Claire Mackay chats with David and Libby Koch about all things financial.
Transcript of interview
David Koch: Hi, gang. Welcome to our first Ask the Expert session. And hey, congratulations for finishing week one of the Money Makeover. Have you found it useful? Well, hope so because you’ve actually laid a great foundation for the next three weeks. What have we looked at? Setting financial goals, how to do your budgeting, track your expenses, boosting your career by looking at your CV, how to earn other bits of income to help balance the family budget. So we’ve covered a lot in this week, a lot of the fundamentals on which we’re going to build for the next three weeks.
David Koch: Remember, Banking and Data is next week. So that’s gonna be a cracking week. But first up, let’s start answering your questions from this week. And I love the way, how you’re swapping your ideas through the forums as well. Let’s keep that up and all learn from each other. Now, delighted to welcome as our first expert, Claire Mackay, from Quantum Financial. Claire is an award winning financial planner and has been and seen through it all. So, it’s great to have her aboard. Claire, good to see you again. And of course, she who must be obeyed, Lib, who’s the financial guru about our financial relationship. How long you been looking after our family dough for? 37 years?
Libby Koch: Oh, pretty well the whole time, 37 years we’ve been married.
David Koch: Well, that’s a lot.
Libby Koch: It’s gone like a flash, of course.
David Koch: I still get my allowance every week.
Libby Koch: You don’t even stick to it.
David Koch: Let’s get underway guys. We’ve got a few questions to go through. First of all, should we open a separate savings account or are we better off leaving the money in a mortgage offset account? This way, we’re not earning interest and increasing our income, instead we’re reducing the interest paid on our mortgage. This is, the argument is a mortgage offset account better than a savings account? Claire?
Independent financial planner Claire Mackay: Well, if you’re getting about 3% in savings and you paid four and a half, 5% on your mortgage, the math is pretty simple. It’s better to use your offset.
David Koch: Yep, exactly. Just do the math. Same one here. “Hi, Claire. My wife and I have a mortgage, one child, and another on the way. For around eight years now, we’ve simply been putting any excess cash into our mortgage or offset account. Do we just continue paying off the mortgage as fast as we can? Or look at other investments?” There aren’t that many investments that actually return you, what, 5% or 6% a year.
Independent financial planner Claire Mackay: Guaranteed. Guaranteed.
Libby Koch: That’s the trick, isn’t it? Guaranteed.
Independent financial planner Claire Mackay: You know your mortgage is what it is and for this family, working hard to pay down that mortgage as quickly as possible is the best advice.
David Koch: Yep, yep. And Lib, that’s what we’ve always done, isn’t it?
Libby Koch: Definitely. We’ve just planned any spare cash so that we’ve been able to accumulate into the mortgage, knowing that you’re not gonna get the same interest.
David Koch: Yup. And also, your mortgage because you can have drawdowns and offsets, some things like that. It’s also a good place for your emergency fund too, isn’t it? That’s the best place for it, rather than putting it in a separate account. But you’ve gotta have the discipline. “My husband runs a local post office, while I work three days a week hair dressing from home. My issue, I find it hard to ever save as I feel my hair dressing money is grocery money and for pleasure. And most of the time, everything goes out of the post office to pay the bills. So, I find it hard to write up a budget. My husband is definitely the money man. I’m the spender. I’ve never been great with money. I’m eager to learn as I’ve joined up to learn more, but personally, I’m embarrassed that at my age I don’t have a lot for myself.” It’s a really vulnerable position, Lib.
Libby Koch: Exactly.
David Koch: And we’ve got lots of friends in this exact same position, don’t we?
Libby Koch: Yeah. The embarrassment is what she’s feeling. It’s not necessarily what anybody else would be thinking of her. So, I think she’s making the first step by saying, “I actually want to learn more.” So, the best way is just to think, “Well, that’s the positive thought here.” Put the embarrassment aside because there’s a lot of other people that are just burying their heads in the sand and not even making that first step. And so, then she can go on and make a budget. And I think if she actually makes a family budget, she then might not be such a spendthrift and get more excitement in seeing the saving grow and thinking, “I’m actually helping my husband pay the major bills, like the mortgage.” And would feel better about herself when she thinks, “Well, I don’t… Shouldn’t spend as much.” She’s obviously thinking that way so she’ll actually get more steam.
David Koch: Yeah. And in week four, we look at how to have a better financial relationship with your partner because this one’s a classic case. You should be talking more with each other about your money. And you being across what he’s doing and him being across more what you’re doing. Now this business of having one partner take control of all the money, I think is incredibly dangerous. It’s usually the bloke that doesn’t. It means you’re incredibly vulnerable. And we give you a few tips on how to make that work a whole lot better if your husband says, “Don’t you trust me?” What should you know?
Independent financial planner Claire Mackay: It’s not about trust.
David Koch: Not a matter of trust.
Independent financial planner Claire Mackay: It’s not about trust.
David Koch: It’s protecting yourself.
Independent financial planner Claire Mackay: It’s also what happens if he gets sick? What happens if he can’t and he’s for whatever reason…
David Koch: Gets hit by a bus, or…
Independent financial planner Claire Mackay: Exactly.
Libby Koch: But…
Independent financial planner Claire Mackay: So as you said Lib, really saying, “You know what? Forget the embarrassment. Start learning. It’s never too late to learn.” It’s never too late to learn. It’s never too late to learn great habits.
Independent financial planner Claire Mackay: Exactly. And another aspect that I’ve recently come across. In this same scenario with a husband thinking, “Oh, it’s okay. I understand the money. I’m happy to do it. I won’t bother telling my wife the real situation because it might just upset her.” And it actually created a lot of stress, because things haven’t gone so well. So, he’s left it so long and he thinks, “Well, I can’t start talking about money now. It’ll be just way to much to hit her with.” And so, he’s carrying all that stress because the finances sort of have gone backwards and where do you start?
David Koch: That affects their relationship.
Libby Koch: Terribly. Terribly. So you’re setting yourself up for trouble down the track.
David Koch: Both sides. The key is just building a strong financial relationship together and each sharing… Yes, you can allocate tasks to each other… But you gotta share everything. What I always say is, once a month, it’s only once a month, sit down together for 15 minutes and just talk about money. Not pay bills. Not say, “Oh, we spent too much there, we spent too much there.” Just sit down, and say, “Okay, what are our goals and dreams about money? How are we going? How do we have to adjust our behaviour?” All that sort of stuff. Glass of wine and just talk about it as a couple. Rarely do couples sit down and talk about money, financial.
Libby Koch: Funny, the most important message we could actually give to people or I would hope that they would get from doing the makeover. When you’re in a partnership, it’s all about sharing that load and creating understanding.
David Koch: Yup. Alright, let’s move on. As I said, week four, we’ve got a special day looking at relationships. Next question, “My husband and I had three children, private schools… ” [chuckle] For one year we had four. I know your pain!
Libby Koch: You know what that’s like!
David Koch: “I think there are areas we could save money.” Yup, we went through that… “I believe we’re over-insured and a lot of money is lost here. Two super funds each. Should we be rolling the old super into the new one to save fees?” Easy answer, Claire?
Independent financial planner Claire Mackay: Yes, once you know what you’re losing, moving them.
David Koch: Yep. Alright, yeah. Make sure you know what the exit fees are, but…
Libby Koch: That’s a good point.
David Koch: Also, we had death and disablement benefits through super and we also had private life and trauma cover. What’s a good gauge on how much is enough insurance?
Independent financial planner Claire Mackay: Well, again, you can pay for the Rolls Royce of insurance cover but it’s going to cost you in your budget.
David Koch: Yep.
Independent financial planner Claire Mackay: So, to understand how much insurance you need, you need to know how much debt you’ve got, what your living expenses are, and if someone can’t work, what do you need to pay for. So, you’ve obviously got three private school fees and, you know, all the other things that, the living costs. But, you don’t need to have more than enough. You don’t need to be doubling up and you don’t need to necessarily have the Rolls Royce.
David Koch: Yep.
Independent financial planner Claire Mackay: Because it’s a Plan B you pray you never have to use to alleviate the concerns.
David Koch: So, first step would be to look at what your super fund insurance covers you.
Independent financial planner Claire Mackay: And how much it costs.
David Koch: And then see if you need the top up or whether you can do it through your super fund for cheaper.
Independent financial planner Claire Mackay: Yeah, because generally, insurance through your super fund for life and TPD will be cheaper than outside.
David Koch: Yup. And we went through that, Claire.
Libby Koch: Exactly. That’s what we recently did and it was a terrific thing. It was initiated by our banker, suggested that I look at it, and it has not only saved us a lot of money on our premiums but because I’m paying the life insurance as an annual fee from the super fund, that’s created a lot of monthly extra income, which basically we could then put into our mortgage. So, it’s actually created more for us by just looking at how you organize where it’s coming from.
David Koch: So, your banker or your super fund will advise you but that’s a starting point. Another one, “I was made redundant for 20 years of loyal service almost 12 months ago, unsure how to commence the first step of documenting my spending with no wage or financial assistance at the moment. I’m doing some casual work, but it’s difficult to track, given that I only cover some food and the odd bill. I’m hoping to be employed more permanently later. I’m 52, single, life’s difficult. Can you please give me some guidelines on my current situation?” That is tough because you do feel vulnerable.
Independent financial planner Claire Mackay: Yeah. And so, again, recognizing that you need help and that there’s actions you can do is brilliant. So, when you’re in that situation where everything is gonna count, you’ve really gotta lock down what are your existence costs, you know, your living costs. The bare necessities when it comes to food, if you need a car for work, and things like that. So, absolute essential costs because anything above and beyond that is not, you know, can be cut.
Libby Koch: Yup. Is ancillary.
Independent financial planner Claire Mackay: Yes.
David Koch: And then, look at how you can earn extra income, extra sources of income. And we go through that in the makeover, turning a hobby into a money makeover or into a money machine, if you like. Going to markets, all that sort of thing.
Independent financial planner Claire Mackay: Yeah. Uber, Airbnb if you’ve got a room that you can rent out; there’s lots of ways of being creative about what you can do.
David Koch: Yeah. And lots of new industries, that’s, you know, become a new… All this controversy about an Uber ex-driver, become one of them. Airbnb is renting out rooms in your house or even your front yard. You can rent out to backpackers. There’s a website, it’s called… The flash term is collaborative consumption but you can earn… I did a story for 7 News the end of last year and worked out that you can be earning about $300 a week out of your house just by sharing. So, give it a go!
Libby Koch: And it’s not so hard, like, he was worried about putting out a document, everything getting in the habit of that, but most people have smart phones and with the notes section, I find it’s easy. You just open up note and then just, you know, write down all, you know, just spent so much on petrol, I had to go to lunch, so much there or so much in postage. You just track that for, say, a week or two, and it’s always with you if you just pop it in your phone. It’s very easy then to get an idea of where your spending is going and that’s what he’s worried about.
David Koch: And pop it into our budget spreadsheet.
Libby Koch: That’s right. Once you got your total.
David Koch: That’s part of my makeover with your control center. Alright, next question. “I’m married with three young kids, set up three bank accounts for each child, put in $3,000 offsetting against the home mortgage. We’d like to continue adding $20 to each account per week until they’re 18. Which is financially better? Keep the money saving in this manner, join their money together into a high interest savings account and add $60 a week to it, open up three high interest savings account, one for each child, or invest this $9,000 in banks shares, then how do we add the $60 a week?”
Independent financial planner Claire Mackay: Okay. So again, with a mortgage, using the offset is smart for the overall family.
David Koch: Yep.
Independent financial planner Claire Mackay: There sometimes are concerns around the fact that when their children turn 18 how you equate what they could’ve earned.
David Koch: That’s right. Yep.
Independent financial planner Claire Mackay: Putting accounts into children’s names sometimes can also create issues because the children don’t get the tax-free threshold. But, whether their interest earnings are going to be more than that…
David Koch: Yeah, see, understand that’s still $420. They have more than $420 in interest. They go onto the top tax bracket in terms of taxing that interest. So, you gotta be careful when you put money aside for kids.
Independent financial planner Claire Mackay: So, I think the idea of using your offset, which you’re currently doing, is a smart one. You’re obviously very disciplined about allocating across the three children and there’s an element of equity there, so that when at the time you want to give it to the children you can then work out a share of some earnings on that amount.
David Koch: Yep, yep.
Libby Koch: Yeah. I was gonna say that. And the three separate accounts, that’s a lot to maintain. That’s probably more a tool when you wanna actually teach your children about savings and getting them involved and getting part-time jobs and putting into it. I think that’s a separate area of work. [chuckle]
David Koch: Yeah, yeah. Exactly. Alright, final question. “I’d like to know if it’s impossible to use my superannuation towards an investment property. I’ve spoken to a few people with mixed answers.” So, this is your self-managed superannuation. Not, if you’re in an employer super fund, you can’t do it.
Independent financial planner Claire Mackay: Yeah, so there is one type of self-managed super fund that you can do this. It is complex but it is capable. What I would say to someone who’s considering this that they make sure that they can see that their strategy in the line of their overall financial plan, because if it’s all of their super into one property, we’re potentially using debt. And that’s a lot of eggs in one basket.
David Koch: Yup. Particularly if you’ve got your own home, because it means your super’s dominated by a property, and your private investments is dominated by your home which is property. A lot of people don’t class their house as property investment but that should go into the balance, shouldn’t it? Of your investments. So, you’ve gotta be careful with it.
Independent financial planner Claire Mackay: So yes it’s possible, but it’s complicated and you should get some advice.
David Koch: Yeah, yeah, yeah. Talk to your financial planner or accountant and they’ll show you how to do it. Claire, good to see you.
Independent financial planner Claire Mackay: It’s a pleasure.
David Koch: Now, we’ve got all Claire’s details if you want to take anything further with Claire through the website and the control center as well. But good to see you.
Independent financial planner Claire Mackay: Yeah, lovely. Thanks.
David Koch: Look forward to seeing you next week. Week two of the makeover. I’m excited. Hopefully you are, too. Have a good weekend.