Occupations: Full-time mother and scientist.
Annual incomes: Nil and $90,000.
Debts: Mortgage of $165,000.
Expenses: Approximately $4000 a month, health insurance, home security, rates and utilities.
Savings: $10,000.
Goals: To eliminate debt and save for the future; for Tony to retire at 60; and to put the children through university.
* Not their real names.
Samantha and Tony are married. They have a one-year-old child and hope to have another in the next year or two. Samantha is not planning to return to work until the children are at school. Before she had a child, Samantha was earning $35,000 a year.
The couple's short-term goals are to build up savings of around $30,000 as a safety buffer for unexpected expenses or emergencies. They are putting all their savings into an offset account and want to know if this the best way to use their money.
"We would also like to have a one-week ski trip in Australia a year, which costs approximately $3000. So far, we have managed a ski trip almost every year," Samantha says.
They are keen to find out about the risks of borrowing money to invest in shares and property. "We have a strict budget we try to stick to each month. Tony always takes a homemade lunch to work, we hardly ever eat dinner out." Tony says: "Money approaches me and departs her." Samantha says: "I feel rich and he feels poor."
She says: "It would be nice to eat out once a month but that needs to include the cost of a babysitter, which is $10 an hour.
"Because we spent almost all our savings on building a new house three years ago, we had nothing left for a garden." Samantha wants to plant trees so that Max can play in a shaded yard.
Tony often rides to work. Samantha and Max go to garage sales every Saturday morning and Samantha buys pieces of furniture and refurbishes them.
"We have a frozen pizza and rent a video every Friday night. We look forward to Friday all week," she says. "Our biggest expenses are health insurance, house insurance, running two cars and food."
Christopher Mobbs, a certified financial planner, an authorised representative for AMP Financial Planning, a principal of Comprehensive Financial Solutions Pty Ltd, and a member of the Financial Planning Association, replies:
Congratulations on accomplishing the most difficult aspect of a sound financial planning strategy - completing a detailed budget and sticking to it.
Your strategy of accumulating savings in your home-loan offset account is sound - especially in the uncertain economic climate. Keep saving until you build up your desired emergency fund.
One aspect of your planning you should think about, if you have not already, is getting income protection insurance for Tony because he is the family income earner. Without Tony's income your family's personal and financial needs, goals and objectives will not be met.
For Tony to retire at 60, I estimate you will need to accumulate approximately $1.25 million so that you can each retire on an income of approximately $35,000 per annum in today's dollars. I'm assuming you will have paid off debts and that there will be enough capital to provide income until Tony is 95.
You asked about borrowing money to invest in shares or property, known as gearing. Careful use of gearing can be an effective strategy to accelerate wealth accumulation. In a falling market, gearing can also give you much greater exposure to potential loss. Before you consider gearing you need to be confident that you can afford to comfortably service the borrowings and afford an increase in the cost of your loan or a decrease in the income from your investment.
If you would like a Money Makeover, send your details, including a daytime telephone number, to: Money Manager, The Age, GPO Box 257C, City Mail Processing Centre, Victoria 8001, or email: money@theage.com.au
