Income: $55,000 a year.
Assets: House ($150,000) and superannuation ($30,000).
Expenses: $2000 a month.
Savings: $300 a month.
Debts: Mortgage $93,000.
Goals: To be debt-free; to own my home by 2008; to save to start investing in the sharemarket and to support my son at university; and to have enough super to retire at 60 or 65.
Caroline is recently separated and wants to pay off her debts and ensure she is set up for retirement. She wants to know how to achieve financial security and adequate superannuation. She is also interested in learning more about the stockmarket.
She has neglected her finances, she says. "However, I keep a budget. I record all spending. I check all bank statements and invoices. I pay off my credit card each month. I do not smoke, drink or gamble."
Caroline would like to budget for a holiday, and a new car in two or three years. Her main priority, though, is to look after her children.
"(I want to) support my 20 yearold daughter and 17 yearold son through the next few years of university and school life," she says.
Her lifestyle is frugal, she says.Caroline lives by herself in the family home. "I extended the mortgage to pay out my husband."
"I would like to move to Melbourne to live and work because both my children will no doubt end up in Melbourne," Caroline says. "However, the property values are so significantly different I think it may be out of the question."
Andrew Garrigan, a certified financial planner with Australian Financial Services and member of the Financial Planning Association, replies:
Caroline is going through a pretty tough time and now might be a good time to get some professional guidance.
Before you start saving, you need to understand how much you are spending. By working through a formal budget, you will be able to recognise how much you spend on fixed expenses (such as the mortgage, groceries and the like) and variable expenses (such as clothes, books, music and so on).
To repay the mortgage by 2008, you would need to make monthly repayments of about $1630. If you can't afford that, a monthly repayment of $1130 would repay the mortgage in about 10 years.
Eliminating nondeductible debt is important. Increasing your mortgage repayments will effectively provide you with an aftertax return equivalent to your mortgage interest rate. If your mortgage rate averages 8 per cent, any investment would need to return a guaranteed pretax rate of about 14 per cent for you to be better off with the investment. Investing in the sharemarket can provide the potential for excellent returns, but I would encourage you to concentrate on repaying your mortgage at this stage.
To save $8000 within 18 months, you would need to save $425 a month, assuming your savings were to earn 5 per cent. Alternatively, you could increase your mortgage repayments and redraw your savings as you needed them.
With 15 to 20 years until you retire, you have an opportunity to invest your super in "growth assets", including investments such as shares and property.
Remember, to get higher potential growth, you need to take a higher level of investment risk. You need to make sure you are comfortable with this.
Based on your current super fund balance, and with standard employer contributions, your superannuation would be worth about $200,000 by age 65 (in today's dollars).
For an income in retirement of about $25,000 lasting for a 25year period (without any government assistance), you will need a lump sum of $395,000.
If each year, you were to arrange for 10 per cent of your gross wage to be paid into super through a salarysacrifice arrangement with your employer (this will reduce your takehome pay by about $55 a week), you will improve your super balance significantly, to about $332,040 by age 65.
Your overall cash flow should improve once your children are more independent and the cost of education is no longer a factor. A move to Melbourne may be possible, although it will depend on location and the type of residence you live in.
There are a number of issues you need to consider and I would encourage you to discuss these with a financial planner.
Each week financial advisor Noel Whittaker answers your
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