him. Living pay cheque to pay cheque, renting in bad areas cause they can't afford anything else. I can only imagine how much better off they'd be if they waited, and planned their lives out properly before starting a family. They wouldn't be millionaires, but they'd be better off then what they are now.

Sorry, but kids do cost money. And if I am going to bring life into this world, I'm going to do my best to plan for it to ensure I can give them the best possible life. Just popping out kids with no financial plan and with no awareness of how much they cost is a very irresponsible attitude in my opinion.

This is an opinion based game of course so I completely respect your views. Watching my best mate over the last 5 years has just convinced me it's not the way to go.

 

[tech/a]

Kids are VERY costly.
Many marriages suffer stress and breakup due to the financial pressures of kids
Single income which often results in single parents.

Kids are amazing it’s not their fault.
But they definitely drain many relationships.

 

[HelloU]

All species produce offspring. We are the only species that uses money .........

 

[PZ99]

Hi all,

Long time reader, just joined today to get some advice on my next steps for our family's investment plan.

Here's our current scenario;

My wife and I are currently 28 years of age. We have a mortgage against our house but no other debts (no car loans, credit cards, etc etc). We have no kids but plan on starting to try towards the end of the year.

Household P&L

Joint family income (NET) = $135,182
Household expenses = $39,392
Repayments on loan = $28,008
Surplus = $67,782

*All above quoted figures are annual

Household BS

Family Home = $800,000
Home Loan = $441,000
Equity = $359,000
Cash / Offset = $30,000
Combined Super = $70,000
Net Assets = $409,000

Our current strategy has been simple - pay off the mortgage as quickly as possible (i.e. all surplus money at the end of the month goes onto the mortgage). Our current interest rate is 3.96%. Add-back tax (at a rate of 30%) our total return on paying back our mortgage is $5.66%.

The goal is to have our mortgage paid off by 40 years of age. This time frame takes into consideration having kids (therefore increasing our expenses) as well as loss of income while the wife is at home. Once the mortgage is paid off, I was planning on salary sacrificing the maximum I possibly can into our super to maximize the tax benefits of doing so, and then invest the remainder of our money into a managed fund. The plan would be for both of us to continue working to 55 years of age (another 15 years) and then slowly retire (I will continue to work though even if its a couple days a week).

Based on this, I anticipate to have roughly $1,016,730 in managed fund investments as well as roughly $416,000 in combined super.

Calculations for the above as follows

Current Surplus = $67,782
Remaining years of work post mortgage payoff = 15
Total surplus savings = $1,016,730

* Notes regarding the above calcs
- Do not factor in increase in expenses for kids
- Do not factor in CPI increases in wages or living expense
- Do not factor in pay rises through promotions at work
- Do not factor in return on investing funds over the 15 year saving period

My super contributions = $10,000
Wife's super contributions = $6,000
Total = $16,000
Total years available for super investment = 26
Total surplus balance = $416,000

* Notes regarding the above calcs
- Do not factor in increased super contributions
- Do not factor wife staying at home therefore not making contributions
- Do not factor in return on investing funds over the 26 year saving period

PLEASE NOTE; I understand my calculations have a lot of flaws and missing assumptions, however this is just very rough just to get some advice for now.

My questions are;

1. Based on our current scenario, is paying off the mortgage as the first priority the best thing to do? I look at it as a guaranteed return of 5.66% risk free. Should I be looking to invest and beat that?

2. Is our long term investment strategy a smart one? I am trying to keep things simple. The plan obviously does not factor in inheritance and stuff like that. I feel very guilty thinking with that mind set so prefer not to think about it.

3. What's missing? I'm looking for harsh criticism here (please do not criticise the calcs, I have already noted I have some assumptions missing - I have a more detailed model at home).

Appreciate any advice that can be provided.

SMB

I reckon smash the loan down to $50k and keep your offset at $50k as well.
You then have $50k available as an instant pre approved loan at home loan interest rates.

If your income gets much higher then talk to your accountant. They might suggest you take an investment loan big enough to buy a property, pay off your own home and use the investment loan interest to reduce your taxable income.

But smashing the loan is the best return you can get at this point - especially if the economy goes down and LVR's are adjusted against you. People are going through that process right now.

 

[tech/a]

pay off your own home and use the investment loan interest to reduce your income.

Think you mean reduce interest!

The presumption is with pretty well all here that the OP cannot return better than Home loan interest rates on any form of investment.--5%
While its is sound advice for those who cant its pretty bland!

You have to think outside of the PAYE mentality.
Hourly rates and Very low returns on investment --kids--rising costs of living--life--will keep you firmly in struggle street.
You have to be able to multiply your earning capacity when your working and get yourself in a position where you can create
income from other sources than your labor. Make what you get work for you and work very hard!

 

[barney]

Hi Barney,
Sorry, but kids do cost money. And if I am going to bring life into this world, I'm going to do my best to plan for it to ensure I can give them the best possible life.
This is an opinion based game of course so I completely respect your views. Watching my best mate over the last 5 years has just convinced me it's not the way to go.

… All Good SMB. You and @tech/a are of course 100% correct that kids do cost financially. I was attempting to be philosophical about their true worth

As @HelloU may have been alluding to …. Its money (or lack thereof) which sets humans apart …..

Having plans and goals is important of course, and good on you for being responsible about your future. I have 3 kids (none were planned) and I'm not particularly wealthy by todays standards, but we have survived without too much stress even through the "dark ages" of my early trading losses

Bottom line, make your plans as best you can … but if your wife comes home next week and says I'm pregnant …. don't worry about …you'll be perfectly fine …. just do your best to stay healthy. Cheers and good luck in your journey.

 

[sptrawler]

I reckon smash the loan down to $50k and keep your offset at $50k as well.
You then have $50k available as an instant pre approved loan at home loan interest rates.

Tread carefully if you are going to use a PPR residual, as a deposit on an investment, the ATO may not see it as an investment loan when it comes to claiming interest. Just my opinion.

 

[PZ99]

Tread carefully if you are going to use a PPR residual, as a deposit on an investment, the ATO may not see it as an investment loan when it comes to claiming interest. Just my opinion.

Well I did preface my comments with seeking professional advice and that's what should be done.

 

[SMB091]

Sorry to keep this thread going but I wanted to get some more advice.

So I have just started reading the Intelligent Investor for the second time and it has sparked some ideas that I wanted to get some advice on.

For those who don't know, the whole philosophy of this book is to invest your money safely, focusing on minimising losses and think for the long term.

Rather then throwing all my money at my mortgage (per my original post, this yields a pre tax return of 5.66%) I am thinking of distributing some $$$s into a vanguard retail fund. I'm liking the sound of the Diversified High growth index fund. 5 year returns for this fund are ~8.7%.

I was thinking to put $30k per annum into the vanguard facility, and whatever left over savings we have onto our mortgage.

Thoughts on this approach?

The benefits of this is that if the average return on the vanguard facility remains higher then my home loan interest rate pre tax then it is economically beneficial to invest.

The risk is that the vanguard facility doesn't hit the return i am expecting, which would mean I was better of throwing the surplus funds at my mortgage.

Cannot think of anything else.

Appreciate any help!

 

[PZ99]

@SMB091 I would choose de-risking over anything else at this stage of the economic cycle.