How about now?

Let me tell you a story. Maybe it will inspire you/get you off your arse.

Sonia and Todd are everyday people with everyday jobs and a house in the suburbs. Sonia works in a finance company, so it made sense to get financial advice there when they bought a house four years ago.

An adviser hooked them up with a mortgage and an investment strategy. And since then, they haven’t really thought much about it.

Until a few weeks ago, when Todd was at a loose end on a work trip and bought The Barefoot Investor book*. Suddenly, he got interested in his finances (yay!).

He started looking at his home loan interest rate and the investment loan he’d acquired.

But it din’t make a lot of sense. So they invited me over for a second opinion, and over a few beers and some Trivial Pursuit, we started untangling their finances.

It was kinda hard, because until now, they haven’t paid attention to paperwork or statements. But we cracked on.

Home loan haggling

The low-hanging fruit was the mortgage: they were paying an eye-wateringly high rate, so I suggested that Sonia to call up and ask for a better one (a thing that you can totally do). Turns out they were in the wrong product – an investor loan, instead of owner-occupier.

Four years ago, that wouldn’t be a big difference, but investor loan rates have gone up since then (long story – search ‘macroprudential policy’ if you care). Now, they are paying far too much.

So, the lender helpfully put them into the right product and their rate became waaay more competitive. That’s a potential saving of tens of thousands over the life of the loan.

Why were they in the wrong loan originally, who is to blame, and can they get those extra interest payments back? We’re still working that out.

Borrowing to invest

Then we came to the investment portfolio. They have a sizeable ‘line of credit’ investment loan that funds a managed portfolio, mostly of shares.

Kind of like doing a smoky eye, borrowing to invest is neither good nor bad as a concept – it’s all about the execution. The line between ‘hooker after a big night’ and ‘sultry sex kitten’ is very fine.

Borrowing to buy shares increases your gains (if you have them) but it also increases your losses if the market goes down.

At the end of the day, Sonia and Todd are in an investment they don’t really understand, and one that cranks up their financial risk.

Your best ‘listening face’

That’s not to say the strategy wasn’t explained by the adviser at some point, but here’s the thing about ‘experts’. We often listen to them with an interested look on our face, but only half an ear open.

Whether it’s a physiotherapist explaining the intricacies of lumbar discs, or an adviser explaining leveraged investments, we nod and smile along, while being bamboozled on the inside.

It makes vague sense at the time, but when we get home we don’t really know how to do those stretches properly, or why we have thousands of dollars in a loan.

What’s the solution?

I’m not a professional adviser, so I wasn’t going to say ‘do this’ or ‘don’t do that’. But I did ask Todd and Sonia about their goals and priorities are and what they feel comfortable with.

It was clear they were not comfortable with a leveraged portfolio, and they  wanted to pay off their mortgage as a priority. They also had some expensive credit cards they could ditch immediately.

My take on their investment strategy is that they are Holden customers who have been sold a Mercedes. And they are paying a couple of thousand a year to an adviser, plus investment fees, for the privilege.

So, Sonia called a meeting with their adviser. I suggested some questions they could ask, and they had a positive and constructive conversation.

Over time (to minimise capital gains tax), they will sell down the shares to reduce the investment loan. They might add extra to their super (a cheap and cheerful way to lower your tax) and increase what they pay on the home loan.

Todd is also changing their bank accounts in line with The Barefoot Investor’s advice (similar to my suggestion here).

How to take charge

I don’t think Todd and Sonia had bad advice (except for that wrong home loan business). I just think they were given advice by someone who doesn’t know them well. And they didn’t feel smart enough to question it.

But they are smart. And capable. And pretty decent with everyday budgeting.  They just need to know that.

And I am telling you that you are too. Don’t let men in suits bamboozle you with their suit-tastic jargon.

You might have a simpler set-up than my friends. But the same rule applies: take an interest and you’ll get a better outcome.

Don’t be scared to ask questions – especially “why?” and “how much”. Why this home loan and not that one? Why this super fund?  How much am I paying in fees? What’s the long-term cost?

Another hot tip: read your paperwork. Every six months your super fund has to send you a statement. Open it. Read it. Compare it to other funds (some help here). And if you don’t get those statements, contact the fund and update your details.

Same with your home loan, personal loan or credit card – check out the interest rate. See if you can get a better one. Call them up. Put pressure on. In the case of home loans, the lender’s worst outcome is that you go elsewhere – so they will often bend over backwards to keep you. If you used a mortgage broker, get them to do it for you.

When’s the right time to do this stuff? 

Well, obviously … NOW.

Not sure where to start? Ask people (smart ones that you trust). Read The Barefoot Investor. Read the Money section of the newspaper. Google stuff. Visit http://www.moneysmart.gov.au

The knowledge is out there, you just need to get started.

*A lot of people ask me about this book. I haven’t read it all, but in general I like Scott Pape’s way of thinking and I am impressed at his ability to get people fired up about money. So yeah, go ahead and read it.