Income: $30,000 a year plus $1995 (after tax and super) a month in commission. Salary package includes tax-free car allowance, car park and mobile phone.
Monthly expenses: Gym membership, $70; personal loan repayment, $185; private health insurance, $60; Perpetual Savings Scheme, $220; rent, $520; car expenses, $250; all other living expenses, $700.
Assets: managed fund, $1860.
Debts: Personal loan, $5000; credit card, $500; HECS debt, $3500.
Goal: To become more financially independent and to get - and stay - out of debt.
* Not his real name.

Dion has only been a real estate agent for 12 months and is just starting to get commission in his pay. He expects this to grow significantly next year.

"I want to budget only on my base salary and invest a majority of the commission I earn," he says.

Dion contributes $220 a month to Perpetual Smaller Australian Companies managed fund and is considering using this fund as security for a Commonwealth Bank margin loan to invest in a second growth oriented fund to diversify his investments.

He is about to move out of home with his girlfriend and has had his credit card limit lowered from $5500 to $1000.

Dion has a HECS debt from his commerce degree, completed in 1999, but says he is not too concerned about paying it off in a hurry.

"I keep reading various self-help books and I'm struggling to get direction," he says.

"My long term goals are to become more financially independent by substantially increasing my savings and leveraging my investments.

"In about three years I want to buy my first residential property. I am weary of consumer debt and am strongly against taking any more on - I want to have this paid off entirely by mid next year and (to) keep it that way!"

Con Mavridis, a certified financial planner with Financial Planning and Life and member of the Financial Planning Association, replies:

Cash flow is the key to any financial plan.

In your proposed situation, including rental expenses, you are anticipating a surplus of $240 a month. In your current situation there is a surplus of $760 a month.

There is an anomaly between the surplus and your lack of savings. You should consider reviewing your budget to ensure that it is in line with your lifestyle. Otherwise, be prepared to change your budget or your lifestyle.

You need to ensure that your budget takes into account expenses such as a rental bond and furniture. You will also need some cash reserves to allow for unexpected expenses.

Your first goal should be to eliminate all non-tax deductible debt. Credit cards charge interest of more than 15 per cent and personal loans generally charge interest rates of more than 10 per cent. This is much more than any risk-free investment can make for you.

You should stick to your principal of not taking on any more consumer debt and even consider cancelling your credit card. Listen to the maxim: "If you haven't got the cash you should not buy it."

Let your HECS debt take care of itself through the tax system. That said, remember that HECS debts are linked to inflation and a 15 per cent discount applies for early payment. While you carry personal debt and have no cash reserves, I suggest that you suspend your monthly investment. Although the fund has performed well in recent years, it is invested in one sector.

You could consider diversifying your portfolio to minimise risk. But before you do this, you should talk to your financial adviser about any capital gains tax you might have to pay if you switch.

Gearing, or borrowing to invest, is one of the best strategies to help create wealth. Gearing can multiply both your potential profits as well as your potential losses.

Do not consider gearing until you have moved and have adjusted to the extra costs of your new home.

I would also suggest that you wait until you have built up some cash reserves as you can get a "call" to top up your margin loan account if the value of your investments falls. If you cannot pay the amount you need to top up your account, the lender can sell your investments realising a loss.

Aim to be in a position to buy a residential property in the next few years. I recommend that you buy one to live in rather than as an investment property.

It makes little sense to receive taxable rent from an investment property and then pay out after-tax rent to someone else.

The advantage of buying your own home is that you cap the costs of your living expenses, subject to interest rate movements.

I recommend that you use your commission to build up cash reserves in a separate account. Then you should direct your commission to repaying your loans.

Do not forget to consider your insurance needs. Your most important asset is your ability to earn an income - it is critical that you insure this. If you take on debt you should take out life insurance to cover the liability.

To achieve your goal of becoming financial independent more quickly, you should seriously consider living at home a little longer. Review your situation half-yearly until you establish a spending pattern and a commission pattern.

Then I suggest you seek advice from a financial planner and restart your investment strategy.

If you would like a Money Makeover, send your details, including a daytime telephone number, to: Money Manager, The Age, GPO Box 257C, City Mail Processing Centre, Victoria 8001, or e-mail: money@theage.com.au

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