When you try to budget, it’s easy to target your more obvious expenses like-away coffee or lunches at the local cafe. Targeting the small things is great, but it can take the fun out of life and lead you to stray from the budget anyway, especially if you cut out a lot of small things. What we suggest is to have a better look at the bigger picture. To do this, here are the biggest expenses that eat up your income.
4 THINGS THAT EAT UP YOUR LIFETIME INCOME
The average Australian generally spends half their total income over 4 things in a lifetime. These things are Home, Car, Kids, and retirement. So, how much of your income should be allocated to each of these things?
1. HOME
How much should your home cost? Here are two truths that you should keep in mind:
- Your home should cost no more than 4-5 times your gross family income.
- Your mortgage payment should be 35% of your net income (max).
Aside from the cost of the physical home, where you choose to live takes a toll on your other expenses. We tend to replicate the life that our neighbors have. We eat at the same restaurants, we send our kids to the same schools, we take similar holidays and we buy at the same stores.
Among all this stuff, what do you really need and want? Do you think you need a $40,000 pool or a bigger garage? Do each of your kids really need their own rooms? Or can you live a simpler life?
The old notion of buying the biggest house that you can afford is well… old news. There’s a whole new world of investment options out there today that can offer you greater returns than the old bricks and mortar rule, so maybe it’s a case of downgrading the home to build your other investments and achieve some lifestyle goals. Eg. Early retirement, 4 day work week, or more holidays with the family.
Importantly you should always review your mortgage and make sure you are getting the best deal possible as you will be surprised how much you can save on interest.
2. CAR
Cars are expensive. Which says heaps if you have two at home. So, let’s reconsider that for a bit. Do you really need two? Or better yet, do you really need a car at all? If you live in the city, then owning a car is more of a luxury than a necessary expense.
Car sharing and hiring services (such as Uber and GoGet) makes it easier to get around. They are arguably more cost effective. Of course, it’s a totally different story if you really need a car. That said, it’s really about how much do you need a car?
Here’s a simple rule to keep your car from eating up your income:
Your car should cost no more than 3 month’s pay (gross).
If you have 2 cars, then their combined cost should not be more than 3 months of income. This rule will reduce your transport costs to less than 10% of your net income.
3. KIDS
Relax… we’re not getting rid of your kids! Or, should we? Okay, humour aside, kids are costly. According to a recent NATSEM (National Centre for Social & Economic Modeling) study, it costs a middle income family $812,000 to raise two kids, lower income families about $474,000 and over a million dollars for higher income families.
Becoming a parent is a massive financial commitment. There’s no universal rule for it. You simply can’t hack it.
4. RETIREMENT
The real problem here is paying for 90 years of life with 40 years of income. The first 20 or so are taken care of, as most parents foot the bills but the rest is up to us. The first tip: you really don’t need a million dollars to retire. A million bucks would be great, but our brain is not designed to deal with (or even take into consideration) any events that are forty years in the future. Luckily we have compulsory systems in place like superannuation and the pension. The only thing that you need to decide on today is how you want to live tomorrow (retirement).
Spending money in your retirement is one of life’s great pleasures, so our rule here doesn’t involve cutting back, but more on what you can do to have more in retirement.
If you decide you need more to retire on
- Sort out your Super and make sure it’s invested well and earning good returns, with the right type of account.
- Review your super funds fees to make sure you’re not paying too much.
- Follow a plan to eliminate your debts and pay off your mortgage.
If you need us, we are always here to help and provide you with the right advice. Get in contact today.