What to do with my income when I go back to work?

We have two children, and next year the youngest will also be at school, allowing me to go back to work.  Up until now, my husband has been the breadwinner and so next year for the first time since the children were born, we will have some surplus income.  We are presently paying about $1,300 a month on our home loan, which is down to $145,000 and we think our home is worth about $500,000.  We also owe about $40,000 on our car and some personal loans on which we pay over $1,100 a month. When I go back to work, I should be able to earn about $600 a week.  What is the best thing to do with my income when I go back to work?

Ms J

You have several alternatives open to you: You could increase the repayments on your mortgage and possibly on your car and personal loans.  You could consolidate all of your other loans into your home loan.  You could begin a savings and investment program.  Or you could use a combination of all of these.

As a first step, I suggest that you use some of the equity in your home to set up an interest only line of credit in order to cut down on the interest payments associated with your car and personal loans.  This means that you would borrow another $40,000 against your home and use this money to pay out all of your loans, provided there are no or low penalties for early termination of your loan.

The next step is to set up a program to repay this $40,000 over the next four years.  This will cost you about $930 a month, which will save you about $180 a month.  This extra $180 a month should be added to your home mortgage repayments.  This alone will cut about two years off your loan and save you about $11,000 in interest.

The third step is to begin a saving and investment program.  If you earn $600 a week, that leaves you with about $520 after tax or about $2,250 a month, which provides you with a wonderful opportunity to save.  One reason that you need to save is that it is likely to cost you around $420,000 to look after your two children up to the age of 20.

Just to give you an idea of the power of compounding.  If you saved $2,250 each month, which earned 6% per year, over the next 20 years you would accumulate a bit over $1,000,000.

The information in this article is of a general nature only and should not be acted upon without first seeking personal financial planning advice. This article was provided by independently owned AFS Licensee (No. 236855) Direct Advisers Pty. Limited. They may be contacted on 02 6583 7588 or enquiries@directadvisers.com.au for a free consultation or further information.