Vital statistics

Karen and Martin
Karen, 33, and Martin, 34, used to spend their money on travel but now they need a long-term financial plan that fits with their short-term goal: to save so they can afford to start a family.
Occupations: Executive assistant and registered nurse, respectively.
Income: $55,000 and $40,000.
Debts: Home loan, $750 per month - $130,000 left to pay; car loan, $177 per month - $25,500 left to pay; investment loan, $130,000 left to pay ($741 rental return a month on this); credit cards - $600 each; and upfront HECS bill of $3000 a year.
Expenses: $2000 per month.
Investments: $45,000 managed fund and $5000 in shares, mainly Telstra.
Savings: $800.
Goal: To devise a long-term financial plan to ensure their future is secure.

Karen is an executive assistant and her husband, Martin, is a registered nurse, studying the final year of his architecture degree.

They want to have a child next year and are keen to develop a long-term plan for their finances. "We want to minimise our tax and ensure we're putting enough away for a comfortable retirement," Karen says.

Karen and Martin say they have "a pretty good balance" with their financial habits.

"We are pretty good savers when we have to be, which comes from a love of travelling," Karen says. "But now we're a bit older my husband has a fetish for classic chairs and I like to hit shops every now and again."

Generally, she says, Martin is better than her at saving. "Overall, though, we have the same approach, which makes things a bit easier."

All expenses are paid for by credit card, which is paid off on the due date as they have an offset home loan.

Karen says she has lived to a budget for about 10 years. "I think it is really important to have a realistic budget especially when you are trying to save for something," she says. "I don't always stick to it, but at least I know where my money is going.

"We want to start a family early next year and are trying to save some cash for when I take some time off, but, with everything we are trying to do, there is not a lot left over."

Anthony Picone, a financial planner with Macquarie Equities and a member of the Financial Planning Association, replies:

Karen and Martin need to review their assets and debts to decide whether they have an efficient structure in place. There are basically two types of debt: debt accruing interest that is not tax-deductible and debt accruing interest that is. So the interest cost of debt producing assessable income, such as the debt on your investment property, is tax-deductible, while the debt on your home, car and credit card is not.

Usually it is better to minimise your "non-deductible" debt. So Karen and Martin should think carefully about whether they should redeem their managed share fund or shares and pay the proceeds off their mortgage.

Based on current home loan interest rates of 6.5 per cent and your marginal tax rates of 42 per cent and 30 per cent respectively, you would need to generate earnings of approximately 9 per cent a year from your managed fund, which can't be guaranteed, to break even. But check how much capital gains tax you will be liable for before you sell the shares or managed fund.

You could also minimise tax while creating long-term wealth for retirement by using the equity in your home to borrow for other investments. You could considering taking out an equity loan against your property, borrowing $50,000 as an interest-only loan and investing this money in growth assets, such as Australian and international share funds. The annual interest expense of approximately $3250 (assuming an interest rate of 6.50 per cent) will be fully tax-deductible.

Then the required rate of return to break even will be about 4.3 per cent per annum, assuming CPI is 3 per cent, the interest on the loan is 6.5 per cent and a marginal tax rate of 42 per cent. Given your savings capacity and the fact that you will pay off your HECS debt this year, I'm confident you will be able to meet this expense comfortably.

The best preparation for starting a family is to reduce your mortgage, your non-tax-deductible debt, so you can redraw against your mortgage when Karen is not employed.

You should regularly reassess your financial strategy and it is recommended you seek professional financial advice.

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